Currency Decisions Flashcards
Payable
Buy Currency
Receivable
Sell Currency
Payable and it asks what to do in the forward market
Foreign Currency is trading at 28 today and 29 future
It’s a receivable = Sell 28 x
A company headquartered in Vancouver, British Columbia, is building a pipeline in Russia. The invoice amount is due in 90 days and is denominated at 28 million rubles. The Canadian dollar is trading for 28 rubles currently and 29 rubles 90 days forward. Which of the following strategies will the Canadian firm mo
I took this to mean that they were having a pipeline built and that it was a payable. It doesn’t say “building a pipeline for another company.” But it’s a receivable. and so must sell foreign currency. Ignore the prices on the spot and future currency. But it doesn’t say “is having a pipeline built.” It says “building a pipeline.”
Beta is what
Sensitivity of Stock to Overall Price Movements in the market, how volatile is the stock relative to the volatility of the overall market
Market Risk - Is it Systematic? Is It Diversifiable
Market risk (volatility) is systematic Market risk (volatility) is not diversifiable
Is Market Risk Systematic
Yes
Is Market Risk Diversifiable
No
Is Beta Systematic?
Yes because beta is a measure of market volatility risk
What’s a Beta of 1 mean versus a Beta of 1.4
A stock with a beta of 1 is as volatile (i.e. has the same systematic risk as the overall market). A stock with a Beta of 1.4 has a “Systematic risk is higher than that of the market portfolio.”
Systematic Volatility Risk is also called what
Market Risk
Undiversifiable Risk is also called what
Market Risk
Does Market Risk = Total Risk
No only the systematic risk
Total Risk =
Market Risk + Unsystematic Risk
CAPM Required Rate of Return Equals What
Risk Free Rate
+ Beta (Market - Risk Free Rate)
= CAPM Required Rate of Return
should make investments with return over this minimum rate
Market Risk Premium
Amount above the risk free rate that will induce investment. Basically if u are getting the same expected return in terms of $$$, but the required rate on the risky investment is higher, the price of risk basically.
HAS NOTHING TO DO WITH BETA!!!!
“What is the risk premium on the market?”
It’s just looking for the Expected Return on the Market Portfolio - Risk Free Rate
Nothing to do with beta
Another question spoke in terms of securities asking for “the difference between the required rate of return on risky versus a risk less investment” with the same “expected return”. here the difference was the “risk premium” and not the beta. I give up, it’s a bad question, the only way it works is if the same “expected return” is the dollar amount of interest earned and not the “expected rate of return”, because then it would be a function of the beta (not the beta itself).
R is the
R squared is the
R is the Coeeficient of Correlation -1 to 1
R Squared is the Coeeficient of Determination -
COST OF COMMON EQUITY
Think dividend percentage of stock issue price now + what every the rate is expected to grow bye.
TTBO75 or 90
title transfer bargain purchase
75% of useful life
90% of purchase price
If you are calculating the effective rate of the cost of debt do you use the coupon rate or the effective rate
The effective rate
When you are computing the cost of debt on preferred stock do you use the issue price or the current price?
You use the current price NOT the issue price.
So it’s effective rate for the debt (not the par stated) and market price for the preferred.
What is a spontaneous source of financing Accounts Receivable Mortgage Bonds Debentures Accounts Payable
The payables because you are choosing not to pay for stuff. The rest require hoop jumping.
Dividend Payout Ratio
Declared Dividends/Net Income - Preferred Dividends
Measures how much of income is paying out to Shareholders, you want to know if you want a good dividend
What type of depreciation is relevant to capital budgeting (think cash flow)
Only tax depreciation is relevant, not book depreciation. Two sets of books. One for tax return and one for published financials.
Accounting Rate of Return says Accounting Income/Investment
Does accounting income include the impact of depreciation?
Does the savings take into account the tax shield in the accounting method?
How about salvage value?
Yes the accounting income includes the effect of depreciation.
And watch out that you don’t see “After tax” costs and think that’s equivalent to the depreciation being figured in. Saving $20,000 in “after tax cash costs” means that ur income will be $20,000 higher and that will be subject to tax except the depreciation on the new machine will save you (shield) part of the savings from taxation. Salvage is irrelevant.
