Week 1 - capital planning Flashcards
1
Q
What is the break-even-Point? (BEP)
What is it a relationship between?
A
- How we can avoid accounting losses
- The relationsship between costs and units of sale(Q)
2
Q
when is BEPA helpful?
A
- 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)
3
Q
issues with BEPA
A
- 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)
4
Q
Operating leverage (OL)
- why important?
- What is the result of high OL?
- What relationsship between FC and VC constitutes the highest OL?
A
- 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)
5
Q
What is the equation for DOL?
A
6
Q
Explain the difference between DOL and BEPA?
A
- 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
7
Q
What does the FBEPA deal with?
A
- 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
8
Q
What does EBIT stand for
A
Earnings Before Interest and Taxes
9
Q
What does EPS stand for?
When is EPS = 0?
A
- Earnings Per Share
- When Interest+Taxes=EBIT (when earnings before interest and taxes is equal to interest and taxes)
10
Q
- Operating leverage considers how ____ affect ____
- Financial leverage considers how ____ affects ____
A
- Sales (Q) + EBIT
- EBIT + EPS (so also how sales–>EPS)
11
Q
How does Financial Operating Leverage arise?
A
- Through fixed financing costs
12
Q
What is the DFL?
And what is the formulae?
A
- Degree of Financial Leverage?
13
Q
What is DTL?
And what is the the formulae?
A
- the combination of DOL and DFL
- The Degree of Total Leverage
14
Q
How is the illustration of leverages?
A
15
Q
What is CBEP?
A
- Cash Break Even Point
- FC consits of both cash and non-cash elements (depreciation)
18
Q
What is the formulae in the DuPont Analysis?
A
19
Q
Regarding the DuPont analysis formulae, what does each element of the formulae express?
A
20
Q
A
21
Q
Explain shortly the idea behind the DuPont analysis
A
22
Q
What can a high or low ROE be traced back to?
A
