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GT-OMSA-MGT-8803 > Financial Management Week 4 > Flashcards

Financial Management Week 4 Flashcards

1
Q

When do you record cash flow within financial management?

A

You record when the money moves, explicitly avoiding accrual accounting.

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2
Q

How are cash flows classified as relevant or not for potential project investments within financial management?

A

When deciding on a project, all cash flows that change between implementing the project vs not become relevant. Any cash flow that does not change as a result of taking on the project are irrelevant.

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3
Q

If NOT taking on a project creates a negative cash flow, and taking the project creates a positive cash flow, what should you assume in financial management?

A

Cash flows should be the difference of taking the project against NOT. For this example, take the positive cash flow and subtract the negative cash flow to build analyses (like NPV).

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4
Q

What would you call a cost where spent cash does not materially impacting the cash flow of the project?

A

Sunk Cost

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5
Q

What would you call a cost where cash flow is used on R&D?

A

Test Marketing Cost

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6
Q

What would you call a cost where part of cash flow is impacted by a shifting cash flow from another part of the firm?

A

Erosion Cost

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7
Q

What would you call a cost where cash flow could be used in an alternate project that is mutually exclusive?

A

Opportunity Cost

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8
Q

What does ATCF stand for within financial management?

A

After-Tax Cash Flow

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9
Q

What does CF stand for within financial management?

A

Cash Flow

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10
Q

What type of expense is a depreciated Cash Flow?

A

A non-cash expense

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11
Q

What is the formula for ATCF?

A

(Revenue - Cost) * (1 - Tax) + Depreciation * Tax

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12
Q

How are Cash Flows categorized at the beginning and end of a project within financial management?

A

Working Capital is:
- Beginning = Cash Outflow
- End = Cash Inflow

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13
Q

What factors should you consider when making Cash Flow estimates within financial management?

A
  • Price
  • Volume
  • Variable Costs
  • Fixed Costs
  • Capital Expenditure
  • Working Capital
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14
Q

What is a Nominal Return?

A

The percent change in the written money, over some time; relative to a “Real” Return. $100 with a 10% nominal return, will become $110.

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15
Q

What is a Real Return?

A

The percent change in the purchasing power of money, over some time; relative to a “Nominal” Return. A 20% nominal return, with a 10% inflation rate, is a “Real” return of 9.1%.

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16
Q

What is the Formula for the Fisher Effect?

A

1 + R = (1 + r) * (1 + h)
- R: nominal return
- r: real return
- h: inflation rate

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17
Q

What is the Formula for the approximated Fisher Effect?

A

R = r + h
- R: nominal return
- r: real return
- h: inflation rate

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18
Q

What is Sensitivity Analysis within financial management?

A

Sensitivity Analysis is the process of creating an analysis where key variables change to compare and contrast alternate project outcomes.

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19
Q

What types of Cash Flows does Stock ownerships produce?

A
  • Dividends
  • Capital Gains
20
Q

What types of stocks growths are there?

A
  • Zero Growth
  • Constant Growth
  • Differential Growth
21
Q

What kind of growth does a perpetuity stock have?

A

Zero Growth

22
Q

What is the Formula for a Zero Growth Stock?

A

P₀ = Div / R

23
Q

What kind of growth does a growing perpetuity stock have?

A

Constant Growth

24
Q

What is the Formula for a Constant Growth Stock?

A

P₀ = Div₁ / (R - g)
OR
P₀ = [Div₀ * (1 + g)] / (R - g)

25
Q

What is the Formula for the Growth Rate?

A

g = Retention Ratio * Return on Retained Earnings

26
Q

What is the Formula for the Retention Ratio?

A

Retention Ratio = 1 - (DPS / EPS)

27
Q

Into what fundamental parts can you break down Discount Rate?

A
  • Dividend Yields
  • Growth Rate (in dividends)
28
Q

What is “g” in the formula P₀ = Div₁ / (R - g)?

A

Growth Rate

29
Q

What is the “R” in the formula P₀ = Div₁ / (R - g)?

A

Risk

30
Q

What does EPS stand for within financial management?

A

Earnings Per Share

31
Q

What does NPVGO stand for within financial management?

A

Net Present Value of Growth Opportunities

32
Q

What does DPS stand for within financial management?

A

Dividends Per Share

33
Q

What is the “R” in the formula P = (EPS / R) + NPVGO?

A

Risk

34
Q

What is the “P” in the formula P = (EPS / R) + NPVGO?

A

The Price of a Firm

35
Q

What is the “EPS” in the formula P = (EPS / R) + NPVGO?

A

Earnings Per Share

36
Q

What is the “NPVGO” in the formula P = (EPS / R) + NPVGO?

A

Net Present Value of Growth Opportunities

37
Q

How does this formula change for a Cash Cow firm?
P = (EPS / R) + NPVGO

A

Ignore the NPVGO so that the formula is just:
P = (EPS / R)

38
Q

How will an increase in the Retention Rate affect a firm?

A
  • Reduce the dividend paid to shareholders
  • Increase the firm’s growth rate
39
Q

What does PE stand for within financial management?

A

Price-Earnings Ratio

40
Q

What does PPS stand for within financial management?

A

Price Per Share

41
Q

What is the formula for Price-Earnings Ratio?

A

PE = (1 / R) + (NPVGO / EPS)

42
Q

How is a firm’s Price-Earnings Ratio related to Growth Opportunities and Risk?

A
  • Positively related to Growth Opportunities
  • Negatively related to Risk
43
Q

What does EV stand for within financial management?

A

Enterprise Value

44
Q

What is the formula for EV?

A

EV = Market Value of Equity + Market Value of Debt - Cash

45
Q

What does EBITDA stand for within financial management?

A

Earnings Before Interest, Taxes, Depreciation, and Amortization

46
Q

What is the formula for Enterprise Value Ratio?

A

Enterprise Value Ratio = EV / EBITDA

GT-OMSA-MGT-8803 (5 decks)

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