So if you save $20,000 a year on a $100,000 machine and now have an extra $10,000 depreciation expense you net increase in accounting income is $10,000. In the question I’m looking at they don’t mention tax rates. But anyway to figure the return it’s $10,000/$100,000 or 10%.
Does the net present value depreciation shield get the present value factor applied to it.
Yes. You calculate the after tax inflow per year and apply. the present value factor to it.
Then calculate the depreciation shield (tax rate X the depreciation) and apply the present value factor to that. Add the two together and you get the After Tax Present Value.
What do you do to the operating net cash inflows (if it doesn’t say after taxes) on a present value calculation for the project.
You find the tax rate and multiply them by (1 - the tax rate) to get what the net after tax inflow is. Then you calculate the cash inflow from the depreciation shield (the annual depreciation X the tax rate) and apply the PV factor to that. Then you add the two together to get the After tax NPV.
Present Value Backward Problems
They give you the residual value, the cost, the PV factors and ask what it has to generate in yearly savings to earn that yield.
You need to:
1. PV the salvage and net it out of the cost in current dollars.
- Divide that cost by the PV factor for the ordinary annuity.
Really are just calculating where the PV equals 0.
Present Value Problems
Pay attention to cash - “cash operating expenses” means without depreciation, you can net these out of the cash income and then apply the tax rate.
Pay attention to Depreciation for both “financial and tax purposes”
Net Present Value Means Net
Don’t jump and look for the answer after u calculate the PV, remember to net out the cost
NPV and Depreciation
I guess if the question says “after tax inflows” you don’t worry about the depreciation??? in a NPV question.
What types of analysis capital budgeting techniques recognize salvage value
IRR, NPV, Accounting
Does Accounting Rate of Return Consider Depreciation
Yes
Does NPV consider depreciation
Yes
Does IRR consider Salvage Value
Yes
Does NPV Consider Salvage Value
Yes
It’s the payback period that doesn’t care about salvage apparently unless it’s within the payback period? Because the payback cares about the depreciation shield.
Does ACcounting rate of return recognize salvage Value.
Yes
Who uses the tax shield for deprecation
Accounting
NPV
IRR
Accounting Rate of Return Formula
Accounting Income/Investment
Accounting Income net of tax effects, IOW increased tax on the income and decreased tax from the depreciation
Now this is a horrible question:
How are the following used in the calculation of the internal rate of return of a proposed project. Ignore income tax considerations.
Then it has “Residual Value of a Project” and “Depreciation Expense”
Include or Exclude
Now you’ve memorized that the depreciation shield is used in both IRR and NPV and Accounting. And the same with salvage value. So when they say “ignore income tax considerations” what they mean is that ignore non-cash flow considerations. And if you ignore income tax considerations depreciation isn’t used in any of the calculations.
It’s just such a tricky way of testing the question, not to mention it could screw you up if you memorized it wrong.
If the NPV is negative, then the _________ used is ___________ than the project’s IRR.
If the NPV is negative, then the discount rate greater than the projects internal ROR.
If the NPV is negative, then the firms cost of capital rate (the discount rate) is so large that when you discount the cash flows they __________________ the original cost of the investment.
If the NPV is negative it means that when you discount the cash flows they aren’t even valuable enough to justify the cost. The firm could have stuck it’s money elsewhere and earned more than that.
IF the NPV is positive, then the _______________ rate is less than the ______________
If the NPV is positive, then the discount rate is less than the project’s IRR.
The project is earning more than the discount rate.
You discount all the money you’re going to earn from this thing and see what it’s present value is. If you do that at your hurdle rate and the PV still adds up to more than you invested you know the project must be earning more than you would have gotten in the bank.
Does the Payback Period Method Take into Account salvage value
NO.
Does the payback period care about the depreciation tax shield.
Yes it does and it probably cares about the salvage if it’s within the payback period. IDK!!!
You apparently have to think cash flows with all these methods, as in cash flows to payback. The depreciation is a non-cash inflow of sorts.
Profitability Index Formula
1q
Profitability Index
Present Value of Future Cash Flows/Initial Investment
Profitability Index and the NPV - Which type of projects yield the same decision and which types different.
