CS Executive CAFM flashcards

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

Prime cost

Sum of direct material, direct labour, and direct expenses incurred in production. It excludes factory overheads and forms the base for adding manufacturing overheads.

Break-even point units

Fixed cost divided by contribution per unit. At this volume total contribution equals fixed cost and profit is zero.

P/V ratio

Contribution divided by sales, expressed as a percentage. It shows the proportion of each sales rupee available to cover fixed costs and profit.

Margin of safety

Actual sales minus break-even sales. It measures the fall in sales the firm can absorb before incurring losses; profit equals margin of safety times P/V ratio.

Under-absorption of overheads

Occurs when overheads absorbed into production are less than actual overheads incurred. The shortfall is charged to the costing profit and loss account.

Relevant cost

Incremental future cash cost that differs between alternatives. It excludes sunk costs and committed fixed costs but includes opportunity cost of resources used.

Material usage variance

(Standard quantity for actual output minus actual quantity used) multiplied by standard price. A positive result is favourable; negative is adverse.

Present value formula

Future value divided by (1 + r) raised to n, where r is the discount rate and n the number of periods. Used to discount future cash flows to today.

Cost of equity

Return required by shareholders. Under the dividend growth model it equals expected dividend divided by price plus growth; under CAPM it equals risk-free rate plus beta times market premium.

Weighted average cost of capital

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

Degree of operating leverage

Contribution divided by EBIT. It measures the percentage change in EBIT for a given percentage change in sales.

Degree of financial leverage

EBIT divided by EBIT minus interest. It measures the sensitivity of earnings per share to changes in operating profit.

Net present value

Present value of expected cash inflows minus initial outlay. A positive NPV means the project adds value at the given cost of capital.

Profitability index

Present value of cash inflows divided by initial investment. Accept when above one; used to rank projects when capital is rationed.

Holding period return

Income received plus the change in price, divided by the beginning price. It measures total return over the period the security is held.

Beta

Measure of a security's systematic risk relative to the market. A beta above one means the security moves more than the market.

Security market line

Graph of expected return against beta under CAPM. Securities plotting above the line offer excess return and are considered undervalued.

Sharpe ratio

Portfolio return minus risk-free rate, divided by portfolio standard deviation. It measures excess return per unit of total risk.

Treynor ratio

Portfolio return minus risk-free rate, divided by portfolio beta. It measures excess return per unit of systematic risk.

Jensen's alpha

Actual portfolio return minus the return predicted by CAPM for its beta. A positive alpha indicates outperformance after adjusting for risk.

Bond duration

Weighted average time to receive a bond's cash flows. Percentage price change approximately equals negative duration times the change in yield.

Internal rate of return

Discount rate at which a project's net present value equals zero. Accept the project if IRR exceeds the cost of capital.

Accounting rate of return

Average annual accounting profit divided by average investment. It ignores the time value of money and uses profits rather than cash flows.

Depreciation tax shield

Depreciation multiplied by the tax rate. It represents the tax saving from depreciation and is added back when computing operating cash flow.

Discounted payback period

Time taken for discounted cash inflows to recover the initial investment. It accounts for the time value of money, unlike simple payback.

Capital rationing

Situation where funds available are limited, so projects must be ranked. Divisible projects are ranked by profitability index; indivisible ones by trial combinations maximising NPV.

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 locked in operations.

Economic order quantity

Square root of twice annual demand times order cost divided by carrying cost per unit. It minimises total ordering and holding cost.

Quick ratio

Current assets minus stock and prepaid expenses, divided by current liabilities. It tests short-term liquidity without relying on inventory.

Re-order level

Maximum usage multiplied by maximum lead time. It is the inventory level at which a new order is placed to avoid stock-out.

Book building

Process of pricing a public issue through bids collected from investors within a price band. It helps discover demand and the issue price.

Mutual fund NAV

Total assets minus liabilities of the scheme, divided by units outstanding. Open-ended schemes buy and sell units at this value.