‭ ey components should be considered when evaluating investment opportunities‬

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‭Market Analysis:‬
‭-‬ ‭helps identify opportunities, assess demand, understand competition, and anticipate‬
‭market trends.‬
‭-‬ ‭It guides companies to invest in projects aligned with market needs and preferences,‬
‭ensuring better acceptance and potential success.‬
‭-‬ ‭Example: A thorough market analysis might lead a company to invest in a new line of‬
‭organic skincare products after observing an increasing trend in consumers favouring‬
‭natural and sustainable beauty solutions.‬
‭Risk Assessment:‬
‭-‬ ‭identifies potential pitfalls, uncertainties, and challenges associated with a project.‬
‭-‬ ‭Impact on Decision: Companies evaluate and mitigate risks to make informed‬
‭investment decisions, minimizing potential losses or disruptions.‬
‭-‬ ‭Example: A company might reconsider a project to expand into a volatile market after‬
‭a risk assessment reveals regulatory uncertainties and unstable economic‬
‭conditions.‬
‭Liquidity:‬
‭-‬ ‭determines the financial capacity to fund projects and manage unforeseen expenses.‬
‭-‬ ‭Companies consider their available liquidity to ensure they can finance investments‬
‭without compromising operational needs or risking financial stability.‬
‭-‬ ‭Example: If a company has low liquidity, it might opt for smaller-scale projects that‬
‭require less immediate funding rather than large-scale ventures that demand‬
‭significant upfront investment.‬
‭Profitability:‬
‭-‬ ‭determines potential returns, revenue generation, and overall project success.‬
‭-‬ ‭Companies prioritize projects with higher expected profitability, aiming to maximize‬
‭returns on investment.‬
‭-‬ ‭Example: A tech company might invest in developing innovative software expected to‬
‭capture a large market share, foreseeing substantial profitability compared to‬
‭maintaining existing products.‬
‭Explain why people invest in stock not preference stock/bond‬
‭Ownership Stake:‬
‭●‬ ‭Common stock represents ownership in a corporation, providing investors‬
‭with a share of the company.‬
‭Growth Potential:‬
‭●‬ ‭Investors are attracted to common stock due to the potential for capital‬
‭appreciation as the company grows.‬
‭Market Value Determinants:‬
‭●‬ ‭The market value of common stock is influenced by the company's‬
‭profitability, growth prospects, current market interest rates, and overall stock‬
‭market conditions.‬
‭Liquidity:‬
‭●‬ ‭Stock exchanges provide liquidity, allowing investors to easily buy and sell‬
‭shares. Liquidity is crucial for investor confidence.‬
‭Convertibility to Cash:‬
‭●‬ ‭Investors prefer stocks because they can easily convert their shares to cash‬
‭when needed, providing flexibility in managing their investments.‬

‭ ormally who/what type of people invest in stock, who will invest in bond or‬
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‭preference stock‬
‭Who Invests in Stock:‬
‭●‬ ‭Generally, individuals seeking long-term capital appreciation and growth invest in‬
‭stocks.‬
‭●‬ ‭Investors with a higher risk tolerance who can withstand market fluctuations are often‬
‭attracted to stocks.‬
‭Bond and Preference Stock:‬
‭●‬ ‭Bonds: Investors who prioritize stability and regular income may prefer bonds. Bonds‬
‭represent debt, and investors receive periodic interest payments.‬
‭●‬ ‭Preference Stock: Investors who want a fixed dividend and priority in receiving assets‬
‭in case of liquidation might opt for preference stock. It offers a hybrid of‬
‭characteristics between common stock and bonds.‬
‭ heory on bond, characteristics of bond, how these characteristics of bonds, how‬
T
‭these characteristics influence the rating of the bond, how investors make decision‬
‭based on the process of rating, how it influences the decision-making‬

‭Bond Characteristics:‬
‭●‬ ‭Definition: A publicly traded form of debt issued to fund various projects or operations‬
‭by entities like corporations, governments, and agencies.‬
‭●‬ ‭Issuer's View: Seen as a loan requiring regular interest payments and eventual‬
‭repayment of borrowed principal.‬
‭●‬ ‭Known as: Fixed-income securities.‬

