CA Inter Paper 6: FM & SM flashcards

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

Degree of Operating Leverage

Contribution divided by EBIT. It measures how sensitive operating profit is to a change in sales volume, and rises as fixed operating costs increase.

Degree of Financial Leverage

EBIT divided by EBIT minus interest. It shows the percentage change in EPS for a one percent change in EBIT, and rises with fixed interest obligations.

Combined Leverage

DOL multiplied by DFL, equivalently Contribution divided by EBIT minus interest. It links a sales change directly to the resulting change in earnings per share.

Net Income Approach

Capital structure theory stating that increasing debt lowers the weighted average cost of capital and raises firm value, because debt is assumed cheaper than equity.

MM Proposition with Tax

Modigliani–Miller result that levered firm value equals unlevered firm value plus the tax rate multiplied by debt, because interest is tax deductible.

Weighted Average Cost of Capital

Weighted average of after-tax costs of debt, preference and equity, using market-value weights where available. It is the minimum return a project must earn.

Net Present Value

Present value of a project's cash inflows minus its initial outlay, discounted at the cost of capital. Accept if positive; rank mutually exclusive projects by highest NPV.

Profitability Index

Present value of inflows divided by initial outlay. A value above one means the project is acceptable, and it helps rank projects under capital rationing.

Internal Rate of Return

The discount rate at which a project's NPV equals zero. Accept the project if IRR exceeds the cost of capital; it can mislead when cash flows change sign.

Operating Cycle

Raw material holding period plus work-in-progress period plus finished goods period plus receivables collection period minus payables deferral period. It measures cash tied up in operations.

Working Capital Gap

Current assets minus current liabilities, excluding short-term bank borrowing for working capital. It indicates the portion of current assets needing long-term funding.

Baumol Cash Model

Optimal cash balance equals the square root of twice annual cash requirement times transaction cost, divided by opportunity cost per rupee. It assumes steady, predictable cash outflows.

Miller-Orr Model

Sets a return point and upper control limit for cash using the variance of daily flows, transaction cost and daily interest rate. Cash is invested or replenished when limits are breached.

Walter Dividend Model

Share price equals dividend plus retained earnings multiplied by return on investment divided by cost of equity, all divided by cost of equity. It links dividend policy to investment returns.

Gordon Growth Model

Share price equals next year's dividend divided by the cost of equity minus the constant growth rate. It requires growth to be below the cost of equity.

Residual Dividend Theory

Dividends are paid only from earnings left after funding all positive-NPV projects with retained earnings at the target capital structure, keeping the cost of capital optimal.

Average Collection Period

Debtors divided by credit sales, multiplied by 365 days. It measures how long customers take to pay and drives the receivables investment in working capital.

Rights Issue Value

Theoretical ex-rights price equals the number of existing shares needed for one new share times cum-rights price, plus the issue price, divided by that number plus one.

Porter Five Forces

Framework assessing industry attractiveness through new entrants, buyer power, supplier power, substitutes and rivalry. Strong forces compress industry profitability and reduce average returns.

Generic Strategies

Porter's three competitive positions: cost leadership, differentiation, and focus on a narrow segment. A firm lacking any clear advantage is stuck in the middle.

Value Chain Analysis

Divides the firm into primary activities such as logistics, operations, marketing and service, and support activities such as infrastructure, HR, technology and procurement, to locate competitive advantage.

BCG Matrix

Portfolio tool plotting business units by market growth and relative market share, yielding Stars, Cash Cows, Question Marks and Dogs, each with a distinct investment and cash-flow implication.

Cash Cow

A business unit with high relative market share in a low-growth market. It generates surplus cash used to fund Stars and selected Question Marks.

Ansoff Matrix

Product-market grid of market penetration, product development, market development and diversification, classified by whether the product and the market are existing or new.

Core Competence

A bundle of skills that is valuable, rare, hard to imitate and non-substitutable, gives access to many markets and is difficult for competitors to replicate.

SWOT Analysis

Pairs internal strengths and weaknesses with external opportunities and threats. TOWS converts these into SO, ST, WO and WT strategies for action.

PESTLE Analysis

Scans the macro environment through political, economic, social, technological, legal and environmental factors to identify opportunities and threats facing the firm.

Levels of Strategy

Corporate strategy sets the business portfolio and diversification; business strategy sets competitive positioning; functional strategy covers marketing, finance, human resources and operations decisions.

Industry Life Cycle

Stages of introduction, growth, maturity and decline. Each changes demand growth, competitive rivalry, pricing and the investment and financing priorities of firms.

Strategic Management Process

Sequence of environmental scanning, strategy formulation, strategy implementation and evaluation and control, reviewed continuously as internal and external conditions change.

Stuck in the Middle

A firm that pursues neither low cost nor clear differentiation, so it loses volume to cost leaders and margin to differentiators and earns below-average returns.

Diversification Strategy

Entering new products and new markets, either related through shared resources and capabilities or unrelated through a holding-company portfolio approach. It spreads risk but raises complexity.