Financial Management Week 4 Flashcards
When do you record cash flow within financial management?
You record when the money moves, explicitly avoiding accrual accounting.
How are cash flows classified as relevant or not for potential project investments within financial management?
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.
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?
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).
What would you call a cost where spent cash does not materially impacting the cash flow of the project?
Sunk Cost
What would you call a cost where cash flow is used on R&D?
Test Marketing Cost
What would you call a cost where part of cash flow is impacted by a shifting cash flow from another part of the firm?
Erosion Cost
What would you call a cost where cash flow could be used in an alternate project that is mutually exclusive?
Opportunity Cost
What does ATCF stand for within financial management?
After-Tax Cash Flow
What does CF stand for within financial management?
Cash Flow
What type of expense is a depreciated Cash Flow?
A non-cash expense
What is the formula for ATCF?
(Revenue - Cost) * (1 - Tax) + Depreciation * Tax
How are Cash Flows categorized at the beginning and end of a project within financial management?
Working Capital is:
- Beginning = Cash Outflow
- End = Cash Inflow
What factors should you consider when making Cash Flow estimates within financial management?
- Price
- Volume
- Variable Costs
- Fixed Costs
- Capital Expenditure
- Working Capital
What is a Nominal Return?
The percent change in the written money, over some time; relative to a “Real” Return. $100 with a 10% nominal return, will become $110.
What is a Real Return?
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%.
What is the Formula for the Fisher Effect?
1 + R = (1 + r) * (1 + h)
- R: nominal return
- r: real return
- h: inflation rate
What is the Formula for the approximated Fisher Effect?
R = r + h
- R: nominal return
- r: real return
- h: inflation rate
What is Sensitivity Analysis within financial management?
Sensitivity Analysis is the process of creating an analysis where key variables change to compare and contrast alternate project outcomes.
What types of Cash Flows does Stock ownerships produce?
- Dividends
- Capital Gains
What types of stocks growths are there?
- Zero Growth
- Constant Growth
- Differential Growth
What kind of growth does a perpetuity stock have?
Zero Growth
What is the Formula for a Zero Growth Stock?
P₀ = Div / R
What kind of growth does a growing perpetuity stock have?
Constant Growth
What is the Formula for a Constant Growth Stock?
P₀ = Div₁ / (R - g)
OR
P₀ = [Div₀ * (1 + g)] / (R - g)
What is the Formula for the Growth Rate?
g = Retention Ratio * Return on Retained Earnings
What is the Formula for the Retention Ratio?
Retention Ratio = 1 - (DPS / EPS)
Into what fundamental parts can you break down Discount Rate?
- Dividend Yields
- Growth Rate (in dividends)
What is “g” in the formula P₀ = Div₁ / (R - g)?
Growth Rate
What is the “R” in the formula P₀ = Div₁ / (R - g)?
Risk
What does EPS stand for within financial management?
Earnings Per Share
What does NPVGO stand for within financial management?
Net Present Value of Growth Opportunities
What does DPS stand for within financial management?
Dividends Per Share
What is the “R” in the formula P = (EPS / R) + NPVGO?
Risk
What is the “P” in the formula P = (EPS / R) + NPVGO?
The Price of a Firm
What is the “EPS” in the formula P = (EPS / R) + NPVGO?
Earnings Per Share
What is the “NPVGO” in the formula P = (EPS / R) + NPVGO?
Net Present Value of Growth Opportunities
How does this formula change for a Cash Cow firm?
P = (EPS / R) + NPVGO
Ignore the NPVGO so that the formula is just:
P = (EPS / R)
How will an increase in the Retention Rate affect a firm?
- Reduce the dividend paid to shareholders
- Increase the firm’s growth rate
What does PE stand for within financial management?
Price-Earnings Ratio
What does PPS stand for within financial management?
Price Per Share
What is the formula for Price-Earnings Ratio?
PE = (1 / R) + (NPVGO / EPS)
How is a firm’s Price-Earnings Ratio related to Growth Opportunities and Risk?
- Positively related to Growth Opportunities
- Negatively related to Risk
What does EV stand for within financial management?
Enterprise Value
What is the formula for EV?
EV = Market Value of Equity + Market Value of Debt - Cash
What does EBITDA stand for within financial management?
Earnings Before Interest, Taxes, Depreciation, and Amortization
What is the formula for Enterprise Value Ratio?
Enterprise Value Ratio = EV / EBITDA
