Week 1 - capital planning Flashcards
What is the break-even-Point? (BEP)
What is it a relationship between?
- How we can avoid accounting losses
- The relationsship between costs and units of sale(Q)
when is BEPA helpful?
- cost control
- obtaining information regarding price policy
- analysing how changes affect production, costs, prices etc.
- required level of sales for new products
- analysing plan for modernisation/automatisation (vc–> fc)
issues with BEPA
- inadequate to deciding sales capacity
- Based on a single scenario
- What if sales escalate above the production capacity (extra workers might need overtime (VC up), or new premises may be required (FC up)
Operating leverage (OL)
- why important?
- What is the result of high OL?
- What relationsship between FC and VC constitutes the highest OL?
- An important issue is the impact of production volume on profitability when firms have different relations between FC and VC
- High OL=relatively small changes in sales can result in a large change in profit
- High FC over VC –> High OL. (The Net Operating Income - NOI - is more sensitive to changes in sales)
What is the equation for DOL?
Explain the difference between DOL and BEPA?
- BEPA emphasises on the volume required to make profits. DOL shows the sensitivity of profits with respect to changes in volume.
- Both show the impact of FC on TC
What does the FBEPA deal with?
- the Financial Break Even Point Analysis unveils the EBIT that the firm needs just to cover all of its financing costs and produce EPS equal to zero
- It deals with the lower part of the income statement, i.e. from EBIT to Net income available to stakeholders
What does EBIT stand for
Earnings Before Interest and Taxes
What does EPS stand for?
When is EPS = 0?
- Earnings Per Share
- When Interest+Taxes=EBIT (when earnings before interest and taxes is equal to interest and taxes)
- Operating leverage considers how ____ affect ____
- Financial leverage considers how ____ affects ____
- Sales (Q) + EBIT
- EBIT + EPS (so also how sales–>EPS)
How does Financial Operating Leverage arise?
- Through fixed financing costs
What is the DFL?
And what is the formulae?
- Degree of Financial Leverage?
What is DTL?
And what is the the formulae?
- the combination of DOL and DFL
- The Degree of Total Leverage
How is the illustration of leverages?
What is CBEP?
- Cash Break Even Point
- FC consits of both cash and non-cash elements (depreciation)
- What happens to the CBEP if cash expenditures are very close to FC?
- CBEP is very close to BEP
What does ROE stand for?
Return on Equity
What is the formulae in the DuPont Analysis?
Regarding the DuPont analysis formulae, what does each element of the formulae express?
Explain shortly the idea behind the DuPont analysis
What can a high or low ROE be traced back to?
Mention some issues with the DuPont analysis?
1) Depreciation: If a company writes of its fixed asset quicker, then its annual profits and subsequently its ROA will be lower
2) Internal pricing: In large MNC (Multinational corporations) divisions sells to each other and these prices have a significant effect on profits - so high internal pricing will lead to high ROA for that specific devision
3) Time: Some investments will not show an effect immediately (R&D), so these will only be an expense in the beginning and not contribute to profit –> lowering ROA
4) Inflation and market conditions: A company that bought an asset many years ago at a lower price will have a higher ROA than the firm that recently bought the asset
