Strategic Planning A - Market and Risk Analysis Flashcards
Contribution Margin Ratio =
(Sales Price - Variable Cost) / Sales Price
Breakeven units =
Fixed Costs / (Price per unit - Variable cost per unit)
Breakeven units =
Annual Fixed Costs / Contribution Margin
A risk analysis technique based upon utility theory that compels the decision maker to choose at what point he/she is indifferent to the choise between a certain amount of money and the expected value of a risky amount is
certainty equivalent adjustment
Using a real options approach in capital investments planning helps managers in dealing with
uncertainty
Probability (risk) analysis is
an extension of sensitivity analysis
Probability analysis has the characteristics of:
- being used with an infinite # of outcomes
- the largest possible probability is 1.00
Sensitivity analysis determines
how the results will change if the original data or the underlying assumptions change
Strategic plan is
a document that assists a business with implementing its long-term goals and mission statement
The first step to complete in performing the strategic planning process is
create a mission statement
Sensitivity analysis in an investment project proposal
calculates the change in the result due to a potential change in the project’s CF
Techniques for assessing the potential effect of risk in a capital budgeting project include:
- sensitivity analysis
- adjusting req. rate of return
- adjusting estimated future cash inflows
- adjust payback period
Strategic planning establishes
the general direction of the organization
Strategic planning answers the questions:
- what product or service do we supply
- who are our customers
- how can we perform well
Correlation coefficient is
a measure of how closely 2 variables move in relation to one another; indicates which direction and by how much
The range of the Correlation coefficient is
-1 to +1
A negative Correlation coefficient means
that as one variable increases by 1 unit the other variable decreases by 1 unit
A positive Correlation coefficient means
that as one variable increases by 1 unit the other variable will also increase by 1 unit
A Correlation coefficient of zero means
that the movement of the variables is unrelated
Correlation coefficient is used by portfolio managers to
- diversify a portfolio
- remove unsystematic risk
- reduce volatility
*aim for negative correlation
Disadvantage of NPV is that it
does not provide the true rate of return on investment
The appropriate technique to analyze the alternatives by using expected inputs and then altering them before a decision is mad is
sensitivity analysis
The proper discount rate to use in calculating certainty equivalent NPV is the
risk-free rate
