Managing Business Finance Revision Flashcards

Flashcards covering key concepts from the Managing Business Finance course, focusing on revision for the exam.

Why does money have a time value?

People prefer to consume goods today rather than wait to consume similar goods tomorrow because money has a time value. A pound today can be invested to earn interest.

What is the method called to find a present value?

Discounting

What does enviornmental sustainability aim to do?

Maintain and preserve ecological integrity, biodiversity, and the balance of natural systems.

What are the investment appraisal techniques?

Return on Capital Employed (ROCE), Payback Period (PBP), Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI)

What is the first step in NPV Calculation?

Identifying and adding up all expenses related to the cost of the project.

What does a Profitability Index greater than 1 indicate?

If the PI is greater than 1 (PI > 1): This indicates that the present value of expected cash flows exceeds the initial investment and that the project is expected to generate a positive return on investment.

What are divisible projects?

Investment opportunities that can be broken down into smaller, independent components or stages.

What are indivisible projects?

Investment opportunities that cannot be easily broken down and require commitment to the entire project as a whole.

What analysis is applied to invesment projects?

Risk, uncertainty, sensitivity analysis, breakeven analysis, scenario analysis, and simulation.

Based on the nature of the claim, financial markets can be divided into what two categories?

Equity markets and Debt Markets

How do equity markets provide financing?

Equity markets provide financing through the issuance of financial instruments that come with a claim on the earnings and/or assets of the company.

What is a capital market?

A capital market is a market for issuing and trading financial securities that have a long or indefinite maturity (typically with a maturity of above one year).

What is market efficiency?

Market efficiency concerns the extent to which market prices correctly reflect available information.

What can total portfolio risk be divided into?

Total portfolio risk can be divided into systematic and unsystematic risk.

What is market risk?

Market risk is due to external factors such as changes in interest rates, business cycles and government policy.

What is specific risk?

Specific risk is a company- or asset-specific risk.

What relationship does the Capital Asset Pricing Model (CAPM) define?

The CAPM defines a positive linear relationship between the expected return on any asset (𝑅𝑖) and its exposure to market (or systematic) risk as measured by 𝛽𝑖.

What does the market portfolio contain?

Theoretically, the market portfolio contains the sum of all investments, including not just financial securities such as stocks and bonds but also other investments such as real estate and human capital.

What is the equity of the corporation?

The collection of all outstanding share of a corporation is known as the equity of the corporation.

What is the order of precedence for residual claimant to corporate assets?

An order of precedence governs the distribution of the proceeds from liquidation in the event of bankruptcy

What is Theoretical Ex-Rights Price (TERP)?

After the rights issue, both old and new shares will trade at the TERP. It is calculated as the weighted average of the “old” price (cum rights price) and the rights issue price, weighted by the number of shares.

What is the Dividend Discount Model formula?

If an investor sells a stock in 1 year, the value of the stock today would be: 𝑃0 = 𝐸(𝐷𝑖𝑣1 + 𝑃1) / (1 + 𝑟)

What rights does a shareholder have?

A shareholder has the right to attend general meetings of the company, vote on appointment of directors, vote on appointment, remuneration and removal of auditors, receive annual accounts of the company and the report of its auditors and receive a share of any dividend paid.

What are bonds?

Bonds are securities that represent debt owed by the issuer to the investor, and typically have specified payments on specific dates.

How is the coupon payment determined?

The amount of each coupon payment is determined by the coupon rate of the bond.

What is the primary principle for valuing bonds?

Primary Principle: Value of financial securities = PV of expected future cash flows

How do bond prices and market interest rates relate?

Bond prices and market interest rates move in opposite directions.

What is default risk?

The risk that a bond issuer may default on his bonds.

What are convertible bonds?

Can be converted to ordinary shares at option of the holder at a specific date.

What are warrants?

Warrants give the holder the right (option), but not the obligation, to buy shares on a future date at a set price.

What is a lease?

A lease is a contractual agreement between a lessee and lessor.

What is the cost of capital?

The rate of return that a company has to offer finance providers to induce them to buy and hold a financial security.

When are dividends paid out according to the Residual Dividend Policy?

Dividends are paid out of the residual earnings that are not needed to finance new investment opportunities.

What is Capital structure?

Capital structure (also known as a company’s financial structure) is the specific mixture of long term debt and equity that a firm uses to finance its assets.

What is the formula for Capital Gearing Ratio?

LT Debt+Preference Share Capital / Total Equity

What is the Modigliani-Miller view?

The value of a company is a function of the investment decision, rather than the finance decision.

What is the pecking order theory?

Asymmetric information exists and it is costly. Managers have more information about the quality of firms.

What are Scrip Dividends?

Offer of additional ordinary shares to existing shareholders, in proportion to their existing shareholding (e.g. 1 for every 20 shares held), instead of a cash dividend.

What alternatives are there to dividends?

Typical Dividends, Share Repurchases or Share buybacks, Special Dividends, Non-pecuniary benefits

What is are sensible payout policy characteristics?

Avoid cutting positive NPV projects to pay dividends or buy back shares. Do not initiate dividends until the firm is generating substantial free cash flow.

What is the formula for Net Working Capital?

Net Working Capital = Current Assets- Current Liabilities

What are Working Capital accounts?

Working Capital accounts are Cash, Inventory, Trade receivables, Short-term investments AND Trade payables , Overdrafts and short-term loans , Long-term loans payable in the year , Tax payable , Dividend payment due

What is CCC?

CCC = Inventory period + Receivables period - Payables period