ICSAN Financial Strategy flashcards
ICSAN Financial Strategy · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Agency cost
- The reduction in shareholder wealth caused by managers pursuing their own interests rather than owner interests; mitigated by incentives, monitoring, covenants and takeover threat.
- Sustainable growth rate
- The maximum sales growth a firm can achieve without issuing new equity, equal to retention ratio multiplied by return on equity.
- Free cash flow to firm
- EBIT after tax plus depreciation, less capital expenditure and the increase in working capital; the cash available to all providers of capital.
- Corporate governance code
- Rules on board composition, independence, audit and remuneration committees, and disclosure, designed to protect shareholders from management misbehaviour.
- Restrictive covenant
- A negative loan covenant limiting the borrower's actions, such as further borrowing, dividend payments or asset disposals, to protect lenders.
- Signalling theory
- The idea that dividend increases or debt issuance convey management's private information about future cash flows to the market.
- Net present value
- The sum of future cash flows discounted at the cost of capital, less the initial outlay; projects with positive NPV create shareholder value.
- Internal rate of return
- The discount rate at which a project's NPV equals zero; accept if it exceeds the cost of capital, but beware multiple solutions and scale neglect.
- Profitability index
- Present value of a project's future cash flows divided by its initial investment; used to rank projects when capital is rationed.
- Equivalent annual cost
- The constant annual cost with the same present value as an asset's life-cycle cost; used to compare assets with unequal lives.
- Weighted average cost of capital
- The market-value-weighted average of after-tax debt cost and equity cost, used as the discount rate for average-risk projects.
- Capital asset pricing model
- Ke = risk-free rate plus beta times the market risk premium; only systematic risk is rewarded because unsystematic risk is diversifiable.
- Asset beta
- The beta of a firm's operating assets, reflecting business risk alone; relever it to obtain an equity beta for a given capital structure.
- Pecking order theory
- Firms prefer internal funds first, then debt, then new equity, because information asymmetry and issue costs make equity issuance expensive.
- Rights issue
- An offer of new shares to existing shareholders in proportion to their holdings, usually at a discount, preserving pre-emptive rights.
- Theoretical ex-rights price
- The market value of the firm before the rights issue plus the new proceeds, divided by the total number of shares after the issue.
- Convertible bond
- A bond carrying a lower coupon that can be converted into shares at a set price, giving the holder equity upside and the issuer cheap debt.
- Semi-strong efficiency
- The form of market efficiency in which prices reflect all publicly available information, so fundamental analysis cannot earn abnormal returns.
- Enterprise value
- The value of a firm's operating assets, equal to equity value plus net debt; obtained by discounting free cash flow to the firm at WACC.
- Synergy value
- The excess of the combined firm's value over the sum of the standalone values; the maximum premium an acquirer can rationally pay.
- Management buyout
- A purchase of a company or division by its existing management team, often funded largely with debt and backed by private equity.
- Dividend valuation model
- Share value equals next year's dividend divided by the excess of cost of equity over growth; valid only when growth is below that cost.
- Forward contract
- A binding, customised agreement to exchange an asset or currency at a fixed price on a future date; no upfront payment but counterparty risk.
- Interest rate swap
- An agreement to exchange fixed for floating interest payments on a notional principal, used to change the interest profile of debt.
- Money market hedge
- Borrowing or lending in the foreign currency today to fix the domestic currency value of a future foreign cash flow.
- Purchasing power parity
- The principle that exchange rates adjust so that identical goods cost the same across countries, linking relative inflation to currency movements.
- Residual dividend policy
- Paying dividends only from earnings left after funding all positive-NPV investments at the target capital structure.
- Cash conversion cycle
- Inventory days plus receivable days minus payable days; the period cash is tied up in operations before collection from customers.
- Economic order quantity
- The order size minimising the sum of ordering and holding costs, equal to the square root of twice annual demand times order cost divided by holding cost.
- Economic value added
- NOPAT less the product of WACC and invested capital; a positive figure indicates the firm earned more than its cost of capital.
- DuPont analysis
- Decomposing return on equity into net profit margin, asset turnover and financial leverage to identify the source of performance.
- Cash budget
- A forecast of cash receipts and payments by period, revealing peak funding needs and surplus cash for short-term investment.