Man5 exam (basics of financial management)
Chapter 5,6,7,8,9.
5.1 Capital budgeting and free cash flow
Capital budgeting: analyzing alternative investment options and selecting options to be
implemented.
Investing = tying up capital in the form of assets (capital goods)
2 types of investments:
1. Replacement investments: preserve production capacity (machine>resources to work
2. Expansion investments: increase production capacity.
Investment project: sum of all related investments in all assets (=major cash outflow)
Free cash flow = difference between cash inflows (sales) and cash outflows (purchasing)
Freely available cash = cash left after payments to dividends / stakeholders.
Cash flow = difference between cash inflow and cash outflow.
Time value of money = money now could be worth more than in 1 year (difference in value)
Opportunity costs: missing out on revenue due to the time value of money
Weighted average cost of capital = average costs against which a company can attract
capital
Is an investment worth it? > analyze free cash flows.
Period profit = calculated by the difference between sales revenue and cost of period
Difference in profit and cash flows = depreciation in profit not in cash flow.
Disinvestments = start: cash outflow and no sales/costs > end: assets no longer needed =
residual value in the assets > create extra cash inflow during last year investment project.
Marginal tax rate: tax rate paid on profit.
Free cash flow = period profit after tax paid + depreciations – investments + disinvestments
5.3 assessment based on free cashflows.
Payback period = point in time when difference between cash inflow and cash outflow
becomes nil (money is fully returned) based on liquidity instead of profitability.
5.4 hard to see if an investment is worth it = time between cash outflow and inflow can be
long
Financial arithmetic (time value of money calculation) = comparing different moments in
time > concerned with interest calculations.
Simple interest: interest is always calculated on the original amount
Compound interest: interest on original amount + on interest already due (continuously
Increasing > Year 1: 6% on 10.000, year 2 6% on 10.600)
Future value = the value of capital at a future moment
Present value = current value of amounts due in the future
Discount rate= interest rate used to calculate a present value
Net present value method = calculates the net present value of expected free cash flows at
the start of a project, including investments, using the weighted average cost of capital as
discount rate. (Positive value = project is executable)
Internal rate of return method = measure profitability of investment by determining
discount rate at which present value of expected free cash flows is equal to investments.
1
, Sensitivity analysis: analysis of the effect of a change in sales on profit and free cash flows
- Future values are not known > methods of dealing with that: expected value,
pessimistic scenario and optimistic scenario.
Risk premium: calculating with a higher discount rate that reduces the Net present value
5.5 Leasing = hiring fixed assets if you cannot pay / don’t want to loan money
2 types of leasing:
1. Financial lease: long-term rental agreement that cannot be cancelled (on balance
sheet) Risk is entirely for the lessee > they have economic ownership and carry same
risk as buying
2. Operational lease: rental agreement that can be cancelled at short notice >
maintenance costs for leasing company & object NOT mentioned on balance sheet.
Interesting for assets that are sensitive for economic obsolesce
+’s and –‘s for leasing:
+ does not affect company’s financial structure
- Monthly obligations
CHAPTER 6 Working capital management.
6.1 Cash flow cycle
Working capital: current assets (necessary to work with fixed assets)
Cash flow cycle: transformation process that is related to the production and sales process
from the moment of purchasing raw materials to delivery of product to customers.
6.2 inventory management
Keeping an inventory creates carrying costs = storage costs, financing and risk.
+ decoupling function: maintaining intermediate inventory for the supply transit and
dispatch of goods, this way stagnation (not moving) in production can be avoided.
+ economics of scale resulting from buying large raw materials avoided.
+ saving transportation costs.
Ordering costs: costs that are the result of placing an order
- Costs generated for every new order and barely influenced on size
(Advantage: placing few big orders)
Inventory costs: costs of creating and maintaining an inventory.
Economic order quantity: ordering size with the lowest ordering/carrying costs.
- WILSON Formula: Optimal order quantity (Q) = 2 X Total demand per period (D) x
fixed ordering costs per period (F) : carrying costs per period (C )
Lead time: order must be placed before inventory runs out.
Reorder time: the inventory level at which a new order must be placed.
- Formula reorder point: sales volume per day x order lead time = reorder point.
Always uncertainty > high and low purchasing should be considered.
Safety inventory: the difference between a reorder point with uncertainty and a reorder
point with certainty. > to accommodate higher than average sales volume.
Increase in carrying costs due to safety inventory > formula:
Increase in carrying cost = safety inventory x carrying costs per unit.
