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
