ACCA AFM flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Agency problem

Conflict between principals (shareholders) and agents (managers) where managers may act in their own interest rather than maximising shareholder wealth.

Stakeholder theory

Theory that a firm should consider the interests of all stakeholders (employees, customers, suppliers, community) not just shareholders when making decisions.

Semi-strong EMH

Form of efficient market hypothesis stating that share prices reflect all publicly available information, so fundamental analysis cannot yield abnormal returns.

Corporate governance

System of rules, practices, and processes by which a firm is directed and controlled, balancing interests of stakeholders and ensuring accountability.

Financial intermediary

Institution such as a bank or pension fund that channels funds from savers to borrowers, reducing transaction costs and information asymmetry.

NPV

Net present value: sum of present values of cash inflows minus outflows; a positive NPV indicates a project adds value to the firm.

IRR

Internal rate of return: discount rate at which NPV equals zero; project accepted if IRR exceeds the cost of capital.

Payback period

Time required for cumulative cash inflows to equal the initial investment; ignores time value of money and cash flows after payback.

ARR

Accounting rate of return: average annual accounting profit divided by average investment; based on profits not cash flows.

Relevant cash flow

Incremental after-tax cash flow that arises only if a project is undertaken; excludes sunk costs and allocated overheads.

Tax shield

Reduction in tax payable due to tax-allowable depreciation or interest payments, increasing project or firm value.

Asset beta

Beta reflecting only business risk of a firm's assets, ungeared for financial risk; used to compare projects in different industries.

Interest rate parity

Theory that forward exchange rate differs from spot by interest rate differential between two currencies, preventing arbitrage.

Purchasing power parity

Theory that exchange rates adjust to reflect inflation differentials between countries, so goods cost the same in both currencies.

Forward rate agreement

Contract fixing an interest rate for a future period on a notional amount; used to hedge against interest rate movements.

Interest rate swap

Agreement to exchange fixed and floating interest payments on a notional principal to reduce interest rate risk or exploit comparative advantage.

Interest rate cap

Option giving buyer right to receive compensation if interest rate exceeds strike, limiting cost of floating-rate borrowing.

Money market hedge

Hedging technique that borrows or invests in foreign currency to fix the domestic currency value of a future foreign cash flow.

Transaction risk

Foreign exchange risk arising from timing differences between entering a contract and settling it, affecting cash flows.

Synergy

Additional value created by combining two firms, often expressed as combined value minus sum of individual values.

MBO

Management buyout: existing management team purchases the business, often with private equity backing and debt financing.

Divestment

Sale or spin-off of a business unit or subsidiary to focus on core activities or raise funds.

Takeover defence

Action taken by target management to resist a hostile bid, such as poison pills, white knights, or staggered boards.

Leveraged buyout

Acquisition financed largely by debt, often using the target's assets as collateral, increasing financial risk but potentially improving efficiency.

WACC

Weighted average cost of capital: weighted average of after-tax cost of debt and cost of equity, used as discount rate for projects of average risk.

CAPM

Capital asset pricing model: Ke = Rf + β(Rm − Rf), relating required return to systematic risk.

Dividend growth model

Ke = D1/P0 + g, where D1 is next dividend, P0 current price, and g expected growth rate of dividends.

MM with taxes

Modigliani-Miller proposition: value of levered firm equals unlevered firm value plus tax shield (T×D), so debt increases firm value.

Pecking order theory

Firms prefer internal financing first, then debt, and issue equity as last resort due to information asymmetry costs.

Rights issue

Offer of new shares to existing shareholders at a discount, usually pro rata to existing holdings, to raise new equity capital.

TERP

Theoretical ex-rights price: (market value of existing shares + proceeds of rights issue) / total shares after issue.

Financial distress costs

Direct and indirect costs of bankruptcy or financial difficulty, which offset the tax benefits of debt in trade-off theory.