ICAEW - financial management Exam Questions and Answers Graded A+ (Already Passed)
SVA - value of business - Answers Sales growth
Life of cashflows
Operating profit margin
Working capital investment
Cost of capital
Assets (non current) investment
Tax rate
Payback period - Answers Pros - s...
Payback period - Answers Pros - simple, good for initial screening, importance of liquidity, focused on
nearest cashflows
Cons - ignores time value of money, only cashflows up to payback date, short-term view, no clear
decision
ARR/ROCE - Answers Pros - simple, entire life of project, reflects how external investors judge the org
Cons - ignores time value of money, profits not cashflows, doesn't consider project length, no clear
decision
average annual profit/average investment
NPV - Answers Pros - time value of money, shows shareholders wealth, allow for risk through cost of
capital, clear decision, entire project life
Cons - cost of cap it estimated several years into future, time consuming, misunderstood, doesn't
consider liquidity/time taken for return, assumes can reinvest proceeds at cost of capital.
IRR - Answers Pros - time value of money, doesn't require exact cost of funds, easy to interpret, entire
project
, Cons - ignores size on investment and total cash inflows, can conflict with NPV, assumes can reinvest
proceeds at IRR.
Sensitivity - Answers NPV of project/PV of cashflow input
EAC - Answers NPV of project/annuity factor for project
Profitability Index PI - Answers NPV/initial investment
Real options - Answers strategic factors to be considered:
TERP - Answers Share value before + proceeds - issue costs + NPV/total shares after RI
Green finance - Answers Green loans - for green projects
Sustainability linked loans - meeting green targets
Green bonds - green projects
Green funds - help investors target socially responsible companies by producing an index
Dividend policy - Answers Residual theory - only residual profit after all investment used for dividends.
Irrelevancy theory - always invest in positive NPVs. s/h create their own dividends through selling
shares.
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