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
Present Value of Net Cash Outflows:
$750,000 cost of Machine - Useful Life of 5 Yrs. with a scrap value of 10% of the purchase price at the end of the 5 Yrs.
Option 1: 5 Yr Lease - Annual Payment of $155,000 payable at beginning of the year. Machine must be returned.
Option 2: 5 Yr Bank Loan - $750,000 at 7% interest, subject to covenants
Option 1: because it is due at the beginning of the year, this is an annuity due. If the PV Factors do not give you this, it would be
$155,000 First Payment at Present Value +
$155,000 at PV Factor for 4 years (5-1), since only the remaining payments are subject to inflation.
Option 2:
$750,000 - the PV of the residual value of the Machine.
Since the PV of the cash outflows represents the cost today including the current inflation of future payments, the machine will be paid for today at $750,000 but we will get back the residual value of the machine after 5 years or…
$750,000 x 10% = $75,000 x PV of $1 after 5 years
Price Elasticity of Demand Formula
% Change in Qty Demanded
/
% Change in Price
% Change = New - Old / Old
This is expressed in Absolute Value
I
I
Only the after-tax profit part are adjusted for tax.
FOH + (Before Tax Desired Profit x (1-TaxRate) / Contribution Margin per Unit
