ACCA FM flashcards

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

Shareholder wealth maximisation

The objective of maximising the present value of expected future cash flows to shareholders, taking account of risk and timing; it differs from profit maximisation because it focuses on cash and long-term value.

Agency problem

A conflict that arises when managers act in their own interests rather than those of shareholders, due to separation of ownership and control; it can be reduced by monitoring, incentives and bonding.

Corporate governance

The system of rules and practices by which companies are directed and controlled, including board structure, audit committees, transparency and accountability to shareholders and other stakeholders.

Value for money

The objective of not-for-profit organisations, assessed through economy (acquiring resources cheaply), efficiency (using resources well) and effectiveness (achieving intended outcomes).

Monetary policy

Central bank actions to control money supply and interest rates in order to influence inflation, employment and economic growth; it contrasts with fiscal policy, which uses taxation and government spending.

Money market

A financial market for short-term debt instruments with maturities of one year or less, such as treasury bills and commercial paper; it provides liquidity and short-term funding.

Semi-strong efficiency

A form of market efficiency in which share prices reflect all publicly available information, so fundamental analysis cannot consistently earn abnormal returns; only private information could do so.

Interest rate parity

A relationship stating that the difference between spot and forward exchange rates reflects the interest rate differential between two currencies, preventing risk-free arbitrage profits.

Cash operating cycle

The length of time between paying suppliers for inventory and receiving cash from customers, calculated as inventory days plus receivable days minus payable days; a shorter cycle reduces working capital needs.

Economic order quantity

The order quantity that minimises total inventory costs, calculated as the square root of (2 × annual demand × order cost ÷ holding cost per unit per year).

Overtrading

A situation in which a business expands rapidly without sufficient long-term finance, causing cash shortages and liquidity problems even though it may be profitable.

Baumol model

A cash management model that applies EOQ logic to determine the optimal cash balance by balancing transaction costs of selling securities against the opportunity cost of holding cash.

Factoring

Selling accounts receivable to a financial institution at a discount; the factor may also administer the sales ledger and provide credit protection, improving immediate cash flow.

Net present value

The present value of a project's cash inflows minus its cash outflows, discounted at the cost of capital; a positive NPV indicates the project increases shareholder wealth.

Internal rate of return

The discount rate at which a project's net present value equals zero; a project is acceptable if its IRR exceeds the company's cost of capital.

Sunk cost

A cost already incurred and unaffected by the decision, such as past market research; it is excluded from investment appraisal because it is not incremental.

Profitability index

The ratio of the present value of cash inflows to the initial investment, or NPV divided by initial investment; used to rank projects under capital rationing.

Equivalent annual cost

The constant annual cost that has the same present value as a project's total costs over its life; used to compare assets with different useful lives.

Theoretical ex-rights price

The market value per share after a rights issue, calculated as the total market value of existing shares plus the rights issue proceeds, divided by the total number of shares after the issue.

Convertible bond

A bond that gives the holder the right to convert into a specified number of ordinary shares at a predetermined price; it combines debt security with equity upside.

Finance lease

A lease that transfers substantially all the risks and rewards of ownership to the lessee; the lessee capitalises the asset and recognises a corresponding liability.

Murabaha

An Islamic financing arrangement in which the financier purchases an asset and sells it to the customer at a disclosed mark-up, with payment deferred; interest is not charged.

Weighted average cost of capital

The average return required by a company's providers of finance, weighted by the market values of equity and debt; it is used as the discount rate for average-risk projects.

Capital asset pricing model

A model that calculates the cost of equity as the risk-free rate plus a risk premium equal to beta multiplied by the market risk premium.

Asset beta

A measure of a company's business risk that excludes the effect of financial gearing; it is used to find a project-specific cost of capital by regearing to the project's gearing.

Dividend growth model

A method of estimating the cost of equity as the expected dividend yield plus the expected growth rate of dividends, assuming dividends grow at a constant rate.

P/E valuation

A valuation method that multiplies a company's sustainable earnings by the price-to-earnings ratio of comparable listed companies to estimate equity value.

Free cash flow to firm

Cash generated by operations after tax and reinvestment, available to all providers of finance; calculated as EBIT(1 - tax) plus depreciation minus capital expenditure minus working capital increase.

Synergy

The additional value created when two companies combine, for example through cost savings or revenue enhancements, over and above the sum of their separate values.

Transaction exposure

The risk that exchange rate movements change the domestic currency value of specific foreign-currency receivables or payables before settlement.

Money market hedge

A hedging technique that uses borrowing, spot exchange and investing in the appropriate currencies to fix the domestic value of a future foreign-currency cash flow.

Interest rate collar

A combination of an interest rate cap and floor that limits interest rate movements within a range, reducing the net premium compared with buying a cap alone.