Same for independent, different for mutually exclusive.
You can only choose one in the latter. Not sure why.
Profitability Index
PV of Inflows/Investment
Measures Return per dollar of invested capital.
How is it different from IRR percentage - IDK - but if you have IRR, NPV and Profitability index and limited funds you’re supposed to take the one with the highest IRR, or rank them by the profitability index and take them until you run out of money.
You have a bunch of projects and limited funds. The problem gives you these figures:
NPV in Cash
Profitability Index
IRR
What do you use to rank the projects
Profitability Index
After Tax Cash Flows and Years to Recover is What
Payback Method
After Tax!!!
Return on Investment =
Operating Income/Average Total Assets
This is for measuring divisional performance.
Free Cash Flow
Cash for operations after subtracting amounts that must be paid to sustain current productive capacity.
Economic Value Added
After Tax Capital - Cost of Capital Weighted Investment Basde
Residual income after the cost of all capital deducted
Economic ROR on Common Stock
Dividends + Change in Price/Beginning Stock Price
Rate of Return on Assets
Net Income/Average Assets.
Return on Common Equity
Net Income - Preferred Dividends/Average Common Equity
Average Common Equity Includes:
Common Stock
Retained Earnings ACOI
Residual Income =
Net Income - Target Return on Invested Capital
IOW
Imputed Interest Rate X Invested Capital
If they just give you sales and the capital turnover then divide the turnover number into the sales
E.g. sales =400,000 Capital TO = 4. Invested Capital = 100,000
Capital Turnover
Sales/Invested Capital
Disadvantage of Using ROI versus REsidual Income
ROI may lead to rejecting projects with positive cash flows
Manager doesn’t want to spend money on project with a positive, but lower ROI than the current average because he has to average that in and it lowers the entire ROI for the company
ROI Return on Investment
Income/Capital Investment
Product Life Cycle MODEL
Introduction Stage
Growth Stage
Maturity Stage
Decline Stage
What stage of the life cycle do you begin increased marketing efforts
Introduction
Introduction-Growth-Maturity-Decline
What step comes before the budget
Strategic plan
What order are the budgets prepared In
Sales
Production
Raw Materials
Cash DISBURSEMENTS (cash)
Master budget contains two major groups of smaller budgets
What’re are they called
Operating Budget and the Financial Budget
Master budget
contains two groups of smaller budgets the operating budget in the financial budget done
operating budgets begin with
The sales budget
List of four documents: return space OK… Listing of cash collections… cash budget… Pro forma statement of cash flow’s… Detailed listing of cash payments for merchandise purchases. Space what order did these go in?
listing of cash collections, listing of cash payments, cash budget, pro forma statement of cash flow’s not sure why the budget comes after listings of collections and payments
when is the master budget prepare
before the next accounting. It is managements best estimate of sales production levels and costs
when is the flexible budget prepared?
The flexible budget is prepared after the actual output is known and consisted of the cost that should have been incurred based on the actual level of production
what is a static budget and how does it compare to a master budget and a flexible budget
A static budget is prepared for one level of activity a master budget if it’s used all year for comparison it must be a static budget a flexible budget is prepared for many levels of activity and against them after the period ends
what kind of budget contain only budgeted amounts and the budget versus actual amounts
static budgets are prepared for the upcoming. So they contain the best estimate of output based on the budget costs
List of four responsibility centers in budgeting: profit center cost center revenue center investment center
and investment center is the one treated like a business and independent business. Don’t confuse it with a profit center which has responsibility for revenue and cost but not for invested capital. even though it investment center is treated like a business it is not measured by profit. It is measured by return on investment to Georgia operating performance. in essence net income is stages of proportion of investment capital no it’s not. So it’s not just profit or income it’s profit in context by dividing it by the investmentin capital
responsibility centers: what our manufacturing subunits what kind of responsibility centers are they
they are cost centers not revenue centers and then a product centers
what is the balance scorecard?
for perspectives: financial, international business processes, customer, learning and growth
balance scorecard approach: success in target markets. What perspective does this relate to
customer perspective
balanced scorecard: what are the four perspectives
Financial, customer, internal business processes processes, learning and growth
what is Fishbone fishbone
determines the on known cause of problems
