CIFA Intermediate Level

Corporate 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 five functions of a finance manager?

1. Investment (capital budgeting) decisions. 2. Financing (capital structure) decisions. 3. Working capital management. 4. Dividend (payout) decisions. 5. Risk management.

What is the EBIT/EPS indifference point, and how is it found?

The level of EBIT at which two financing plans (for example all equity against a debt issue) give the same EPS. Write the EPS formula for each plan, set them equal and solve for EBIT; the tax factor appears on both sides and cancels. Above that EBIT the more leveraged plan gives higher EPS; below it the plan with less fixed financing cost does.

How is a breakpoint in the marginal cost of capital schedule calculated?

Breakpoint = amount of the cheaper source available / that source's weight in the target capital structure. Example: KES 60 million of retained earnings and a 60% equity weight give a breakpoint of 60,000,000 / 0.60 = KES 100 million of total new capital. Beyond it the costlier source (new equity, with flotation costs) must be used, so WACC steps up.

How do the risk-adjusted discount rate and certainty equivalent methods differ, and which discount rate goes with each?

RADR: keeps the risky expected cash flows and builds the risk into a higher discount rate. Certainty equivalent: converts each risky cash flow into a smaller certain amount and discounts it at the risk-free rate. Never mix them: a certain cash flow at a risk-adjusted rate counts the risk twice, and a risky cash flow at the risk-free rate omits it.

How are the operating cycle and the cash conversion cycle calculated?

Operating cycle = days inventory outstanding + days sales outstanding. Cash conversion cycle = operating cycle - days payables outstanding. A shorter cash conversion cycle than peers signals more efficient working capital management: less cash is tied up for the same level of sales.

What are the four dividend payment dates, in order?

1. Declaration date: the board approves and announces the dividend, creating a legal obligation to pay. 2. Ex-dividend date: the first trading date without the right to the dividend, typically one business day before the record date; the price is expected to fall by about the dividend. 3. Holder-of-record date: the date an investor must be registered to be entitled. 4. Payment date: the dividend is paid.

What is EPS bootstrapping, and why is it a trap?

When an acquirer with a higher P/E buys a lower-P/E target with shares, it issues relatively few shares for the target's earnings, so combined EPS rises mechanically. It happens even with no synergy at all, so rising EPS alone is not evidence that the merger created value.

How do a spinoff, an equity carve-out, a divestment and a liquidation differ?

Ask who owns the unit afterwards. Spinoff (demerger): existing shareholders, who receive the new listed company's shares; no cash changes hands. Equity carve-out: the public buys a minority stake through a new listing; the parent keeps control. Divestment: a third party buys it for cash or other consideration. Liquidation: nobody; the assets are simply sold off.

What are riba and gharar, and why does Islamic finance prohibit them?

Riba: interest or usury. Prohibited because it generates wealth from money itself rather than from productive activity or shared risk. Gharar: excessive uncertainty or ambiguity in a contract's terms. Prohibited because it can amount to unfair speculation.

What is the difference between VaR and conditional VaR (expected shortfall)?

VaR: the maximum loss not expected to be exceeded at a given confidence level over a given horizon. CVaR: the expected loss given that a loss beyond VaR has already occurred. VaR says nothing about how bad losses beyond its threshold could be, which is why the Basel framework has moved towards expected shortfall.

Why is shareholder wealth maximisation preferred to profit maximisation as the goal of the firm?