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BEC > B2 - Financial Management > Flashcards

B2 - Financial Management Flashcards

1
Q

cWhat is the CAPM formula?

A

Cost of RE = Risk-free rate + Risk Premium
Cost of RE = Risk-free rate + (Beta * Mkt Risk Premium)
Cost of RE = Risk-free rate + [Beta * (Market Return - Risk-free rate)

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2
Q

What is Beta?

A

Beta represents volatility of stock relative to the market.
Beta = 1; stock is as volatile as the market.
Beta = >1; stock is more or less volatile as the market.

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3
Q

How do you calculate Beta?

A

% Change in Stock Price / % Change in Market Price

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4
Q

What is WACC?

A

Weighted Average Cost of Capital.
Serves to max sh equity.
It is used to compare ROR and determine weather to make an investment.

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5
Q

How is the optimal capitalization of an organization determined?

A

By the lowest WACC.

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6
Q

What is the biggest advantage of having debt?

A

It is the cheapest!

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7
Q

What to remember about bonds?

A

Coupon Rate > Market rate = Bonds sell @ Premium
Coupon Rate < Market rate = Bonds sell @ Discount

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8
Q

What is overall cost of capital?

A

ROR required to cover resources employed.

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9
Q

When do managers meet the responsibility of increase shareholder value?

A

When the return on the cap investments > ROR associated to beta.

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10
Q

What are the benefits of debt financing vs equity financing?

A

High tax rates and few noninterest benefits.

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11
Q

What are the 3 elements to estimate cost of equity?

A
  1. Current dividends per share.
  2. Expected growth rate in dividends.
  3. Current market price per share of common stock.
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12
Q

What is the type of bond that maintains a constant market value.

A

Floating rate bond.

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13
Q

How do you calculate After-tax cost of debt?

A

After-tax cost of debt = Pretax cost of debt * (1 - Tax Rate).

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14
Q

What is the interest on a one year US T-Bill?

A

Risk free rate + Inflation rate

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15
Q

What is the cost of equity?

A

Dividend payout / Stock Issue Price

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16
Q

What is the cost of debt?

A

Interest Exp / Total Debt * (1 - Tax Rate)

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17
Q

What is the dividend growth model?

A

(Dividend * Constant Growth % / FMV of CS) + Constant Growth%

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18
Q

What is cost of preferred stock?

A

Dividend Paid / Net Proceeds

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19
Q

What is WACC for equity?

A

Cost of Equity * % Equity

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20
Q

What is WACC for debt?

A

Post Tax Debt WACC = Pretax WACC * (1 - Tax Rate)

Pretax WACC = Cost of Debt * % Debt

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21
Q

What is the Discounted Cash Flow Model?

A

Dividend / Price + Growth Rate

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22
Q

What is the Bond Yield Risk Premium Model?

A

Pre-tax Cost of Debt + Risk Premium

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23
Q

What is cost of preferred stock?

A

Preferred stock dividend / Net proceeds from issuance

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24
Q

What is Financial Leverage?

A

The degree to which a company uses debt rather than equity to finance the company.

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25
Q

What is Operating Leverage?

A

The degree to which a company uses fixed costs rather than variable costs.

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26
Q

What is Times-Interest-Earned ratio?

A

EBIT / Int Exp

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27
Q

What are the core activities pertaining to the SCOR model?

A
  1. Plan = Properly balance/plan demand and supply.
  2. Source = Procure resources to meet demand and supply.
  3. Make = Production; turning RM into FG.
  4. Deliver = Getting goods to customers/consumers.
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28
Q

What are carrying costs?

A

The cost of carrying inventory.

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29
Q

What are ordering costs?

A

The cost of ordering additional inventory.

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30
Q

What is the Economic Order Quantity model?

A

A model that wants to minimize the total ordering and carrying costs. It assumes periodic demand is known.

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31
Q

How are safety stock levels affected?

A
  1. Uncertain sales forecast.
  2. Dissatisfaction of customers.
  3. Uncertain lead times.
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32
Q

What is MRP?

A

Material Requirements Planning = Focus is RM and WIP. It makes sure we have enough RM and WIP to produce.

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33
Q

How is the optimal level of inventory affected?

A
  1. Time required to receive inventory.
  2. Cost per unit.
  3. Cost of placing orders.
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34
Q

What are ordering costs for manufacturers?

A

Production set-up costs.

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35
Q

What is the annual cost of a quick payment discount?

A

APR = 360 / (Pay Period - Discount Period) * Discount % / (100% - Discount %)

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36
Q

How is reorder point calculated?

