SP3 Flashcards
What are two potential ethical issues associated with not disclosing the true source of ingredients in a company’s products?
Misleading Customers: By not disclosing that the bread used in sandwiches comes from outside the local sourcing commitment, a company risks misleading customers who choose their products based on the promise of local sourcing. This could damage trust and brand loyalty if discovered, as it contradicts advertised ethical standards and customer expectations.
Contradiction of Sustainability Claims: Using ingredients that require significant transportation undermines a company’s sustainability claims, especially if these involve reducing carbon footprints and supporting local economies. Not revealing such practices could be seen as deceptive, potentially jeopardizing the company’s reputation as a leader in sustainability and risking its eligibility for sustainability awards.
What is Return on Capital Employed (ROCE)?
ROCE is a financial ratio that indicates the efficiency and profitability of a company’s capital investments. It measures how well a company is generating profits from its capital employed, providing insight into the effectiveness of management in using capital to drive revenue.
How is Return on Capital Employed (ROCE) calculated?
ROCE = (Profit Before Interest and Tax) / Capital Employed (debt + equity)
Profit Before Interest and Tax (PBIT): Represents the operational earnings generated from the company’s core business operations.
Capital Employed: This typically includes the total equity and debt used by the company to fund its operations. It represents the total capital that is being utilized to generate earnings.
What is Residual Income (RI)?
Residual Income (RI) is a financial performance metric that measures the excess profit that a business generates above its cost of capital. It is used to assess the absolute amount of wealth created by a business after covering all costs, including the cost of capital. RI helps in evaluating the effectiveness of management in generating additional value over and above the required return on investment.
How is Residual Income (RI) calculated?
Answer (Back of the Flashcard):
RI = Profit Before Interest and Tax (PBIT) – Imputed Interest
RI = Profit Before Interest and Tax (PBIT) – Imputed Interest (Capital Employed * Cost of Capital)
Profit Before Interest and Tax (PBIT): This is the operating profit earned before the deduction of interest and tax expenses.
Imputed Interest: This is the notional interest charge on the capital employed in the business operations, calculated as (Capital Employed * Cost of Capital).
What is Economic Value Added (EVA)?
Economic Value Added (EVA) is a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA is a useful indicator of how profitable company projects are and whether they are generating value above the total cost of capital.
How is Economic Value Added (EVA) calculated?
EVA = Adjusted Net Operating Profit After Tax (NOPAT) – Imputed Interest on Adjusted Capital Employed
Where:
Adjusted Net Operating Profit After Tax (NOPAT): This represents the company’s operating profits after adjusting for taxes but before financing costs. It provides a clear view of the profitability derived purely from operating activities.
Imputed Interest on Adjusted Capital Employed: This is the notional cost of capital (including both debt and equity), calculated by multiplying the total adjusted capital employed by the cost of capital percentage. It represents the minimum rate of return that capital could have earned if invested elsewhere.
What is an invoice factoring proposal?
An invoice factoring proposal is a financial arrangement where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount.
The factor provides the business with an immediate advance of a percentage of the invoice value, typically 70% to 90%, allowing the business to generate immediate cash flow. The factor then collects the full amount from the customer at maturity of the invoice, and the remaining balance, minus a factoring fee, is paid to the business.
This arrangement helps businesses manage their cash flow by quickly converting sales on credit terms into immediate working capital.
What are two critical non-financial factors a company should consider before deciding to use a factoring service?
Control Over Customer Relationships and Credit Decisions: When engaging in non-recourse factoring, the factoring company typically takes control of deciding which customers’ credit to approve. This can lead to the rejection of potentially profitable sales perceived as too risky by the factor, possibly causing a decline in overall sales and negatively impacting the company’s market reputation. Additionally, losing direct interaction with customers might result in a loss of valuable market intelligence and opportunities for additional sales, which could have strategic implications for business development and customer relationship management.
