Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

PD4 > Q3 > Flashcards

Q3 Flashcards

1
Q

What is the advantages & disadvantages of Payback?

A

Payback is a method that shows how rapidly a project returns the initial investment back to the organisation.

Advantages:

  • Easy to calculate
  • Easy to understand
  • Quick decisions to be made on go, no-go rules

Disadvantages:
- Doesn’t consider time value of money
- Payback method does not give a rate of return
-

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the advantages and disadvantages of Discounted cash-flow?

A

DCF compares the the value of a unit of currency today to the value of that same unit in the future, taking inflation and returns into account.

Advantages:

  • Take into account the time value of money
  • Takes inflation and returns into account

Disadvantages:
- No certainty with the calculations using the discount figure
-

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the advantages and disadvantages of Internal Rate of Return?

A

Internal rate of return is defined as the discount rate where the NPV of cash flows are equal to zero. An internal rate of return offers a way to quantify the rate of return provided by the investment.

Advantages:

  • Widely accepted in the project and financial community
  • Considers time value of money
  • Can provide excellent guidance on project’s value and risk

Disadvantages:

  • Multiple or no rates of return
  • Changes in discount rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Explain the term exchange rate?

A

Exchange rate is the price of a nations currency in terms of another currency. It is the rate at which one country’s currency is traded for that of another.

There will be 2 exchange rates between pairs of currencies; a selling rate and a buying rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is meant by a fixed and floating exchange rate including their role in managing the volatility of currencies?

A 
Fixed rates (pegged exchange rates)
In this system the currency's value is matched to some sort of anchor currency or even a commodity. The advantages of this are that the fixed rate method can provide certainty to exporters and importers as a guard and also it is an assurance against speculation.

Eg. Dollarisation is an extreme example of a fixed rate: a nation officially adopts another nations currency as it’s own.

Floating (flexible exchange rates)
In this system currency’s are allowed fluctuate freely according to demand and supply, interest rates and inflation rates. Government intervention will still occur to achieve a government target rate. This is considered to be a managed or dirty float.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Reasons for exchange rate volatility?

A

Supply and demand; (interest rates, inflation, policies, speculation)
Purchasing power parity
The Fisher Effect
Balance of Payments; (international trade)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

5 risks that is present when funding investment in long term project?

A

Fights Typical Risks
Credit Risk;
Market Risk; (currency risk, interest rate, supply/demand)
Portfolio Concentration; (too much focus on one area)
Liquidity Risk; (both client and contractor)
Operational Risk; (systems, people, operations)
Business Event Risk; (STEEPLE)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Explain the term project finance?

A

Project finance is the funding package put together to enable large-scale, long term assets to be developed, built or installed which will, in operation, pay back the money invested in creating them from their own activities. Uses of project finance include the following;

  • Energy infrastructure
  • Pipelines
  • Mining projects
  • Roads
  • Factories
  • Hospital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Evaluate the key long-term sources of finance that may be available to a large public limited company (plc)?

A

Debt vs Equity

Equity Options:

  • Ordinary and preference shares
  • Venture capital
  • Future retained profits

Debt Options:

  • Bank loans
  • Leasing
  • Hire Purchase
  • Sale and leaseback agreements
  • Bonds
  • Grants
  • Debentures
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Describe 3 services provided by the banking sector?

A 
Trade Finance
Guarantees
Bills of Exchange
Documentary letters of credit
International bank accounts
Currency exchange and trading
Client introductions
Business advice
Investment Advice
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Outline the role played by the banking sector in international trade?

A

Banks are vital facilitators of international trade; besides providing liquidity they guarantee payment for around a fifth of world trade, in particular when the contract enforcement of the company is weak.

Banks can;

  • lend money through various loans
  • enable payments internationally through electronic transfer
  • provide credit references
  • assist with market intelligence
  • assist parties reach agreed exchange values
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Analyse 5 factors that could impact exchange rates?

A 
Interest rates
Inflation
Government Policy
Speculation
Purchasing Power Parity
The Fischer Effect
Balance Of Payments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Assess three main reasons for the volatility of exchange rates?

A 
Supply and Demand
Level of interest rates
Employment Outlook
Economic Growth Expectations
The Balance Of Trade
Central Government Intervention
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Compare the use of spot and forward exchange rates in the management of currencies by organisations in a supply chain?

A

A spot rate is the exchange rate that is being offered at the current time for an immediate transaction. The spot foreign exchange (forex) rate differs from the forward rate, in that it prices the value of currencies compared to foreign currencies today, rather than some time in the future. The spot rate in forex currency trading is the rate that most traders use when trading with an online foreign exchange broker.

A currency future or forward contract is legally binding contract that obligates the two parties involved to trade a particular amount of a currency pair at a predetermined price at some point in the future. Assuming that the seller dies not prematurely close out the position, they can either choose to own the currency at the time the future is written, or may speculate that the currency will be cheaper in the spot market some time before settlement date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Analyse the possible methods for managing commodity price volatility in the supply chains?

A

Commodities are unbranded and undifferentiated products the same in nature no matter the source nor who supplies them. Traditionally there are two types of commodities;

Hard: Natural resources that are mined or extracted (Oil, Metals)
Soft: Natural resources that are grown (Fruit, Grain)

  • Negotiating with supply chain partners
  • Improving purchasing operations
  • Pooling purchases to get discounts
  • Backward integration
  • Exchange rate management
  • Forward buying
  • Futures contracts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define the term ‘commodities’ and distinguish between hard and soft commodities?

