CA Inter Paper 6: FM & SM key terms

The process of evaluating long-term investment proposals, such as buying machinery or a new plant, and deciding which ones to accept based on expected cash flows and risk.

The difference between the present value of a project's expected cash inflows and the present value of its outflows. A positive figure suggests the investment adds value to the firm.

The discount rate at which a project's net present value becomes zero. It is compared with the required rate of return to judge whether a proposal is acceptable.

The time a project takes to recover its initial cash outlay from its cumulative cash inflows. It measures liquidity and risk simply but ignores the time value of money.

The number of years needed for the present value of cash inflows to equal the initial investment. It corrects the plain payback method by applying a discount rate.

The ratio of the present value of a project's cash inflows to its initial investment. A value above one indicates the project is worth accepting when capital is limited.

The rate used to convert future cash flows into their present value. It usually reflects the firm's cost of capital adjusted for the risk of the cash flows.

The minimum return a firm must earn on its investments to satisfy lenders and shareholders. It blends the after-tax cost of debt and equity in proportion to their weights.

The overall required return calculated by weighting each source of finance-debt, preference shares and equity-by its share of total capital, using after-tax costs where relevant.

A method of estimating the cost of equity by adding a risk premium to the risk-free rate. The premium equals beta multiplied by the market risk premium.

A measure of how much a share's returns move relative to the overall market. A beta above one indicates greater volatility than the market.

The portion of total risk that affects the whole market and cannot be removed by diversification, such as changes in interest rates or inflation.

Risk specific to a single company or industry, such as a strike or product failure. It can be largely eliminated by holding a diversified portfolio.

Spreading investment across many securities so that company-specific risks offset one another. It reduces unsystematic risk but not market-wide risk.

The mix of debt and equity a firm uses to finance its assets. The choice affects financial risk, cost of capital and the value of the firm.

The use of fixed-interest debt in the capital structure. It magnifies the effect of changes in operating profit on earnings available to equity shareholders.

The use of fixed operating costs in a firm's cost structure. Higher leverage means a small change in sales produces a larger change in operating profit.

The level of sales at which total revenue equals total cost, so the firm makes neither profit nor loss. It is computed as fixed costs divided by contribution per unit.

Sales revenue minus variable costs. It represents the amount available to cover fixed costs and then generate profit.

The funds tied up in day-to-day operations, measured as current assets minus current liabilities. It covers inventory, receivables and cash needs.

The period from buying raw materials to collecting cash from customers. It combines the inventory holding period and the receivables collection period.

The operating cycle minus the payables deferral period. It shows how long cash is locked up before it returns to the business.

The order size that minimises the combined cost of placing orders and holding inventory. It balances ordering costs against carrying costs.

The inventory level at which a fresh order should be placed so stock does not run out before delivery. It considers usage rate and lead time.

Planning and controlling stock levels to meet demand while minimising holding and ordering costs. Techniques include EOQ, ABC analysis and just-in-time systems.

The set of rules governing terms of sale, credit standards, collection efforts and cash discounts. It influences sales volume and the investment in receivables.

Managing the money owed by customers so that credit sales generate profit without excessive bad debts or collection costs.

The decision on how much profit to distribute to shareholders and how much to retain for reinvestment. It affects shareholder wealth and internal funding.

The proportion of earnings per share paid out as dividends. The remainder is retained in the business.

The fraction of net profit kept in the business rather than distributed. It equals one minus the dividend payout ratio and supports internal growth.

An acquisition financed largely by debt, using the target company's assets and cash flows as security. It is a form of corporate restructuring.

The combination of two or more companies into a single entity, often to achieve synergies, market power or cost savings.

The purchase of one company by another, either through buying shares or assets. The acquired firm may continue as a separate legal entity.

The extra value created when two businesses combine, so the merged entity is worth more than the sum of its parts.

The ongoing process of setting long-term direction, analysing the environment, choosing strategies and implementing them to achieve organisational goals.

A description of the future state an organisation wants to reach. It provides direction and inspires stakeholders over the long term.

A declaration of an organisation's purpose, scope of operations and values. It explains why the entity exists and whom it serves.

A structured review of internal strengths and weaknesses and external opportunities and threats. It helps match an organisation's capabilities to its environment.

A framework for scanning the macro-environment across political, economic, social, technological, legal and environmental factors that may affect strategy.

A model assessing industry attractiveness through rivalry among existing firms, threat of new entrants, threat of substitutes, and bargaining power of buyers and suppliers.

An attribute that lets a firm outperform rivals, such as lower costs, superior quality or unique capabilities valued by customers.

A distinctive internal capability that is difficult for competitors to copy and central to delivering value to customers across several products or markets.

The series of primary and support activities through which a firm creates and delivers value to customers. It helps identify where costs arise and advantage is built.

The stages an industry passes through-introduction, growth, maturity and decline-each requiring different strategies for investment, pricing and competition.

A semi-autonomous division with its own products, markets and objectives. It is managed separately for planning and performance measurement.

A portfolio tool that classifies business units as stars, cash cows, question marks or dogs based on market growth and relative market share, guiding resource allocation.

A performance framework that measures an organisation across financial, customer, internal process, and learning and growth perspectives to link actions with strategy.

A measurable value used to track how effectively an organisation or unit is achieving important strategic and operational objectives.