F9 Chapters 1-5 Flashcards
What are the 3 types of Stakeholders?
- Internal (e.g. Employees/ Directors)
- Connected (e.g. Customers/ Suppliers/ Banks/ Shareholders)
- External (e.g. Government/ Community/ Regulators/ Pressure Groups)
How do you ensure managers take decisions that reflect shareholder objectives?
- Clearly Defined, easy to monitor, impossible to manipulate
- Link rewards to shareholder wealth
- Match time horizons of shareholders and managers
What is the agency relationship?
When one party, P, employs another party, A, to perform a task on their behalf.
What are the 3 E’s?
- Economy: minimising inputs to achieve defined output
- Efficiency: ratio of inputs to outputs
- Effectiveness: whether outputs/objectives are met
What is the definition of VFM?
Achieving the desired level and quality of service at the most economical cost
Advantages of ROCE?
- Simple
- Links with out accounting measures
Disadvantages of ROCE?
- No account of project life
- No account of timing of cashflow
- Depends on depreciation/acc policies
- Does not measure absolute gain
Payback period equation?
-Payback period = Initial Investment
—————————
Annual Cashflow
Advantages of Payback?
- Simple
- Useful for rapidly changing technology
- Minimises risk
- Favours quick return
- Uses cashflow, not profit
Disadvantages of Payback?
- Ignores returns after payback period (/ and during period)
- Ignores overall profitability
Definition of Present Value (PV)
The cash equivalent now of money receivable/payable at some future date
If the NPV is positive - what does this mean?
- The project is financial viable
- The surplus funds after funding the investment
Assumptions of discounting?
- All cashflows occur at start/end of period
- Initial investment is at T0
Advantages of using NPV?
- Considers time value of money
- Uses cashflow, not profit
- Should lead to maximisation of shareholders’ wealth
Disadvantages of using NPV?
- More difficult to calculate/explain
- Requires knowledge of discount rates etc
ROCE / ARR Equation?
ROCE = Average PBIT
———————————
1/2 ( Investment + Scrap)
What is the present value of a Perpetuity?
PV = Cashflow x 1
———————
Rate of Interest
Definition of IRR?
The Internal Rate of Return (IRR) represents the discount rate at which the NPV of an investment is zero.
Advantages of IRR?
- Considers time value of money
- Uses cashflow, not profit
- Should increase shareholders’ wealth if positive
Disadvantages of IRR?
- Not an absolute measure of profitability
- Interpolation is estimate (unless using a spreadsheet)
- Possible to have multiple or no IRR
What is Af4-10
Af4-10 = Af1-7 x Df3
Which is better: NPV or IRR?
NPV is king
What are EACs?
The Equivalent Annual Costs/Cashflow to which a series of uneven cashflows is equivalent in PV terms.
What is the formula for money rate?
(1 + i) = (1 + r)(1 + h) where
i = money rate (overall)
r = real rate (require rate excl inflation)
h = inflation rate
