Notes On Financial Management

Submitted By Pavirajan1
Words: 4722
Pages: 19
Open Document
FINANCIAL MANAGEMENT

5. Measuring Return on Investments

1. What determines the required rate of return on a project? How can we estimate the required rate of return on a project?

Determined by the risk of the project
Estimated by: If taking a project that does not affect firm’s risk, then use WACC
If not, estimate cost of equity (unlevered) (unlevered = without the debt)

2. What are the differences between accounting earnings and cash flows?

You shouldn’t use accounting earnings because can manipulate. Includes income statement, sales, COGS, profit.
Cash flows = earnings before interest and taxes + depreciation + increase in assets – increase in Accounts Payable – variation in capital expenditures

-Do an example

3. How can we estimate cash flow to firm from earnings?

(above)

4. What are incremental cash flows? Why are they important?

Incremental cash flows = cash flows of the firm with the project – cash flows of the firm without the project (difference between cost if take proj and not take, additional cash flows if take a project)
Include: sunk costs, opportunity costs, side effects of projects
Important because regardless will have sunk costs. Ex: cost to valuate the project. Also, it will be the original CF that is gone, shows the difference between the cash flows and helps decide whether to take the project

5. What are sunk costs? How do we use them when estimating the NPV of a project?

Costs that have already incurred before the project. Irrelevant to the decision of accepting the project. Don’t INCLUDE!

6. What are opportunity costs? How do we use them when estimating the NPV of a project?

The option foregone. Include when estimating NPV.

7. What are the side effects of a project? How do we use them when estimating the NPV of a project?

Side effects will affect other project cash flows. Incremental cash flows help estimate. These will be affect if you accept the project or not.

8. Explain payback method. What are the disadvantages of this method?

Shows how many years it will take to get money back from investment in project.
Disadvantages: not very precise, does not take into account the TVM or cash flows after the cut off period

9. What is the net present value (NPV)? What is the main advantage of this method?

--the present value of the project’s incremental cash flows, helps show what the company value is today. Most consistent with the goal to maximize shareholder wealth. Helps decision be made. If positive, shows that project should return positive.

Company value increased in the future because of the project. You maximize shareholder wealth

10. What is the internal rate of return (IRR)?

Yield on an investment (return). It is the discount rate where NPV = 0. Take project if IRR > the original discount/return rate.
When have more than one change in sign for cash flows, IRR is not reliable.

11. What is the net present value profile?

An abbreviation for net present value profile. An NPV profile charts the net present value of a business activity as a function of the cost of capital. This comparison allows decision-makers to determine the profitability of a project or initiative in different potential financing scenarios, enabling more effective cost-benefit planning.

12.
A graph of the NPVs of a project at different discount rates. (zero, appropriate (given), and IRR). Shows that NPV is dependent on IRR.

13. What are the two problems with IRR?

a. Can be multiple if change sign more than once
b. Can give incorrect answer for mutually exclusive projects (sometimes when looking at two projects, the NPV tells you to do one thing while the IRR says another. When comes down to that, choose one with larger NPV (max SH wealth))
Does not focus on maximization of shareholder wealth

14. What does the stand-alone principle mean? What should we do when it is violated?

Assumes
Show More

Related Documents: Notes On Financial Management

Financial Management Essay

higher current ratio implying that is more capable of paying its obligations. Although both companies have the ability to pay current debt, financial records show PepsiCo’s shows the likelihood to stay afloat because their short term debt and current portion of long term debt is more than six times greater. Basically, Pepsi is more liquid. According to the financial report, it is noted that Pepsi had a higher Current Ratio than Coca-Cola, in 2008 we see that Coca-Cola might have struggled to pay off…

Words 1534 - Pages 7

Financial Management Research

Financial management article research questions. 1) This articles primary topic or focus is about managing effective disaster recovery. 2) Main conclusions are methods of disaster recovery and making sure that it does not mean potential loss of data. This includes Taking care of fundamentals e.g making sure basic secure backups are in place for data files and software that run the business. Spending a specific amount of money to ensure fundamentals of disaster recovery are taken care of. Be more…