A

Commodities are unbranded and undifferentiated products the same in nature no matter the source nor who supplies them. They tend to be primitive products such as raw materials in their basic state as the more refined the less undifferentiated they become. Commodities can be traded through commodity exchanges such as the New York Mercantile Exchange, the London Metal Exchange.

Hard commodities: include crude oil, iron ore, gold,and have a long shelf life. Agricultural products such as soybean, rice and wheat are considered ‘soft commodities’ since they have limited shelf life.

17
Q

Discuss the disadvantages and advantages of;

(i) Sale of Assets
(ii) Bank Overdraft
(iii) Line of Credit
(iv) Sale & Leaseback
(v) Factor and invoice discounting

A

(i) Sale of Assets
Adv
- Asset may no longer be needed or underused
Dis
- Reduces the overall value of the organisation
- May be a lengthy process if the asset is a propoerty

(ii) Bank Overdraft
Adv
- Quick and easy to arrange
- Maybe cheaper than a loan if required for short time
Dis
- Interest rates maybe high
- Facility can be withdrawn at short notice
- There will be a charge even if unused 
(iii) Line of Credit
Adv
- Interest is only payable if and when it is utilised 
Dis
- A set up fee may be payable in advance
(iv) Sale & Leaseback
Adv
- Injects cash into the organisation
Dis
- Expensive over the longer term
- Business loses ownership of the asset

(v) Factor & Invoice Discounting
Adv
- Availability of cash to continue to expand the business
Dis
- It can be a costly approach as charges may be high

18
Q

Explain the term ‘cost centre’ and asses how using cost centers could assist in managing and controlling the costs of an organisation?

A

A cost centre can be a location, a function, a process or any identifiable ‘centre’ where costs are grouped and controlled. A cost centre has responsibility for the centre, making ownership clear and highlighting that control can be linked to budget variance and future years budget process.

There are two main types of cost centers - production cost centres (direct costs) and service cost centres (indirect costs/overheads)

19
Q

Describe the main financial objectives;

(i) Government department or ministry
(ii) A public limited company

A 
(i) Government department or ministry
Value for money
Economy 
Efficiency 
Effectiveness 
Sustainability
(ii) Public Limited Company
Profitability
Shareholder Value
Revenue maximization
Turnover
ROCE
Sustainability
20
Q

Describe the 3 foreign currency risks?

A

Transaction Risk: Short term exposure the exchange rate movements that occur in the normal course of events with international transactions. Eg - Import/Export agreed in a foreign currency, then exchange rate moves before event.

Economic Risk: involves the effect of present value of longer-term cash flows. This can be difficult to avoid, although its effects can be dampened by spreading risk across different nations.

Translation Risk: involves gains/losses when accountancy results of foreign business units are translated into home currency.

21
Q

Discuss the key headings to consider when looking at the exchange rate markets?

A
  1. Types of exchange rate markets;
    - Fixed (pegged) - Dollarisation
    - Fluctuating - Dirty Float
  2. Reasons for exchange rate volatility;
    - Supply & Demand
    - Purchasing Power Parity
    - Balance of Payments
    - The Fisher Effect
  3. Types of foreign currency risk;
    - Transaction Risk: Short term exposure
    - Economic Risk: Long-term unavoidable
    - Translation Risk: Accounting risk when translating
  4. Different measures for managing exchange rate risk;
    - Strategic
    - Tactical
    - Currency derivatives; (Futures, Currency Swaps, Options)
  5. Forward Exchange Contracts
    - Currency Futures
    - Currency Options
    - Money Market Hedging
    - Currency Swaps
    - Banking services
    - Currency exchange and trading
22
Q

What is meant by a managed or dirty float?

A

Currencies with floating exchange rates are allowed to fluctuate freely, according to demand, interest rates, inflation, investor confidence. The currency’s governing bodies might not be happy with all the consequences of free floating, and may intervene to counter specific events. In this circumstance, it is considered a managed or dirty float.

23
Q

What is a nations balance of payments?

A

When you consolidate individual currency flows at the national scale, it highlights the role of international trade as a major factor in the determination of exchange rates. The national balance of payments account, which records the flow of receipts and payments between a nation’s resident organisations and citizens, and the rest of the world can dictate currency valuations.

24
Q

Explain the Fisher effect?

A

The Fisher effect relates to interest rates and expected rates of inflation. Following the Fisher effect, the currency of a nation with a relatively high interest rate should depreciate against the currency of a nation with a relatively low interest rate.

25
Q

Distinguish between forward rate of exchange and a spot rate?

A

The spot rate is the exchange rate that is being offered now, for an immediate transaction.

The forward rate is an exchange rate that is set now for currencies that are to be exchanged at a future date. It can either be higher (at a discount) or lower (at a premium) than the current spot rate.

26
Q

What is a currency future?

A

A currency future is a standardised contract to buy or sell a specified quantity of a specified currency at a specified future date. Futures are traded in futures market, so in theory there is more price transparency.

27
Q

What is a currency swap?

A

A currency swap is an agreement where two organisations agree to swap equivalent amounts of different currencies for a period. Such swaps can provide protection against exchange rate movements for longer periods than it would be possible in the forward market.

28
Q

How does a documentary letter of credit work?

A

In Bank B in Country B promised to pay Bank A in Country A, then Bank A believes it, and acts accordingly. In this way, Supplier A only needs to convince Bank A that they have fulfilled their obligations, and Customer B only needs to convince Bank B that they can be trusted to pay, for the system to work.

29
Q

What is a bill of exchange?

A

Banks facilitate bills of exchange. A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person whom it is addressed to pay on demand or at a fixed or determinable future time a sum of certain money to the order of a specified person. A cheque is a special type of bill of exchange.

PD4 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions