ATD Level III

Fundamentals of Finance flashcards

Read the question, say the answer to yourself, then turn the card to check. The first 10 of 50 cards are free; the rest come with the subject.

Card 1 of 50

Jump to a card

Complete Flashcard Reference

Review every card in this deck. Open any card to reveal its answer. The first 10 are free; the other 40 come with the subject.

What are the four categories of finance decision?

Investment: which assets and projects to commit the organisation's funds to. Financing: the mix of debt and equity used to fund those investments. Dividend: how much profit to distribute to shareholders and how much to retain. Liquidity: managing short-term assets and liabilities so obligations can be met as they fall due.

What is the matching principle of financing, and why does it matter?

Match the maturity of a source of finance to the life of the asset it funds: long-lived assets with long-term finance, short-lived needs with short-term finance. Funding a long-lived asset with short-term finance exposes the firm to refinancing risk before the asset has paid for itself.

What are the formulas for compounding and discounting a single sum?

Compounding: FV = PV(1 + r)^n. Discounting: PV = FV / (1 + r)^n. Example: KES 200,000 at 10% for 5 years grows to about KES 322,102.

How does the Gordon growth model value an ordinary share?

Value = D1 / (r - g), where D1 = D0 x (1 + g), r is the shareholders' required return and g the constant dividend growth rate. Example: D0 = KES 5, g = 4%, r = 12%: D1 = 5.20, value = 5.20 / 0.08 = KES 65. It breaks down when g is greater than or equal to r.

How is the weighted average cost of capital (WACC) calculated?

WACC = (E/V)ke + (D/V)kd(1 - t), where E and D are the market values of equity and debt and V = E + D. Each component's cost is weighted by its share of the total market value of capital.

What is net present value (NPV), and when is a project accepted?

NPV = present value of all future net cash inflows, discounted at the firm's cost of capital, minus the initial investment. Accept the project if NPV is positive. NPV is generally regarded as the theoretically superior technique, because it directly measures the shilling value the project adds.

How is the working capital cycle calculated?

Inventory holding period + receivables collection period - payables payment period. Example: 45 + 40 - 30 = 55 days. The shorter the cycle, the less financing the firm needs to sustain its operations.

What is the difference between systematic and unsystematic risk?

Unsystematic risk is specific to one firm or industry, and diversification can eliminate it. Systematic (market) risk affects the whole market at once and cannot be diversified away. Beta measures only systematic risk, the only risk the market rewards with extra expected return.

What are the four dates in a dividend payment, in order?

Declaration date: the board announces the dividend and the key dates. Ex-dividend date: from this date the share trades without the right to the dividend, and its price typically falls by roughly the dividend amount. Record date: decides which shareholders on the register are entitled. Payment date: the dividend is paid.

What is riba, and how do Islamic financial instruments earn a return without it?

Riba is any predetermined, guaranteed return on a loan of money, prohibited under Shariah because money itself has no intrinsic productive value. Returns come instead from trading mark-up (murabaha), rental income (ijara) or partnership profit (mudarabah, musharakah), each tied to a real asset or venture.

How does finance differ from accounting?