Cash Flow
What is the purpose of a cash flow forecast?
To predict the inflows and outflows of cash over a specific period to manage liquidity.
What is an example of an internal source of finance?
: Retained earnings or sale of assets.
Explain the limitations of Payback Period and Accounting Rate of Return (ARR) as investment appraisal techniques.
Payback ignores cash flows after payback and time value of money. ARR ignores cash flow timing and reinvestment potential.
– What is another name for the statement of financial position?
Balance sheet.
Why is the acid-test ratio considered more conservative than the current ratio?
r: It excludes inventory, which may not be quickly convertible to cash
Name two reasons why a business might experience cash flow problems.
Low sales revenue, high expenses, late payments from customers, or over-investment in inventory.
Give one advantage and one disadvantage of debt financing.
Advantage: No ownership dilution. Disadvantage: Interest payments must be made.
Calculate the NPV for an investment of $100,000 with the following cash flows and a discount rate of 8%:
Year 1: $30,000, Year 2: $40,000, Year 3: $50,000
NPV = $27,778 + $34,314 + $39,714 - $100,000 = $1,806
What are the three main sections of a statement of financial position?
Assets, Liabilities, and Equity.
Calculate the Current Ratio and Acid-Test Ratio given:
1.17:1
Distinguish between cash inflows and cash outflows with examples.
Cash inflows are money received (e.g., sales revenue, loans), while cash outflows are payments made (e.g., rent, salaries).
– What is equity financing and how does it differ from debt financing?
Equity financing involves selling shares, giving up ownership, whereas debt financing involves borrowing money to be repaid with interest.
A project requires an initial investment of $200,000 and generates the following cash inflows:
Approx. 10-12%
Differentiate between liquidity and solvency in financial analysis.
Liquidity is the ability to meet short-term obligations, while solvency is the ability to meet long-term obligations.
Explain how a decline in liquidity ratios might impact a company’s creditworthiness.
It indicates potential difficulty in meeting short-term liabilities, leading to lower credit ratings and higher borrowing costs.
Differentiate between profit and cash flow, using examples to illustrate how a profitable business can face cash flow problems.
Profit is revenue minus expenses, while cash flow is the movement of cash in and out. A business may be profitable but face cash shortages due to delayed receivables or high capital expenditures.
– Explain the difference between short-term and long-term sources of finance with examples.Define appropriateness of each
Short-term finance is for less than one year (e.g., overdraft), while long-term finance exceeds one year (e.g., mortgages).
A business is evaluating two projects using NPV and IRR. Project A has a higher NPV but lower IRR than Project B. Which project should be chosen and why?
Choose Project A if maximizing shareholder wealth is the goal (higher NPV). Choose Project B if maximizing investment efficiency (higher IRR) is prioritized.
Evaluate the implications of high gearing on a firm’s financial stability.
High gearing increases financial risk due to fixed interest payments but can enhance shareholder returns if earnings exceed debt costs.
A firm has a current ratio of 1.5 but faces liquidity problems. Explain why.
The firm may have high inventory levels that are not easily convertible to cash.
A business had an opening balance of $10,000, net cash flow of -$3,000, and closing balance of $X. Calculate the closing balance.
$7,000
A firm is considering issuing bonds versus obtaining a bank loan. Evaluate the financial and strategic considerations influencing this decision.
Bonds may offer lower interest rates and no ownership dilution but require credit ratings and public disclosure. Bank loans are quicker to obtain but often come with restrictive covenants.
What is the purpose of investment appraisal?
To evaluate the profitability and risk of an investment.
A company has the following balances:
Calculate the company’s Total Equity and explain the financial implications of the result.
380,000
Discuss the limitations of liquidity ratios in assessing a company’s financial health.
Ratios do not consider cash flow timing, quality of receivables, or inventory liquidity.