Lectures 4 and 5 Flashcards

1
Q

Factors affecting the sensitivity of NPV calculations

A
Sales price
Annual sales volume
Project life
Financing cost
Operating costs
Initial outlay
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2
Q

Long term external sources of finance

A
Ordinary shares
Preference shares
Borrowings
Financial leases
Hire purchase agreements
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3
Q

Short term external sources of finance

A

Bank overdraft
Bills of exchange
Debt factoring

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4
Q

Ordinary shares

A

No fixed rate of dividend

More risky

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5
Q

Preference shares

A

Less risky
Fixed rate of dividend
Get priority
Lower levels of return

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6
Q

Lowest risk to return ratio

A

Loan capital
Followed by preference shares
Followed by ordinary shares

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7
Q

Loan capital

A

It’s a loan so they bank don’t really benefit??

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8
Q

Benefits of finance leasing

A

Ease of borrowing
Reasonable cost
Flexibility
Improves cash flows

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9
Q

What is hire purchase

A

A method of buying goods through making instalment payments over time

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10
Q

Benefits of hire purchasing

A

Cash flows can be weighted towards the end of the term
Flexible
However, overall cost is higher

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11
Q

What is financial leasing

A

A form of renting an asset, using it without owning it

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12
Q

What is bank overdrafts

A

Allows business to maintain a negative balance on its bank account

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13
Q

What is debt factoring

A

A way a business can raise cash by selling their sales invoices to a third party at a discount

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14
Q

How does debt factoring work

A

Company sells factor invoices for less but receives the money now

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15
Q

What are retained earnings

A

Shareholders leaving their dividends in the business

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16
Q

Pecking order theory

A
  1. Retained profits
  2. Loan capital
  3. Share capital
17
Q

Internal sources of short-term finance

A

Tighter credit control
Reduced inventories levels
Delaying payments to trade payables

18
Q

How to find profitability index

A

(NPV + initial investment) / Initial investment