IFA Financial Analysis & Decision Making Flashcards

What is net present value (NPV) used for in financial decision making?

Answer: Determining whether an investment creates value by discounting future cash flows

NPV discounts all expected future cash flows of a project to their present value and subtracts the initial investment to determine if the project creates net value.

The internal rate of return (IRR) is the discount rate at which:

Answer: Net present value equals zero

The IRR is the discount rate that makes the net present value of all cash flows from a project equal to zero, representing the project's effective yield.

What does a high debt-to-equity ratio indicate about a company's capital structure?

Answer: The company relies heavily on debt financing, increasing financial risk

A high debt-to-equity ratio indicates that a company has financed a large portion of its assets with debt, which increases interest obligations and financial risk.

Which financial statement shows changes in a company's cash position over a period?

Answer: Statement of cash flows

The statement of cash flows categorizes cash movements into operating, investing, and financing activities to explain changes in the cash balance.

What is a payback period and what is its main limitation?

Answer: Time to recover initial investment from cash flows; ignores time value of money and post-payback flows

The payback period measures how long it takes to recoup an investment, but it ignores the time value of money and any cash flows occurring after the payback point.

Vertical analysis of an income statement expresses each line item as a percentage of:

Answer: Revenue (net sales)

In vertical analysis of an income statement, each line item is expressed as a percentage of net sales or revenue, showing the relative proportion of each cost and profit component.