D076 - Finance Skills for Managers

1 - PI's break-even point. If the PI is 1.15, then the project generates 15% more in the present value of cash inflow than the initial investment. One the other hand, if PI is .90, the project generates cash inflows that are 10% short of the initial investment. You should accept a project with a PI greater than 1 and you should reject a project with a PI less than 1 3 Key uses of the cash budget - indicating future financing needs, providing a basis for corrective action, and providing the data for performance evaluation A specialist - provides liquidity and lowers the cost of trading stocks between sellers and buyers activity ratios - (also called efficiency ratios) measures how well the company uses its assets to generate sales or cash - the firm's operational efficiency and profitability. Includes accounts receivable turnover, average collection period, inventory turnover, total asset turnover, fixed asset turnover, and operating income return on investment Advantages of PI - (1) considers the time value of money (2) Takes into account the risk of future cash flows through the cost of capital (3) Includes all future cash flows (4) Indicates whether an investment will create value for the company Advantages of Stock - one of the major advantages of stock is that it does not require a fixed interest payment or return of principal to investors. The funds are available to help grow the company without the need to specifically repay the proceeds. Agency cost - when management does not act in the best interest of the shareholders, it incurs an internal cost to the firm. AR Turnover - Credit Sales / Accounts Receivable helps to identify how quickly these accounts receivable turn over during a given year. Average Collection Period - 365/Accounts Receivable Turnover simply turns accounts receivable turnover into a day count measure. Basic steps of cash budgeting - (1) determine cash inflows (2) estimate cash outflows (3) create a budget plan Benchmarking - the process of completing a financial analysis and comparing a firm's performance to that of other similar firms Bond - are vehicles by which corporations raise debt capital. Is a debt agreement between borrowers and savers that obligates the borrower (or the corporation) to make certain payments to the bondholder as a repayment of the loan. Budgeting - used to forecast future events, and it focuses on a specific time period in the short term of a few months up to a year Cannibalization - common example of incidental cash flow. The reduction in sales of a company's own products due to introduction of another similar product. Capital budgeting - requires individuals and companies to make a decision on how much money to allocate or invest. By making an investment decision and opting to place money into an investment, the business or individual locks money into the project and limits the use of that money until the investment pays off. Capital investment - is a sum of money that a firm raises to invest in long-term projects to achieve its objective of maximizing shareholder wealth. capital market - is from long-term borrowing and lending Cash Budget - is a matter of understanding your business, understanding the timing of cash flows, and keeping track of borrowing requirements. Coincident indicators - collected and analyzed as economic shifts happen and include GDP and personal income Common stock - -represents the basic ownership of a corporation -typically has voting rights -residual claim upon the assets of the firm -no set dividends; some firms may not pay dividends at all to common shareholders -potential for return from increased value of stock share and any dividends paid. Components for Sustainable Growth Rate (SGR) - is the growth rate at which a firm can grow without issuing a new equity. The components are profitability, asset use efficiency, capital structure, and dividend policy. Controlling the variable that changes the SGR will decease the DFN. Compounding - finding a future value given a present value