B2 Flashcards
Capital Asset Pricing Model (CAPM)
=Risk-free rate + [Beta x (Market return - Risk-free rate)]
Discounted Cash Flow Method - to estimate the cost of retained earnings
= Dividend / Stock Price + Expected Growth
Weighted Avg Cost of Capital (WACC)
$50 Million Project
$15 Million Bonds - After Tax Cost of Debt 7%
$35 Million from Retained Earnings - Cost of Equity 12%
(15/50) x .07 = 0.021
(35/50) x .12 = 0.084
0.105%
They might give a bunch of unnecessary information. Real cost of debt is lower because interest is tax deductible.
Cost of Preferred Stock
=Dividend / Issuance Price
issuance price = price that it will be issued and sold on the market for.
This is the % of money that the company will pay for each share of preferred stock (their cost to issue it)
Cost of Debt
=After tax interest cost/ Issuance Price
= Int Rate x (1 - Tax Rate) / Issue Price of Bonds (Debt)
Financial Leverage increases when?
the Debt to Equity Ratio increases
Rank these in order of risk and thus potential returns:
Commercial Paper
Negotiable CDs
T Bills
Banker’s acceptances
- Commercial Paper
- Banker’s acceptances
- Negotiable CDs
- T Bills
Working Capital
Current Assets - Current Liabilities
Safety Stock
50 week calendar year
10,000 units per year
Order Quantity - 2,000
Safety Stock Level - 1,300
Lead Time - 4 Weeks
Basically, how many sales will happen in the lead time needed to get an order plus the safety stock is when you need to make another order
10,000 / 50 = 200 sales per week
200 x 4 weeks = 800 sales during Lead Time
800 + 1,300 Safety Stock
2,100
Constant Growth Dividend Discount Model assumes….?
stock and dividend price will grow at same rate
A high Price / Earnings ratio is an indication of what?
Investors expect increased growth in the years to come
Zero Growth Model
Price = Dividend / Discount Rate (Required Rate of Return)
Price to Earnings
= Stock Price / Annual Earnings per Share
PEG Ratio
= (Stock Price / EPS) / (Growth x 100)
Price to Earning (PE Ratio) / Growth Rate x 100
Market (Median) Value Approach
Take the average of the two middle values
