Commercial Intelligence > Finance > Flashcards

Finance Flashcards

(53 cards)

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1
Q

replacement cost

A

estimates the cost to replace an asset with a similar one at current market prices. Used to value individual business assets for insurance.

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2
Q

adjusted book value method

A

involves restating the value of the individual assets in a business to reflect their fair market values.
i.e., the total value of the business is obtained by summing the fair market values of all individual assets (tangible and intangible assets). minus liabilities

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3
Q

going concern value

A

Extra value from operating the business

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4
Q

what is multiples analysis method

A

Uses share price or other value multiples observed for public companies to estimate the value of a company’s share or an entire business.

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5
Q

what is transactions analysis

A

Analysts use prices paid for comparable companies in mergers or acquisitions to estimate a company’s value.

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6
Q

what is intrinsic value

A

Intrinsic value represents what a future cash flow is actually worth today.

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7
Q

what is FCFC approach

A

The present value of cash flows equals the company’s total value (enterprise value).

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8
Q

what is free cash flow to equity

A

Uses only the portion of the cash flows that are available for distribution to shareholders

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9
Q

dividend discount model

A

The dividend discount model (DDM) approach estimates the value of equity directly by discounting cash flows to shareholders

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10
Q

what is control premium

A

To adjust for the effects of an incorrect discount rate and for any possible cash flows that are not reflected in a valuation based on an income approach, analysts add a control premium.

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11
Q

4 components of financial planning

A

Strategic plan, Investment plan, financial plan, cash budget

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12
Q

what is dividend payout ratio

A

dividend payout measures the percentage of net income paid out as dividends to shareholders

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13
Q

what is retention ratio

A

retention ratio measures the percentage of profit reinvested by the company as retained earnings.

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14
Q

what is capital intensity ratio

A

capital intensity ratio - ratio of total assets to net sales - tells us the amount of assets needed by the company to generate $1 sales.

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15
Q

what is weighted average cost of capital

A

Weighted Average Cost of Capital (WACC) is the average rate of return a company must pay to all its investors (both debt and equity holders), weighted by how much of each type of financing it uses

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16
Q

what is IGR

A

The internal growth rate (IGR) is defined as the maximum growth rate that a company can achieve without external financing.

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17
Q

What is EFN

A

External funding needed (EFN) is defined as the additional debt or equity a company needs to issue so it can purchase additional assets to support an increase in sales.

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18
Q

what is sustainable growth rate

A

The sustainable growth rate (SGR) is the rate of growth that the company can sustain without selling additional shares of equity.

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19
Q

PV

A

FV x 1 / (1+i)n

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20
Q

what is nominal rate

A

interest rate not adjusted for inflation

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21
Q

real interest rate

A

rate adjusted for inflation

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22
Q

what is coefficient of variation

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A

measure of risk associate with every 1$ of expected return

22
Q

what is annuity

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A

stream of cash flows when the company faces a stream of constant payments on a bank loan for a specified period.

23
Q

what is perpetuity

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A

contract calling for cash flow payments to continue forever

24
what is ordinary annuity
constant cash flows occurring at the end of each period.
25
what is amortized loan
each loan payment contains some payment of principal and interest.
26
what is annuity due
payments at the beginning of each period
27
what is EAR
Effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account.
28
what is variance
Measures the spread of returns around the average. Higher variance indicates greater risk and more volatility. Calculated by averaging the squared differences from the mean.
29
what is Standard deviation
Square root of variance, providing a measure of risk in the same units as returns. Indicates how much returns deviate from the average. Higher standard deviation means higher risk and more uncertainty.
30
what is Beta
measure of an asset's systematic risk against market risk
31
what is security market line
The Security Market Line (SML) is a graph that shows the relationship between risk and expected return for investments, based on the Capital Asset Pricing Model (CAPM).
32
Futures contracts
Agreements to buy or sell an asset at a predetermined price on a future date. These are traded on exchanges and used by companies to hedge against price volatility.
33
options contracts
These provide the right, but not the obligation, to buy (call option) or sell (put option) an asset at a set price before a specific expiration date.
34
swaps
Contracts in which two parties exchange cash flows, commonly used in interest rate risk management
35
forwards
Similar to futures but customised and traded over-the-counter (OTC), allowing flexibility in terms and conditions.
36
Risks associated with derivatives
Market Risk: Prices of underlying assets can fluctuate unpredictably, leading to potential losses. Credit Risk: In over-the-counter (OTC) transactions, there is a possibility that one party may default on its obligations. Liquidity Risk: Some derivatives, particularly complex OTC products, may not have active markets, making it difficult to exit positions. Complexity: Understanding and managing derivatives require expertise, and misuse can lead to significant financial losses.
37
How to get FCFC
Revenue - Operating exp = EBITDA - Dep & Am = EBIT - Interest = EBT - Tax - NOPAT + Dep & Am = Cash flow - Additional Inv - Additional WC = FCFC
38
what is EAC
It represents the annual cost of owning, operating, and maintaining an asset over its entire lifespan.
39
4 different risk analysis methods
1. Sensitivity analysis, 2. Scenario analysis, 3. Simulation analysis and 4. Decision tree analysis
40
what are contingent projects
Acceptance of one project is dependent on another project two types of contingency situations: mandatory Projects optional Projects
41
if the discount rate is less than the IRR
accept the project
42
always trust NPV in conflicts
43
the capital structure decisions a company makes have no effect on the value of the company if:
there are no taxes there are no information or transaction costs the real investment policy of the company is not affected by its capital structure decisions.
44
what is the trade off theory in capital structure
Managers choose an optimal capital structure by balancing the benefits and costs of debt. Value Maximisation: Debt is increased until the marginal benefits equal the marginal costs, as this structure maximises company value.
45
what is pecking order theory
Companies prefer to use the cheapest capital first. Use retained earnings first
46
imputation tax system
company tax paid is passed on as a franking credit to offset taxable income.
47
futures contracts disadv
commodity price may fall, demand may fall, margin deposits and calls - affect liquidity, basis risk
48
futures contracts adv
price stability, protection against market volatility, easy to trade and exit, standard contracts, highly transparent and liquid
49
forwards adv
currency stability, customization, no upfront payment
50
forwards disadv
price may fall, credit risk (bilateral agreements), harder to unwind before maturity as they are customized
51
interest rate swaps adv
access to markets, interest rate stability, no need to refinance debts
52
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