Investment Decisions

Question 1

What is Agency Theory>

Answer 1

There is a conflict between shareholders and directors objectives
The role of the director is to maximise shareholder wealth, but in reality their personal objectives may be different (E.g job security)

Question 2

What is the Fisher Equation?

Answer 2

m = r x i

m = nominal (money) rate
r = real (effective) rate
i = general inflation rate

Question 3

What is the Asset replacement formula?

Answer 3

Equivalent annual cost = NPV of one cycle of replacement/AF for cycle length

Question 4

What is Shareholder Value Analysis?

Answer 4

The main purpose of SVA is to highlight 7 key drivers of value.

Question 5

What are the 7 key drivers of value?

Answer 5

1) Sales Growth Rate
2) Operating Profit Margin
3) Corporation Tax Rate
4) Investment in non-current assets
5) Investment in working capital
6) Cost of Capital
7) Life of projected cash flows

Question 5

What are the 7 key drivers of value?

Answer 5

1) Sales Growth Rate
2) Operating Profit Margin
3) Corporation Tax Rate
4) Investment in non-current assets
5) Investment in working capital
6) Cost of Capital
7) Life of projected cash flows