Overview Flashcards
What does the Balance Sheet show?
Assets, liabilities, and equity at a specific point in time.
What does the Income Statement display?
Revenue, expenses, and profit over a period.
What does the Cash Flow Statement report?
Cash inflows and outflows from operating, investing, and financing activities.
Name two liquidity ratios.
- Current Ratio
- Quick Ratio
What are three profitability ratios?
- Net Profit Margin
- Return on Assets (ROA)
- Return on Equity (ROE)
Define the term ‘Time Value of Money (TVM)’.
The principle that a sum of money today is worth more than the same sum in the future due to its earning potential.
What is Present Value (PV)?
Current value of future cash flows discounted at an appropriate rate.
What is Future Value (FV)?
Value of current money invested at a specified rate over time.
What is Net Present Value (NPV)?
Measures the difference between the present value of cash inflows and outflows.
What decision rule is associated with NPV?
Accept projects with a positive NPV.
What does the Internal Rate of Return (IRR) signify?
The discount rate that makes the NPV of cash flows equal to zero.
What is the Payback Period?
The time it takes for a project to recover its initial investment.
What is the formula for the Current Ratio?
Current Assets / Current Liabilities.
What is the Cash Conversion Cycle (CCC)?
Measures time taken to convert investments in inventory to cash.
What are the three types of risk?
- Systematic Risk (market-related)
- Unsystematic Risk (firm-specific)
What does Beta (β) measure?
Market risk.
What does the Weighted Average Cost of Capital (WACC) represent?
The average rate of return required by all of a company’s investors.
What is the purpose of working capital management?
To ensure liquidity for day-to-day operations.
What are the key components of Fund Flow Analysis?
- Sources of Funds
- Uses of Funds
Fill in the blank: Fund Flow Analysis explains the movement of funds between two _______.
balance sheet dates.
What are the objectives of Fund Flow Analysis?
- Analyze financial consequences of operational decisions
- Explain reasons for changes in working capital
- Assess financial health
- Assist in long-term planning
What are the main differences between Cash Flow Analysis and Fund Flow Analysis?
- Cash Flow Analysis shows actual cash inflows/outflows
- Fund Flow Analysis shows changes in financial position between two periods
What is an Aggressive Working Capital Policy?
Maintains low levels of current assets relative to sales.
What is a Conservative Working Capital Policy?
Maintains high levels of current assets to minimize liquidity risk.
What is the significance of Working Capital Policy?
- Ensures operational continuity
- Improves profitability
- Reduces financial risks
- Enhances supplier/customer relationships
What is the main focus of Capital Investment Analysis?
Evaluating long-term investments to determine value generation.
What is the decision rule for IRR?
Accept the project if IRR > Cost of Capital.
What is the formula for calculating Funds from Operations?
Net Profit + Non-cash expenses.
What does a Fund Flow Statement show?
Sources and applications of funds.
What is Trend Analysis?
Identifies patterns over time to forecast future performance.
What does Net Present Value (NPV) measure?
The difference between the present value of cash inflows and outflows
A positive NPV indicates that the project adds value to the firm.
What is the decision rule for NPV?
Accept projects with a positive NPV
Positive NPV indicates value addition to the firm.
What is the Internal Rate of Return (IRR)?
The discount rate that makes the NPV of cash flows equal to zero
IRR is used to evaluate the profitability of a project.
What is the decision rule for IRR?
Accept the project if IRR > Cost of Capital
If IRR exceeds the cost of capital, the project is considered profitable.
What does the Payback Period measure?
The time it takes for a project to recover its initial investment
Shorter payback periods are preferred.
What is a limitation of the Payback Period?
Ignores the time value of money and cash flows after payback
This can lead to suboptimal investment decisions.
What does the Profitability Index (PI) measure?
The value created per unit of investment
Accept projects with PI > 1.
What is the Accounting Rate of Return (ARR)?
Measures expected return based on accounting profits
Accept if ARR > required rate of return.
How does Time Value of Money (TVM) influence capital investment decisions?
Evaluates cash flows at present value
TVM is crucial for comparing investments with different timelines.
What is the formula for NPV?
NPV = Total Present Value of Cash Flows - Initial Investment
NPV calculation considers all cash flows discounted to present value.
What is a horizontal merger?
Occurs between companies in the same industry and at the same stage of production
Example: Two car manufacturers merging.
What is a vertical merger?
Occurs between companies at different stages of the supply chain
Example: A car manufacturer merging with a parts supplier.
What is a conglomerate merger?
Occurs between companies in unrelated businesses
Example: A technology firm merging with a retail chain.
What are the reasons for mergers?
- Synergy Creation
- Economies of Scale
- Diversification
- Tax Benefits
- Growth
These reasons reflect the strategic goals of merging firms.
What is a divestiture?
Occurs when a company sells, liquidates, or spins off a business unit
The goal is often to refocus on core operations or raise capital.
What are the types of divestitures?