A

Reorder Point = Safety Stock + (Lead Time * Sales During Lead Time)

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37
Q

How can you calculate how much are you willing to invest on a cash delaying system?

A

Excess Funds * Earning Rate

Excess Funds = Avg daily cash outflows * days delayed

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38
Q

How do you calculate Annual Cost of Safety Stock?

A

Stockout Cost * Carrying Cost

Stockout Cost = Stockout Units * Stockout Costs per Units * Probability @ stock level * Orders per year

Carrying cost = Inventory Investment per Unit * Carrying Cost % * Safety Stock Units

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39
Q

What is NRV?

A

The price that you can resell your inventory less selling costs.

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40
Q

How is Average Inventory calculated?

A

(Reorder quantity / 2) + Safety Stock

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41
Q

What is Working Capital?

A

Current Assets - Current Liabilities

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42
Q

What would the quick ratio tell you?

A

High quick ratio = I have more $$$
Low quick ratio = I have less $$$

43
Q

When is working capital policy considered conservative?

A

When Assets are funded by LT financing.

44
Q

What does Bad Debt Expense have to do with Working Capital?

A

Bad Debt Exp
Allowance for Doubtful Accts

  1. Allowance reduces AR.
  2. Less AR, less Current Assets
  3. Less Current Assets, less Working Cap.
45
Q

What is the working capital policy that produces the highest risk?

A

Financing permanent assets with ST debt.

46
Q

How do you calculate average collection period in days?

A

Discount period * % customers paying during discount period + Pay period * % customers paying during pay period

47
Q

What is the cash conversion cycle?

A

Days in inventory + Days in AR - Days in AP

48
Q

How do you calculate the expected cost savings when inventory turnover is increased?

A
49
Q

What are the 3 primary motives to hold cash?

A
  1. Transactions Demand.
  2. Precautionary Demand.
  3. Speculative Demand.
50
Q

What is concentration banking?

A

The method by which a single bank is designated as a central bank as a means of controlling receipts.

51
Q

What is the primary reason for you to agree to a debt covenant limiting the percentage of its LT debt?

A

To reduce the coupon rate of the bonds being sold.

52
Q

What is minimized collection float?

A

Expedition of cash inflows.

53
Q

What are the methods to convert AR into cash?

A
  1. Collection Agencies.
  2. Factoring AR.
  3. Cash Discounts.
  4. Electronic Fund Transfers.
54
Q

What happens when sales increase, AR decreases, and the decrease it’s not due to bad debt write off?

A

Average collection period has decreased.

55
Q

What is the potential investment income used to compare to the cost of lockbox?

A

(Reduced collection days/360) * sales * loan interest rate

56
Q

How do you calculate the cost of factoring?

A

Factoring Cost = AR submitted + AR subj to interest - expense saved

Net Cost / Avg amt subj to interest = APR

AR Submitted = AR * Fee * 360/collection days
AR Subject to Interest = (AR - Amt WH or not advanced) * annual rate/12 * 360/collection days

57
Q

What is the cost of carrying additional investments on receivables?

A

Sales * VC * ROR * (collection period / 360)

Then, compare the two

58
Q

How do you calculate average gross receivable balance?

A

Average daily sales * average collection period

59
Q

What is the benefit on planned change in credit terms?

A

Sales - VC - Opp Cost

60
Q

What does the P/E ratio tell you?

A

That earnings have growth potential.

61
Q

What is the price sales ratio?

A

The price sales ratio uses sales per share as a basis for valuation and can be used in start-up situations or when earnings data is not meaningful.

62
Q

What is the formula of the zero growth model?

A

Stock value = Dividend Amt / Required Return.

63
Q

What is the formula for the P/E ratio?

A

P/E Ratio = FMV Stock / EPS Expected in 1 yr

64
Q

What is the formula for the PEG ratio?

A

PEG = P/E Ratio / Expected Growth Rate

65
Q

What is the formula for Free Cash Flow?

A

Net Income
(+) Noncash Exp
(-) Increase in Working Cap
(-) Cap Expenditures
= FCF

66
Q

What is the Gordon Growth Model?

A

Stock Price = (Dividend w/ Growth Rate) / (Required Return - Growth Rate)

67
Q

What is the DCF Method?

A

Intrinsic Value = Valuation Based on DCF / Shares Outstanding

68
Q

What is the Price-to-Sales Ratio?

A

P/S Ratio = FMV / Expected Sales

69
Q

What is the Price-to-Cash-Flow ratio?