2
Chapter 5,6,7,8,9.
5.1 Capital budgeting and free cash flow
Capital budgeting: analyzing alternative investment options and selecting options to be
implemented.
Investing = tying up capital in the form of assets (capital goods)
2 types of investments:
1. Replacement investments: preserve production capacity (machine>resources to work
2. Expansion investments: increase production capacity.
Investment project: sum of all related investments in all assets (=major cash outflow)
Free cash flow = difference between cash inflows (sales) and cash outflows (purchasing)
Freely available cash = cash left after payments to dividends / stakeholders.
Cash flow = difference between cash inflow and cash outflow.
Time value of money = money now could be worth more than in 1 year (difference in value)
Opportunity costs: missing out on revenue due to the time value of money
Weighted average cost of capital = average costs against which a company can attract
capital
Is an investment worth it? > analyze free cash flows.
Period profit = calculated by the difference between sales revenue and cost of period
Difference in profit and cash flows = depreciation in profit not in cash flow.
Disinvestments = start: cash outflow and no sales/costs > end: assets no longer needed =
residual value in the assets > create extra cash inflow during last year investment project.
Marginal tax rate: tax rate paid on profit.
Free cash flow = period profit after tax paid + depreciations – investments + disinvestments
5.3 assessment based on free cashflows.
Payback period = point in time when difference between cash inflow and cash outflow
becomes nil (money is fully returned) based on liquidity instead of profitability.
5.4 hard to see if an investment is worth it = time between cash outflow and inflow can be
long
Financial arithmetic (time value of money calculation) = comparing different moments in
time > concerned with interest calculations.
Simple interest: interest is always calculated on the original amount
Compound interest: interest on original amount + on interest already due (continuously
Increasing > Year 1: 6% on 10.000, year 2 6% on 10.600)
Future value = the value of capital at a future moment
Present value = current value of amounts due in the future
Discount rate= interest rate used to calculate a present value
Net present value method = calculates the net present value of expected free cash flows at
the start of a project, including investments, using the weighted average cost of capital as
discount rate. (Positive value = project is executable)
Internal rate of return method = measure profitability of investment by determining
discount rate at which present value of expected free cash flows is equal to investments.
1
, Sensitivity analysis: analysis of the effect of a change in sales on profit and free cash flows
- Future values are not known > methods of dealing with that: expected value,
pessimistic scenario and optimistic scenario.
Risk premium: calculating with a higher discount rate that reduces the Net present value
5.5 Leasing = hiring fixed assets if you cannot pay / don’t want to loan money
2 types of leasing:
1. Financial lease: long-term rental agreement that cannot be cancelled (on balance
sheet) Risk is entirely for the lessee > they have economic ownership and carry same
risk as buying
2. Operational lease: rental agreement that can be cancelled at short notice >
maintenance costs for leasing company & object NOT mentioned on balance sheet.
Interesting for assets that are sensitive for economic obsolesce
+’s and –‘s for leasing:
+ does not affect company’s financial structure
- Monthly obligations
CHAPTER 6 Working capital management.
6.1 Cash flow cycle
Working capital: current assets (necessary to work with fixed assets)
Cash flow cycle: transformation process that is related to the production and sales process
from the moment of purchasing raw materials to delivery of product to customers.
6.2 inventory management
Keeping an inventory creates carrying costs = storage costs, financing and risk.
+ decoupling function: maintaining intermediate inventory for the supply transit and
dispatch of goods, this way stagnation (not moving) in production can be avoided.
+ economics of scale resulting from buying large raw materials avoided.
+ saving transportation costs.
Ordering costs: costs that are the result of placing an order
- Costs generated for every new order and barely influenced on size
(Advantage: placing few big orders)
Inventory costs: costs of creating and maintaining an inventory.
Economic order quantity: ordering size with the lowest ordering/carrying costs.
- WILSON Formula: Optimal order quantity (Q) = 2 X Total demand per period (D) x
fixed ordering costs per period (F) : carrying costs per period (C )
Lead time: order must be placed before inventory runs out.
Reorder time: the inventory level at which a new order must be placed.
- Formula reorder point: sales volume per day x order lead time = reorder point.
Always uncertainty > high and low purchasing should be considered.
Safety inventory: the difference between a reorder point with uncertainty and a reorder
point with certainty. > to accommodate higher than average sales volume.
Increase in carrying costs due to safety inventory > formula:
Increase in carrying cost = safety inventory x carrying costs per unit.
2
