Core 2 - Finance Flashcards
Which one of the following best describes the type of financing that is most appropriate for a company at the commercialization stage?
A. short-term line of credit
B. long-term secured bank loan
C. equity supplied by a venture capitalist
D. None — no external capital required during this phase
equity supplied by a venture capitalist
A venture capitalist will have adequate funds available to finance the commercialization costs and will not require immediate returns on these cash flows. Theventure capitalist is willing to accept the high risk of an equity investment in an entity that has not generated revenues.
Profitability index (PI)
The PI ranks projects and takes relative performance into account. This method can assist the company in selecting which combination of projects it shouldinvest in based on the profitability of each relative to its initial investment.
Sensitivity analysis
Sensitivity analysis occurs when a company runs a variety of “what-if” scenarios to assess the NPV of a single project under different assumptions. It doesnot assist in determining which projects should be invested in.
Payback period analysis
The payback period analysis is a method used to assist in deciding whether or not a project is viable. It does not assist in determining which of the viableprojects should be invested in.
Net present value (NPV)
NPV is a method used to assist in deciding whether or not a project is viable. It does not assist in deciding which of the viable projects should be invested in.
describes types of cash flows included in the capital budget analysis
Capital expenditures, cash-basis income taxes, and working capital investments
sinking fund provision
in a bond agreement is a measure to ensure the issuer can repay the bond principal at maturity. It requires the issuer to make periodic payments to a trustee, who then uses the funds to repurchase a portion of the bonds in the market.
sponsors agrees to a purchase arrangement
purchase arrangement is a contract where the sponsors agree to buy a certain amount of the product (in this case, oil) at a predetermined price. This guarantees a certain level of revenue for the project, regardless of the market price of oil in the future. Therefore, the risk that is reduced for the lender is the risk that the oil may not be saleable in the future at a price that ensures demand. This is because the sponsors have already agreed to buy the oil at a certain price, ensuring a level of demand and revenue.
informal negotiations with creditors
*Some creditors could “hold out” and refuse to negotiate, requiring the company to seek formal legal court proceedings instead
Informal negotiations are usually completed more quickly and for less cost than the more formal legal court proceedings are.
There is no legal requirement to provide creditors with information. In fact, this lack of information can be detrimental, as a creditor could potentially not be able to make a decision without some knowledge of how the company will improve its cash flows in the future.
net profit margin
is calculated as net income divided by sales. If the net profit margin increased, but sales remained constant, this means that net income must have increased.
Return on assets (ROA)
s calculated as net income divided by total assets. If net income increased, but total assets remained constant, then the ROA must have increased.
most severe limitation of the financial planning process
The financial planning process is time-consuming and expensive.t involves collecting and analyzing a large amount of data, and it may require the use of specialized software or consultants. This can be particularly challenging for small businesses with limited resources.
a company’s reward system is most effective at achieving the desired business outcomes if it does…
.monetary and non-monetary rewards linked to both individual and corporate performance
