F9 Chapters 6-10 Flashcards
Define Risk
Quantifiable - Possible outcomes have associate probabilities and can use mathematical techniques
Define Uncertainty
Unquantifiable - outcomes cannot be mathematically modelled.
What is the formula for Sensitivity Margin?
Sensitivity Margin = NPV x 100%
————————————
PV of flow under consideration
(lower = more sensitive)
Advantages of Sensitivity Analysis?
- Simple
- Identifies critical estimates
- More information for subjective areas
Disadvantages of Sensitivity Analysis?
- Assumes variables change independently
- Does not assess probabilities
What is the formula for Expected Value (EV)?
EV = Σ p.x
What are the advantages of EV?
- Deals with multiple outcomes
- Quantifies probabilities
What are the disadvantages of EV?
- Probabilities could be subjective
- Ignores variability of payoffs (& risk attitude)
- Should only be used for decisions often made
What is working capital?
The capital available for conducting the day-to-day operations of an organisation.
(The net current assets)
What is an ‘aggressive’ approach to capital management?
Keeps a lower level of working capital.
High risk but high profits.
Signs of overtrading?
Big increase to Turnover
Big increase to Current Assets
Big increase to credit
Big decrease in current/quick ratio
What is the cash operating cycle?
Inventory Days x
Less: Creditor Days (x)
Debtor Days x
——
x
What are the 4 main aspects to a Credit Policy?
Assess creditworthiness
Credit limits
Invoice promptly & chase overdue
Monitor credit system
Formula for annual cost of Early Settlement Discounts?
Annual Cost = discount
( 1 + ——————— ) <sup>n</sup> - 1
amount left to pay
where n = 365 / days quicker payment received
Ensure less than overdraft interest rate!
Difference between cash Forecast and cash Budget?
Forecast is an estimate based on current conditions
Budget factors in business plan
What are the two models for Cash Management?
Baumol model:
- 2 CoD & Chips
- Assumes cash is predictable
Miller-Orr Model:
- Controls irregular movements
- Formula given
What are the 3 main objectives to Short Term Investments?
Liquidity (when needed)
Safety (no risk of loss)
Profitability (highest return)
What are the 3 attitudes to Risk regarding Funding?
Aggressive
Finance most current assets (inc ‘permanent’).
High risk, high profit.
Conservative
Long term finance for current assets.
Stable but expensive
Matching
Match finance to investment
