B2 Flashcards

1
Q

How do you calculate weighted cost of capital?

A
  1. add up the investment amounts
  2. divide each one by the total to get the % (proportion)
  3. multiply each % by the market rate of return and cost of equity respectively
  4. add up the final percentages

note: make sure that the debt calculation (market rate of return) is NET OF TAX!!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What would cause a firm to increase the debt in its financials structure?

A

an increase in the corporate tax rate

reason: interest expense is tax deductible (while dividends are not)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a major difference between futures and forward hedges?

A

Futures - for a specific transaction
Forward - for large groups of transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the difference between a letter of credit and a line of credit?

A

Letter of credit: 3rd party guarantee of obligations to ensure payment to creditors; short-term
Line of credit: borrowing from a financial institution to ensure the entity meets cash flow requirements; short-term; does not specifically guarantee payments on trade credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What would the ordering costs of inventory mostly consist of (for a manufacturing business)?

A

production set-up costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are some examples of inventory carrying costs?

A

-storage
-insurance
-obsolescence
-spoilage

note: inspection costs are associated with ordering costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the difference between safety stock reorder point and materials requirements planning?

A

materials requirements planning - projects and plans inventory levels in order to control the usage of raw materials in the production process; used for raw materials and WIP

safety stock - applied to both manufacturing and finished goods inventory to ensure that supply requirements are met

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the formula for calculating WACC?

A
  1. debt: % of debt x interest rate x (1-tax rate)
  2. preferred equity: % of preferred equity x interest rate
  3. common equity: % of common equity x interest rate

formula: 1 + 2 + 3 = WACC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the PEG ratio?

A

(price / earnings) / (growth % x 100)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

T/F: One of a company’s highest objectives is to minimize the WACC.

A

true; a decrease in the WACC increases the value of the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is operating leverage compared to financial leverage?

A

operating leverage: causing fixed expenses to be higher than variable costs (which is good for increasing profits, but you may incur higher losses b/c you still have to cover fixed expenses if sales decline)

financial leverage: higher percentage of debt than equity (the idea is that you will have higher operating income once sales cover fixed interest payments which would be returns to equity holders)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the goal of compensating balance arrangements?

A

to have a minimum balance in that cash account for reduced fees (NOT to increase the availability of cash)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the goal of zero balance accounts?

A

to increase the availability of cash (cash will be invested for the maximum period before disbursement)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the formula for required rate of return?

A
  1. real rate of return + inflation premium = nominal rate of return
  2. interest rate risk + liquidity risk + default risk = risk premium
  3. 1 + 2 = required rate of return
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

EBIT margin:

A

EBIT / Sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

interest burden

A

EBT / EBIT

17
Q

tax burden

A

net income / EBT

18
Q

asset turnover

A

sales / average total assets

19
Q

equity multiplier

A

total assets / total equity

note: this is a number, not a %

20
Q

If stocks are equal in price, what portfolio will have the least risk?

A

stocks that are negatively correlated with each other (ideally if they are perfectly negatively correlated)

21
Q

What is the cash conversion cycle?

A

inventory/(COGS/365) + receivables/(sales/365) - payables/(COGS/365)

22
Q

What is the cost of retained earnings formula?

A

(dividend price next period / stock price) + growth rate

23
Q

What all would be included in the initial net cash outflow in an NPV problem?

A

-purchase price
-shipping, installation, and testing cost
-required increase in working capital

24
Q
A