A

P/CF Ratio = FMV / Cash Flows

70
Q

What is the Price-to-Book?

A

P/B Ratio = FMV / Book Value

71
Q

What is the Black-Scholes model?

A

FREEE!
A pricing model that determines FMV of securities by considering valuation inputs such as:
1. FMV Stock Price
2. Risk-Free Interest Rate (Constant).
3. Expected Term of Options.
4. Expected Volatilty of Stock Price.
5. Expected Dividend Yield.

72
Q

What is an European-style option?

A

Means that stock options are exercisable only at maturity.

73
Q

What are the Black-Scholes model features?

A
  1. Stock options are European-style.
  2. There are no transactions costs for Call and Put options.
  3. Assumes stock pays no dividend, but model can be modified to dividend-paying stock.
74
Q

What is an American-style option?

A

Means that stock options are exercisable anytime.

75
Q

What is the Binomial model?

A

A varation of Black Scholes. It considers the security over a period of time, as compared to the value at one point in time. It is used for American-style options.

76
Q

What are the advantages of the Binomial model?

A
  1. It is used for American-style options.
  2. Can be used for stocks that pay dividends wo modifying the model.
77
Q

When are bonds sold at a discount/premium?

A

Discount = Coupon < Market
Premium = Coupon > Market

78
Q

How do you calculate the median value?

A

It’s the average of all numbers, but take the smallest one and the biggest one away.

79
Q

How do you interpret the NPV method?

A

Positive NPV = Make investment. Disc Rate < IRR
Negative NPV = Don’t make investment. Disc Rate > IRR
Zero NPV = Whatever!

80
Q

What is the formula for Profitability Index?

A

Profitability Index = PV of Future Cash Inflow / Cost of Initial Investment

81
Q

What are After-Tax Cash Flows?

A

Cash inflows * (1 - Tax Rate) + (Depr * Tax Rate)

82
Q

What happens when the individual components of a project’s cash flow are different?

A

You can discount each CF using a discount rate that reflects its risk.

83
Q

What is capital budgeting based on?

A

Predicitons of certain future.

84
Q

What are the assumptions of the NPV model?

A
  1. CFs are reinvested at the discount rate used in the analysis.
85
Q

When is the profitability index used?

A

For capital rationing.

86
Q

What is the formula for Depreciation Tax Shield?

A

Depreciation Tax Shield = Depr Exp * Tax Rate
The greater the depr exp, the greater the depr tax shield.

87
Q

How do you calculate NPV?

A

NPV = CFs * PV Factor (annuity or not) - Today’s pmt.

88
Q

How do you calculate the expected price of stock?

A

Expected Price of Stock = P/CF Ratio * Future CF

P/CF Ratio = FMV / Cash Flows

89
Q

How do you calculate the growth rate?

A

Growth Rate = Future Cash Flow / Current Cash Flow

90
Q

What is the payback method?

A

The payback method determines how many years I am getting my money back at for my investment.

91
Q

What are some particularities about the payback method?

A
  1. It does not consider the time value of money.
  2. It focuses on liquidity.
  3. Profitability is ignored.
  4. Ignores CF after investments is recovered.
92
Q

What is the payback method formula?

A

Payback Period = Net initial investment / Avg incremental CF

93
Q

What is the Internal Rate of Return (IRR)?

A

Determines the PV that results into a Zero NPV.

94
Q

What is the IRR formula?

A

IRR = Net incremental investment / Net Annual CF

95
Q

What is the formula for the Discounted Payback Method?

A

Sum of [CF * Discount Factor]

96
Q

How do you calculate the impact in AR when the credit policy changes?

A

Sales Projections * Credit/Sales Ratio * Collection Days Ratio

97
Q

What is another way to calculate the growth rate?

A

Required return - P/E Ratio

98
Q

What is another way to calculate net cash flows?

A
  1. Get cash inflow.
  2. Calculate tax effected depreciation expense.
  3. Cash Inflow - Tax Effected Depr Expense
99
Q

What is Total WACC?

A

Total WACC = Equity WACC + Debt WACC

100
Q

When does a project have positive NPV?

A

IRR > RRR

101
Q

When is the profitability index >1?

A

When NPV is positive.

102
Q

What is the Key for NVP & Profitability Index

A
  1. Both are calculated with PV of Cash Inflows and Initial invesment.
  2. NPV is PV - Initial Investment.
  3. Profitability Index is PV / Initial Investment.
103
Q
A

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