‭Key Bond Characteristics:‬

‭Maturity Date: The date when the bond issuer repays the principal.‬
‭Par Value (Face Value): Usually $1,000, representing the bond's nominal value.‬
‭Coupon (Interest) Rate: Stated as a percentage of the par value, determining annual‬
‭interest payments.‬
‭Collateral Description: Details the property pledged as security.‬
‭Bondholder Rights: Outlines steps bondholders can take if the issuer fails to pay‬
‭interest or principal.‬
‭Bond Rating and Credit Quality:‬
‭●‬ ‭Bond Rating: A grade of credit quality issued by agencies like Moody’s and Standard‬
‭& Poor’s.‬
‭●‬ ‭Credit Quality Risk: The likelihood of timely interest payments or default by the‬
‭issuer.‬

‭Influence on Decision-Making:‬
‭Assessing Credit Quality Risk:‬
‭●‬ ‭Investors use bond ratings to gauge the risk associated with timely interest‬
‭payments or default.‬
‭●‬ ‭Higher ratings indicate lower credit risk.‬
‭Decision-Making Process:‬
‭●‬ ‭Investors make decisions based on the perceived risk and return associated‬
‭with a particular bond.‬
‭●‬ ‭Higher-rated bonds may offer lower returns but are considered safer.‬
‭Investor Confidence:‬
‭●‬ ‭Bond ratings influence investor confidence in the issuer's ability to meet‬
‭obligations.‬
‭●‬ ‭Investors choose bonds based on their risk tolerance and financial goals.‬

I‭n conclusion, bond characteristics, including maturity, par value, and interest rate, along‬
‭with credit ratings, play a pivotal role in investors' decision-making processes. Ratings help‬
‭investors assess credit quality risk, guiding them in choosing bonds aligned with their risk‬
‭preferences and investment objectives.‬
‭ ey point on how to understand financial in organisation, how financial data‬
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‭contribute to better decision making.‬
‭Guidance for Decisions:‬
‭●‬ ‭Finance guides both big and small decisions in a business.‬
‭●‬ ‭Helps in planning for the future and dealing with everyday choices.‬
‭Control and Feedback:‬
‭●‬ ‭Financial data is like a control panel.‬
‭●‬ ‭It shows how well things are going and helps adjust for better results.‬
‭Resource Smart:‬
‭●‬ ‭Finance is about using money wisely.‬
‭●‬ ‭Helps decide where to invest and how to make the most of what you have.‬
‭Risk Manager:‬
‭●‬ ‭Finance is your business's fortune teller.‬
‭●‬ ‭Helps identify and manage risks to keep the business safe.‬
‭Performance Tracker:‬
‭●‬ ‭Financial data measures how well you're doing.‬
‭●‬ ‭Like a report card, it shows if your plans are working.‬

‭ inancial manager roles in capital budgeting‬

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‭Capital Budgeting/Investment:‬
‭●‬ ‭Focus on long-term operations and investments in the business.‬
‭●‬ ‭Utilize various valuation methods to assess potential investments.‬
‭●‬ ‭Objective is to generate profits and enhance overall business value.‬
‭ iscuss roles of firms and financial managers‬
D
‭Roles of Firms‬
‭Financial Reporting and Transparency:‬
‭Firms are responsible for providing accurate and transparent financial information to various‬
‭stakeholders, including investors, regulators, and the public. Financial reporting helps build‬
‭trust and confidence in the firm's operations.‬
‭Capital Formation:‬
‭Firms play a central role in capital formation by raising funds through various means such as‬
‭issuing stocks, bonds, or taking loans. This capital is essential for the firm's operations,‬
‭investments, and growth.‬
‭Financial Policy Formulation:‬
‭Firms establish financial policies that guide their decisions on issues such as dividend‬
‭distribution, capital structure, and liquidity management. These policies contribute to‬
‭maintaining a balance between risk and return.‬

‭ oles of Financial Managers‬

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‭Capital Budgeting:‬
‭Financial managers are involved in the capital budgeting process, which includes evaluating‬
‭and selecting investment projects that align with the firm's strategic goals. They assess the‬
‭financial viability and potential returns of various investment opportunities.‬
‭Risk Management:‬
‭Financial managers assess and manage various financial risks, including interest rate risk,‬
‭currency risk, and credit risk. They implement strategies such as hedging to protect the firm‬
‭from adverse market movements.‬
‭Financial Reporting and Compliance:‬
‭Financial managers ensure accurate financial reporting. They oversee financial statements,‬
‭audits, and compliance with accounting standards and regulatory requirements. They‬
‭provide guidance to ensure the company's financial health and legal compliance.‬

