13186054
Description
Flashcards by Kirsty Baulch, updated more than 1 year ago
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Created by Kirsty Baulch
over 6 years ago
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| Question | Answer |
| What is invoice discounting? | Non-recourse factoring is where the factor suffers any irrecoverable debts (i.e. the company using the factor is guaranteed to have no bad debts). |
| What is ‘non-recourse’ factoring? | Non-recourse factoring is where the factor suffers any irrecoverable debts (i.e. the company using the factor is guaranteed to have no bad debts). |
| What is meant by the economic order quantity (in the context of inventory management)? | The economic order quantity is the quantity to order each time that minimises the total costs involved. |
| What is over-capitalisation? | Over-capitalisation is the situation where the working capital of a business is too high. |
| How is the operating cycle (or working capital cycle) calculated? | The operating cycle is the inventory days + receivables days – payables days. |
| What is meant by the sensitivity of a variable in the context of NPV decision making? | The sensitivity of a variable is the percentage change in the variable that results in the NPV of the project being zero. |
| What is the difference between ‘risk’ and ‘uncertainty’? | Risk is the situation where there are several possible outcomes and probabilities can be assigned to the outcomes. Uncertainly is the situation where there are several possible outcomes but where probabilities can not be assigned. |
| In the situation of single period capital rationing, when the projects are divisible, on what basis are the available projects ranked? | The projects are ranked on the basis of their profitability index ( = NPV of the project divided by the amount of the initial investment) |
| What is meant by the term ‘profitability index’? | The profitability index for a project is the NPV of the project divided by the amount of the initial investment. |
| What is ‘soft’ capital rationing? | Soft capital rationing is when the company itself limits the amount that it is prepared to borrow. |
| What is ‘hard’ capital rationing? | Hard capital rationing is when capital availability is limited by the amount that lenders are prepared to lend. |
| What is meant by the term ‘capital rationing’? | Capital rationing is the situation where there is a limit on the amount of capital available for investment. |
| In asset replacement questions, how is the equivalent annual cost calculated? | The equivalent annual cost is the present value of the first replacement cycle divided by the annuity discount factor for the replacement period. |
| What is meant by the term ‘real cost of capital’? | The real cost of capital is the cost of capital ignoring any inflation. (The actual (or nominal) cost of capital is the real cost of capital as adjusted for inflation.) |
| What is meant by the term ‘nominal cash flows’? | The nominal cash flows are the actual cash flows after adjusting for inflation. |
| What is meant by the term ‘perpetuity’? | A perpetuity is an equal cash flow each year for ever. |
| What is meant by the term ‘annuity’? | An annuity is an equal cash flow each year. |
| What is the definition of the Internal Rate of Return of a project? | The Internal Rate of Return is that rate of interest at which the Net Present Value of the project is zero |
| What is mean by the term ‘sunk cost’? | A sunk cost is a cost that has already been incurred and does not change as a result of the investment decision. It is therefore not relevant. |
| What is meant by the term ‘incremental cost’? | An incremental cost is an extra cost |
| What is the definition of the payback period? | The payback period is the number of years it takes, in cash terms, to get back the initial investment. |
| Name two cash management models. | The Baumol model The Miller-Orr model |
| List three reasons for a company to hold cash. | Transaction motive Precautionary motive Speculative motive |
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