Impact on Customer Trust and Brand Perception: Utilizing a factoring service can affect how customers view the stability and reliability of a business. If customers become aware that a company is selling its invoices to a third party, it may lead them to question the financial health or operational stability of the business. This perception can affect brand trust and loyalty, particularly if the factor’s interaction with customers is not consistent with the company’s established service standards.
What are three potential disadvantages of a company deciding not to compile annual budgets?
Lack of Financial Guidance: Without a budget, a company lacks a structured financial plan to guide decision-making. This can be particularly detrimental in competitive industries where strategic financial planning is crucial for meeting targets and managing resources effectively.
Operational Continuity Risks: Relying solely on the intuition and experience of a single leader, such as a company founder, for running business operations can pose risks to continuity. If the key person is unavailable (due to illness or other reasons), the absence of a formal budget makes it difficult for other senior staff to maintain operations smoothly and consistently.
Impact on Employee Engagement and Management Incentives: Budgets often play a critical role in setting expectations and goals for management and staff, and are used as tools for motivation and performance evaluation. Without clear budgets, it may be challenging to effectively incentivize and align the efforts of the management team and broader staff, potentially leading to decreased clarity around objectives and reduced motivation.
What are three (+1) opportunities that Big Data might offer an organization?
Enhanced Decision Making: Utilizing real-time data allows organizations to make more informed and timely decisions, enhancing responsiveness to market changes and improving operational efficiency.
Improved Marketing and Revenue Growth: Big Data enables more targeted marketing strategies by analyzing customer behaviors and preferences, leading to increased revenue through better customer segmentation and personalized marketing campaigns.
Advanced Forecasting and Resource Allocation: Predictive modeling helps in improving the accuracy of forecasts, allowing organizations to anticipate future trends and demands more effectively. This capability supports strategic planning and optimizes resource allocation to maximize value addition and profitability.
Development of New KPIs: Big Data supports the development of new Key Performance Indicators (KPIs) tailored to the specific operational aspects of a business, enhancing performance measurement and management.
Product and Service Development: Insights from Big Data can drive innovation in product and service offerings, directly responding to consumer needs and emerging market trends.
How can congestion maps assist a company in improving its operational performance?
Congestion maps are visual tools used to display traffic conditions on roads across different areas at various times.
Optimized Routing: Congestion maps allow a company to identify high and low congestion routes, enabling the rescheduling or rerouting of logistics to avoid traffic jams. This leads to improved fuel consumption, faster delivery times, and reduced operational costs.
Enhanced Customer Service: Regular use of congestion maps to optimize delivery routes can significantly enhance customer service by ensuring timely deliveries. This capability could serve as a competitive differentiator, especially in sectors where delivery speed and reliability are critical.
Maintenance and Refueling Efficiency: By leveraging data from congestion maps, a company can plan optimal refueling stops and maintenance schedules. This helps in maintaining vehicle performance and efficiency, extending the life expectancy of the fleet, and reducing overall maintenance costs.
Cost-effective Route Planning: Utilizing congestion maps to evaluate the cost-effectiveness of using toll roads versus alternative routes can lead to significant savings in both time and money, further optimizing operational expenditures.
How do you calculate the current equity value of a company using the Free Cash Flow approach?
- Estimate WACC: Calculate the Weighted Average Cost of Capital (WACC) by determining the costs of debt and equity according to the company’s capital structure.
- Forecast Free Cash Flows (FCFs): Project the company’s Free Cash Flows over the forecasting period. For NUSOFT, this is done for a two-year period, taking into account operational income, changes in working capital, capital expenditures, and other factors affecting cash flow.
- Estimate Terminal Value: Calculate the terminal value at the end of the forecasting period using a suitable model (e.g., the Gordon Growth Model or an exit multiple) to estimate the value of cash flows extending beyond the forecast period.
- Discount FCFs and Terminal Value: Apply the previously estimated WACC to discount both the forecasted FCFs and the terminal value back to their present values.
- Calculate Equity Value: Sum the present values of the discounted FCFs and the terminal value, and then subtract any outstanding debt to derive the equity value of the company.