‭ xplain 4 methods of calculating operating cash flow‬

E
‭Method 1: Net Income Approach‬
‭Operating Cash Flow (OCF) = EBIT×(1 - Tax rate) + Depreciation‬
‭OCF = EBIT – Taxes + Depreciation‬

‭ ethod 2: Bottom-Up Approach‬

M
‭OCF = Net income + depreciation‬
‭Works only when there is no interest expense‬

‭ ethod 3: Top-Down Approach‬

M
‭OCF = Sales – Costs – Taxes‬
‭Do not subtract non-cash deductions‬

‭ ethod 4: Tax-Shield Approach‬

M
‭OCF = (Sales – Costs)(1 – T) + Depreciation × T‬
‭This approach views OCF consists of two components: 1‬
‭. Project’s CF with no depreciation expense.‬
‭2. Depreciation deduction multiplied by the tax rate‬
‭ hat are the advantage and disadvantage of debt financing‬
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‭Advantages‬‭:‬
‭Tax Benefits:‬‭Loan interest is tax-deductible for businesses, reducing taxable income. This‬
‭deduction lowers the overall tax liability, making debt financing an attractive option.‬
‭Retain Control:‬‭Unlike equity financing, taking on debt doesn’t dilute ownership. Business‬
‭owners maintain full control over decision-making and operations without sharing profits‬
‭with investors.‬
‭Predictable Payments:‬‭Repayment terms are typically fixed. Knowing the exact repayment‬
‭amounts and schedules helps in better financial planning and budgeting since the payments‬
‭remain steady.‬

‭ isadvantages:‬
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‭Fixed payments:‬‭Regular interest payments can be a financial burden, especially during an‬
‭economic downturn or when business profitability is low. These payments can eat into profits‬
‭and impact cash flow.‬
‭Bankruptcy Risk:‬‭Too much debt increases the risk of default or bankruptcy. If a business is‬
‭unable to meet its debt obligations, it may face legal action from creditors, which may lead to‬
清算 清除
‭the liquidation / 崩塌
of assets or the collapse of the business.‬
‭Collateral:‬‭Lenders will typically demand that certain assets of the company be held as‬
‭collateral, and the owner is often required to guarantee the loan personally.‬

‭What are the differences between mutually exclusive project and independent project‬

‭Mutually Exclusive Project‬ ‭Independent Project‬

‭Projects compete in a "runoff." for each ME‬ ‭Compute the project's statistic‬
‭project‬ ‭independently‬

‭Best-performing project in the runoff is‬ ‭ ecision based on the project's own‬
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‭chosen.‬ ‭performance against a benchmark.‬

‭Chosen project is then compared to a‬ ‭No competition with other projects during‬
‭benchmark for final decision.‬ ‭evaluation.‬
‭ hat is the average accounting return, why average accounting return is important‬
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‭for a project‬
‭-‬ ‭Average accounting return (AAR) is a financial metric used to evaluate the‬
‭profitability of investment projects. It calculates the project's average net profit divided‬
‭by the investment's average book value over its lifetime.‬
‭-‬ ‭AAR is important for projects because it provides a simple way to measure‬
‭profitability based on accounting metrics. It provides companies with a simple way to‬
‭evaluate potential investments and compare them to historical or industry standards.‬
‭However, while easy to calculate, AAR has limitations because it relies heavily on‬
‭accounting data and ignores the time value of money and cash flows, which can‬
‭result in an incomplete or misleading picture of a project's actual profitability.‬

I‭mportance:‬
‭Profitability assessment:‬‭Helps assess the average annual profitability of a project.‬
‭Provides a measure of the accounting profit generated by the investment relative to its‬
‭average book value.‬
‭Comparison with minimum required return:‬‭If the AAR exceeds the required rate of‬
‭return, the project is considered acceptable from an accounting perspective.‬
‭Internal performance measurement:‬‭Evaluate the success of a project in generating‬
‭accounting profits. Helps financial managers and project shareholders understand how well‬
‭the project is performing over time.‬
‭Decision-making tool:‬‭Projects with higher AARs are generally preferred, assuming other‬
‭factors are equal.‬
‭◦‬ ‭Simple metric for non-financial managers‬
‭◦‬ ‭Useful in capital budgeting‬
可行性
‭Evaluate the financial viability of long-term projects Helps in comparing different‬
‭investments opportunities and making informed decisions on resource allocation.‬
‭◦‬ ‭Consideration of accounting measures‬
‭Take into accounting measures like accounting profits and book value, providing a‬
‭perspective on financial performance based on historical cost and revenue data.‬