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Financial Management > In Class Test > Flashcards

In Class Test Flashcards

1
Q

Significant factor when setting issue price for a rights issue

A

make sure the issue price stays below the market price

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2
Q

if a firms sales decrease

A

then EBIT decreases

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3
Q

finance lease is the same as

A

a financier providing finance as a loan to buy an asset

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4
Q

size of withdrawal

A

-/~ 2withdrawal costwithdrawal amount/ interest

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5
Q

venture capitalist

A

providing funds to a small/medium company e.g.a management buyout of a medium sized electrical company

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6
Q

Overtrading

A

a company trying to support too large a volume of trade with capital resources

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7
Q

Cash conversion cycle:

A

raw materials+work in progress+finished goods inventory -+debtor conversion-creditor period

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8
Q

strategic information is mainly used by

A

senior management in an organisation

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9
Q

productivity measurements are

A

examples of tactical information

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10
Q

operational information is

A

required frequently by its main users

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11
Q

short term tactical plan

A

lowering selling prices

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12
Q

strategic planning

A

concerned with long term and quantifiable and qualitative matters

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13
Q

Profitability Index

A

Present Value of future cash flows / investment

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14
Q

Fishers equation:

A

(1+m)=(1+h)(1+i) m=money rate of return h= real rate of return i=inflation

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15
Q

high price earning ratio

A

anticipated increase growth in future and increase in share price

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16
Q

trade credit

A

2/10 net 30
2= discount %
10 = days credit for early settlement
30 = credit period

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17
Q

dividend growth rate formula

A

g = Dn-Dn-1/Dn-1

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18
Q

Price Earnings ratio formula

A

price per share/ earnings per share

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19
Q

advantage of high gearing

A

prospects of increased profits from using borrowed money for expansion

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20
Q

conversion price

A

value of shares/amount of shares

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21
Q

conversion premium

A

conversion price - current price / current price

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22
Q

change in EBIT

A

operating leverage * sales change

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23
Q

a firm maintaining a constant ratio of debt equity may experience

A

its more difficult to maintain a stable dividend

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24
Q

characteristics of commercial paper borrowing

A

borrowers have increased credit quality, maturity is short term, banks aren’t lendors

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25
Q

increase in assets and a decrease in liability makes

A

a increase in net working capital

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26
Q

value of equity =

A

net asset value

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27
Q

value of whole firm =

A

total asset value

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28
Q

Net asset value is used for

A

businesses with physical assets

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29
Q

capital gearing is

A

ratio of debt to shareholders funds or total assets

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30
Q

agency costs in finance theory

A

direct and indirect costs of ensuring that agents act in the best interest of principals

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31
Q

stock market pricing efficiency

A

in an efficient market, prices rationally reflect available information

32
Q

advantages of an efficient share market

A

encourages share buying, gives correct signals to company managers, allocates society’s resources

33
Q

to say share price moves in random walks

A

means share prices reflect all available info and price will change in response to new info

34
Q

prices follow a random walk

A

when the next piece of news is independent to the last piece of news

35
Q

g =

A

(1-p)r

36
Q

growth rate of dividends

A

(1 - paid dividend) * ROI

37
Q

using WACC to determine discount rate it must be assumed

A

theres a known target gearing ratio, costs of elements wont alter, project has similar risks to others

38
Q

in capital gearing, increasing the proportion of debt

A

increases the cost of equity

39
Q

traditional view of capital gearing

A

a business with no debt can increase its value by substituting some debt for equity

40
Q

value of a geared business =

A

value of its ungeared counterpart * corporation tax rate * value of debt

41
Q

increase in operating gearing

A

increase in proportion of fixed costs in its total costs figure

42
Q

traditional view of dividends

A

shareholders prefer immediate dividends and high payout ratio

43
Q

if a business with large long term loans plans to pay some off

A

net profit increases and quick asset ratio decreases

44
Q

working capital requirement

A

stock+trade debtors+ cash - trade creditors

45
Q

Economic Order Quantity

A

_/~ 2* annual demand * cost per order/ cost per unit

46
Q

rights issue of a listed company (3)

A

shareholders sell rights on the market//rights issues dont require a prospectus// rights issue can be at a discount at a market price

47
Q

cash discount formula

A

% discount/ 100-%discount * 365/ credit - discount

48
Q

stock market flotation

A

involves selling a percentage of the business in shares which are then traded

49
Q

business risk

A

variability in firms operating profit

50
Q

convertible securities

A

fixed return securities, converted share price is predetermined, and issue costs are lower than for equity

51
Q

capital budgeting decision

A

a decision to expand into a new line of products at a large cost

52
Q

conservative policy

A

all fixed assets, permanent and fluctuating assets, being financed by long term funding

53
Q

reasons for stock market flotation

A

access to more finance, enhancement of companys image and transfer capital to others

54
Q

to measure the change in shareholder wealth

A

share price movement + dividends paid

55
Q

factors to consider when choosing a source of finance

A

companys cost of capital, current and future gearing levels, any NCAs that can be used as collateral

56
Q

asset beta =

A

equity beta*( E/ E+D (1-t) )

57
Q

a bank will consider these factors before lending large sums of money

A

creditworthiness of the company, projected cash flows and any collateral provided by the borrower

58
Q

financial management is

A

concerned with investment, financing and dividend decisions. It’s concerned with financial planning and control and considers management of risk

59
Q

profitability index description

A

the gross present value divided by the initial outlay

60
Q

capital rationing

A

necessary funding for all the projects that have the potential to increase shareholders value

61
Q

soft capital rationing

A

internal management imposed limits on investment expenditure despite availability of npv projects

62
Q

working capital cycle

A

trade receivables+raw material+WIP inventory+ finished goods - trade payables

63
Q

average inventory level

A

EOQ/2

64
Q

central point in M and M’s assertion on dividends

A

the pattern of dividends is irrelevant to valuation

65
Q

M and M’s 3 assumptions

A

no transaction costs, no taxes and shares are efficiently priced

66
Q

Under pecking order theory a business will raise finance by

A

retained profit, debt, new shares

67
Q

M and M’s view on dividends includes the notion that individual shareholders

A

who don’t like a businesses dividend policy can alter it by buying/selling shares

68
Q

stock market flotation

A

converting a private company into a public company

69
Q

WACC =

A

(1-tax rate)interestdebt + ROR(1-debt)

70
Q

cash value formula

A

net cash flow / (cost of debtamount) + (cost of capitalamount)

71
Q

which doesn’t promote a stable dividend policy

A

dividends as a residual, availability of NPV projects

72
Q

dividend growth model formula

A

K= (d(1+g)/p) +g

73
Q

dividend growth model written out

A

dividend per share (1+rate of growth) / current share price + rate of growth

74
Q

high operating gearing

A

high proportion of fixed costs in its total costs figure

75
Q

existence of potential bankruptcy costs and M and M assertion on capital gearing

A

likely to be an optimum capital gearing level

76
Q

sensitivity to change in sales volume

A

net present value / PV of contribution

77
Q

percentage shareholder return

A

difference in share price+dividend at current price / previous share price

Financial Management (2 decks)

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