Core Activity A Flashcards
What is WACC?
Weighted Average Cost of Capital; the weighted average cost of different sources of long-term finance, weighted by monetary value.
How is the Cost of Debt measured?
Return earned by lenders; present value of future interest and redemption amounts, adjusted for tax savings.
How is the Cost of Equity measured?
Return earned by shareholders; present value of future dividends or capital gains.
Why can excessive debt increase WACC?
Excessive debt raises the financial risk for shareholders, increasing their required return.
What is the impact of WACC on investment appraisals?
WACC is used as the discount rate; higher WACC reduces project NPV.
Summarise High vs Low WACC.
High WACC = Bad (higher risk); Low WACC = Good (higher investment value).
What is a business ecosystem?
Networks of organisations collaborating to produce greater value.
Define the CIMA business model steps.
Define, Create, Deliver.
What is digital disruption?
Technology changes and disrupts existing business models.
Strategies to build disruptive models?
Build, Buy, Partner, Invest, Incubate/Accelerate.
Give an example of a Digital Operating Model.
Booking systems.
How to prioritise stakeholders?
By power, legitimacy, and urgency.
How is value created and delivered?
Build trust, allocate resources, design processes, segment customers, and meet expectations.
What is residual value (RV)?
Revenue exceeding cost of creating value, crucial for shareholders.
How to survive digital disruption?
Leadership, strategic direction, collaboration, external influence, judgment, talent development.
What is Price Elasticity of Demand?
Measures sensitivity of demand to price changes.
What is Cost-plus pricing?
Setting a price by adding a profit margin to total costs.
Define Premium Pricing
High price to signal superior quality.
What is Market Skimming?
High initial price, lowered over time.
Define Penetration Pricing.
Low initial price to quickly gain market share.
What is Price Differentiation?
Different prices charged to different customer segments.
What is a Loss Leader Strategy?
Selling at a loss to attract customers.
What is Discount Pricing?
Temporary price reductions to boost sales.
What is Controlled Pricing?
Prices regulated by the market or government.
What is Product Bundling?
Offering multiple products together at a discount.
How does pricing change over the Product Lifecycle?
Prices are high at launch, lower during maturity, and may decline further.
What cash flows are relevant for investment decisions?
Future and incremental; exclude sunk, non-cash, notional items.
Difference between Internal and External Management Information?
Internal = Reliable but limited. External = Broader but needs critical evaluation.
What are Business Intelligence Systems used for?
Reduce costs, find opportunities, improve decisions.
How does Data Analytics help?
Identify patterns, optimise strategies, gain competitive advantage.
What is Net Present Value (NPV)?
NPV measures added shareholder wealth; uses discounted cash flows.
What is Internal Rate of Return (IRR)?
Discount rate making NPV = 0; assumes reinvestment at IRR.
What is Modified Internal Rate of Return (MIRR)?
Adjusts for realistic reinvestment assumptions; more accurate than IRR.
What is Payback Period?
Time needed to recover initial investment.
Define ROCE (Return on Capital Employed).
Operating profit / Capital employed x 100.
What is Capital Rationing?
Prioritising investments when funds are limited.
What is Equivalent Annual Cost?
Standardises costs across projects of different lengths.
What are Real Options in Appraisal?
Flexibility to delay, defer, switch, expand, contract, or abandon projects.
What is Asset Replacement?
Evaluating when to replace old assets based on cost and benefits.
What Other Considerations affect Investment Decisions?
Environmental, social, quality, and reputational factors.
Final Evaluation Questions in Investment Decisions?
What do results mean? What do they tell us? What decisions should follow?