- Sell-Off
- Spin-Off
- Equity Carve-Out
- Split-Off
- Liquidation
Each type serves different strategic purposes.
What are the risks of mergers?
- Cultural Clashes
- Overvaluation
- Integration Challenges
These risks can hinder the success of a merger.
What is the main purpose of divestitures?
To refocus on core business and improve financial performance
Divestitures can also raise capital and comply with regulations.
What is political risk analysis in international capital budgeting?
Assessing risks like expropriation and currency restrictions
Political risks can significantly affect investment decisions.
What are the key markets in international finance?
- Eurocurrency Markets
- International Bond Markets
- Foreign Exchange Markets (FOREX)
These markets facilitate global capital raising and currency trading.
What is the role of the International Monetary Fund (IMF)?
Provides financial assistance and promotes international monetary cooperation
The IMF plays a crucial role in stabilizing global economies.
What is transfer pricing?
The pricing of transactions between subsidiaries of a multinational corporation
Proper transfer pricing ensures tax efficiency and compliance.
What are the determinants of the international cost of capital?
- Country Risk Premiums
- Exchange Rate Forecasts
- Global Debt vs. Equity Mix
These factors influence the cost of financing for multinational corporations.
What does Value-at-Risk (VaR) measure?
Quantifies potential losses in financial risk management
VaR is a crucial tool for assessing market risk.
True or False: A merger results in a combined entity.
True
Mergers aim to create a single entity from two companies.
Fill in the blank: A _______ occurs when two companies combine to form a single entity.
merger
Mergers are often pursued for strategic advantages.
What are spot and forward exchange rates?
Spot exchange rates are current rates for immediate currency transactions, while forward exchange rates are agreed upon today for currency transactions that will occur at a future date.
These rates are essential for foreign exchange markets and currency risk management.
What are the types of currency exposure faced by MNCs?
Types of Exposure:
* Transaction Exposure
* Translation Exposure
* Economic Exposure
Each type of exposure has different implications for financial management in multinational corporations.
What is hedging in currency risk management?
Hedging is a risk management strategy used to offset potential losses in currency movements by using financial instruments such as forward contracts and options.
This strategy helps protect against unfavorable exchange rate fluctuations.
Explain the role of Eurocurrency markets.
Eurocurrency markets facilitate the borrowing and lending of currencies outside their home countries, enhancing international finance accessibility.
These markets allow MNCs to operate with more flexibility in international transactions.
What is the significance of the International Monetary Fund (IMF) and World Bank?
The IMF provides financial stability and monetary cooperation, while the World Bank offers financial and technical assistance for development projects.
Both institutions play crucial roles in international financial markets.
What is the Weighted Average Cost of Capital (WACC) for MNCs?
WACC is the average rate of return a company is expected to pay its security holders to finance its assets, adjusted for the international context of MNCs.
WACC takes into consideration the cost of equity and debt while factoring in the risks associated with international operations.
How does political risk affect capital budgeting for international projects?
Political risk can lead to changes in regulations, expropriation, or instability, affecting project viability and increasing the required rate of return.
MNCs must incorporate these risks into their capital budgeting processes.
Fill in the blank: The three types of exposure faced by MNCs are _______.
Transaction Exposure, Translation Exposure, Economic Exposure
Understanding these exposures is vital for effective financial management.
What is the impact of international diversification on the cost of equity?
International diversification can lower the cost of equity by spreading risk across different markets and reducing the overall volatility of returns.
This strategy allows MNCs to optimize their capital structure.
What are the key components of managing interest rate and currency risks?
Key Components:
* Value at Risk (VaR) methodologies
* Use of derivatives for hedging
* Balancing currency inflows and outflows
Effective management of these risks is crucial for MNCs operating globally.
What are letters of credit in the context of international trade?
Letters of credit are financial instruments issued by a bank guaranteeing payment to a seller upon presentation of specified documents, facilitating trade finance.
They ensure that sellers receive payment while providing security to buyers.
How do export credit agencies support international trade?
Export credit agencies provide financial assistance and insurance to domestic companies to help them compete internationally.
They play a crucial role in mitigating risks associated with international transactions.
What is the formula to calculate Total Assets?
Total Assets = Current Assets + Net Fixed Assets
This formula is fundamental in preparing balance sheets.
What adjustments are made for depreciation in a balance sheet?
Adjustments include increasing accumulated depreciation and decreasing net fixed assets by the depreciation expense.
Accurate depreciation tracking is essential for financial reporting.
What is the final retained earnings amount after dividends in the case of XYZ International?
The final retained earnings amount is $17,000.
This is calculated by subtracting dividends from the initial retained earnings.
Fill in the blank: The Current Ratio is calculated as _______.
Current Assets / Current Liabilities
This ratio assesses a company’s short-term liquidity.
What does a Quick Ratio measure?
The Quick Ratio measures a company’s ability to meet short-term obligations without relying on inventory sales.
It is calculated as (Current Assets - Inventory) / Current Liabilities.