Words 340 - Pages 2

Questions On Financial Management

professor’s discretion. By the way, this syllabus is a compilation and explanation of the rules, so it is a rather serious document. Finally, if you find what you believe to be an error and/or an omission, please notify your professor. FINC 6301 Financial Management Fall 2012 Syllabus FINC 6301 is the core finance course for the MBA program. We will be studying many of the topics covered in the course prerequisite FINC 5308 (or in the six hours of undergraduate finance for which you have already received…

Words 5140 - Pages 21

Financial Management Essay

objective of Financial Management is to maximize shareholders profits (value), accomplish a place between competitive advantages would be another goal of business strategy. A CEO is a person who is responsible achieving this level of his business decided the short or long term vision and predict the best way to accomplish that. I would like to talk about the different between short and long term plan for financial managers Short-term Goals When you're establishing your financial plan, the first…

Words 1235 - Pages 5

Financial Management Essay

[JAYCEE PLC] Financial Management Group 2 BAI LI 2014/12/7 Lecturer: Owen Lewis Number:P143466 Content 1 Introduction 5 1.1Analysing Financial Health using Ratios 5 1.2Assumptions 6 Part 1 1 Financial Ratios And Analysis 7 1.1 Profitablity 7 1.1.1Margin Ratios 7 1.1.2Return Ratios 9 1.1.3Futher Comment 10 1.2Liquidity 11 1.2.1Current Ratios 11 1.2.2Quick Ratios 11 1.1.3Futher Comment 12 1.3 Efficiency 14 1.3.1Fixed Assets Productivity 14 1.3.2Debtors Collection Period 14 1.3.3Creditors Payment…

Words 4636 - Pages 19

Introduction To Financial Management

Chapter 1 Introduction to Financial Management  Forms of Business Organization  Stock Prices and Shareholder Value  Intrinsic Values, Stock Prices, and   Executive Compensation Important Business Trends Conflicts Between Managers, Stockholders, and Bondholders 1-1 Finance Within the Organization 1-2 Forms of Business Organization    Proprietorship Partnership Corporation 1-3 Proprietorships and Partnerships  Advantages  Ease of formation  Subject to few regulations  No…

Words 427 - Pages 2

Financial Management Essay

Scotch whisky, there are two projects to invest, namely rye whisky project and the project of expanding Highland Princess to the Asian and Far Eastern together with the liqueur project under the capital constraint of £400,000. As appointed to the financial consultants, we should make good decision for shareholders to gain more profits in long run. To measure the future investment performance we should consider the cash flow resulting from the actions. 2. Investment appraisal methods: NPV, IRR…

Words 833 - Pages 4

Paper for Financial Management

In 1959 Markowitz did the groundwork for the capital asset pricing theory also known as CAPM. He introduced the notion of mean-variance efficient portfolio. According to him it is optimal for an investor to hold a mean-variance efficient portfolio. The mean-variance efficient portfolio is a portfolio for an investor where he minimizes the portfolio return, given the expected return and maximizes expected return, given the variance. Later Sharpe and Lintner further developed the work of Markowitz…

Words 688 - Pages 3

Essay about Financial Management

questions answered. For example if you answer all 42 I will stop grading at question 33. Understand the pros and cons of maximizing profit as a manager’s goal Know what working capital management is and what it deals with Understand the goal of financial management Have a basic understanding of the financial ratios and what they measure Know how to calculate return on assets, debt to equity, and times interest earned. Know and understand the concepts associated with an annuity. Know how to…

Words 313 - Pages 2

Financial Management Essay

Chapter Five The Time Value of Money Prepared by Professor Wei Wang Queen’s University © 2011 McGraw–Hill Ryerson Limited 5-1 Chapter Outline 5.1 The One-Period Case 5.2 The Multiperiod Case 5.3 Compounding Periods 5.4 Simplifications 5.5 What Is a Firm Worth? 5.6 Summary and Conclusions © 2011 McGraw–Hill Ryerson Limited 5-2 The One-Period Case: Future Value LO5.1 • If you were to invest $10,000 at 5-percent interest for one year, your investment would grow…

Words 3593 - Pages 15