Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business Environment & Concepts > B3 > Flashcards

B3 Flashcards

1
Q

Capital budgeting

A

A process for evaluating and selecting the long-term investment projects of the firm.

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

Stages of cash flows in capital budgeting (3)

A
  1. Inception of the project
  2. Operations
  3. Disposal of the project
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Step 1: “Net initial costs” components

A 
Invoice price + shipping + installation 
\+ Increase in working capital 
- Decrease in working capital 
-Net proceeds from sale of old
=Net outflow
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Step 2: “Net inflows from operations” components

A

Cash flows generated from operations
+depreciation
=Net inflow

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

Step 3: “Net inflows from disposal” components

A 
Selling price
-Increase in working capital 
\+Decrease in working capital 
-Gain * T
\+Loss * T
=Net inflow
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Net present value method (NPV)

A

Focuses decision makers on the initial investment amount that is required to purchase a capital asset that will yield return in an amount in excess of a management-designated hurdle rate

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

Capital rationing

A

Describes how limited investment resources are considered as part of investment ranking and selection decisions

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

Profitability index ratio

A

PVFCF/Initial investment

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

Internal rate of return

A

The expected rate of return of a project; focuses the decision maker on the discount rate at which the present value of the cash inflows equals the present value of the cash outflows

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

Payback period method

A
  • The time required for the net after-tax cash inflows to recover the initial investment in a project
  • Focuses on liquidity and risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Payback period calculation

A

Net initial investment/Increase in annual net after-tax cash flow

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

Operating leverage

A
  • The degree to which a company uses fixed operating costs rather than variable operating costs
  • Capital intensive industries often have a high operating leverage
  • Labor intensive industries generally have low operating leverage
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Degree of operating leverage (DOL) calculation

A

% change EBIT/% change sales

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

Financial leverage

A
  • The degree to which a company uses debt rather than equity to finance the company
  • A higher degree of financial leverage implies that a relatively small change in earnings before interest and taxes will have a greater effect on profits and shareholder value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Degree of financial leverage (DFL) calculation

A

% change earnings per share/% change EBIT

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

Weighted average cost of capital

A

The average cost of all forms of financing used by a company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

WACC formula

A

Cost of equity multiplied by the percentage equity in capital structure
+Weighted average cost of debt (after tax) multiplied by the percentage of debt in capital structure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Weighted average interest rate

A

effective annual interest payments/debt cash available

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Cost of preferred stock formula

A

Preferred stock dividends/Net proceeds of preferred stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

3 methods of computing the cost of retained earnings

A
  1. capital asset pricing model (CAPM)
  2. discounted cash flow
  3. bond yield plus risk premium
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

CAPM key assumptions

A
  • the cost of retained earnings is equal to the risk-free rate plus a risk premium
  • the risk premium is equal to the systematic risks associated with the overall stock market
  • the beta coefficient is a numerical representation of the volatility of the stock relative to the volatility of the overall market
  • the risk premium is the stock’s beta coefficient multiplied by the market risk premium
  • the market risk premium is the market rate of return minus the risk-free rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

CAPM formula

A

Risk-free rate + risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Risk premium formula

A

Beta *market risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Market risk premium formula

A

market return-risk free rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Discounted cash flow method key assumptions

A
  • stocks are normally in equilibrium relative to risk and return
  • The estimated expected growth rate of return will yield an estimated required rate of return
  • The expected growth rate may be based on projections of past growth rates, a retention growth model, or analysis forecast
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

DCF formula

A

(future dividend/current market price) + constant rate of growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

BYRP key assumptions

A
  • equity and debt security values are comparable before taxes
  • risks are associated with both the individual firm and the state of the economy
  • risk estimation can be derived by using a market analysts’ survey approach or by subtracting the yield on an average corporate long-term bond
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

BYRP formula

A

pretax cost of long-term debt + market risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Return on investment (ROI) formulas

A

income/investment capital(D+E)
OR
Profit margin*investment turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

ROA formula

A

Net income/Average total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

ROE formula

A

Net income/Total equity(A-L)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

DuPont Model’s 3 Distinct Components

A
  1. Net profit margin
  2. Asset turnover
  3. Financial leverage
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Net profit margin calculation

A

Net income/sales

34
Q

Asset turnover

A

Sales/Average total assets

35
Q

Financial leverage

A

Average total assets/equity

36
Q

Extended DuPont Model’s 5 Components

A
  1. Tax burden
  2. Interest burden
  3. Operating income margin
  4. Asset turnover
  5. Financial leverage
37
Q

Tax burden (definition & formula)

A

-The extent to which a company retains profits after paying taxes
Net income/Pretax income

38
Q

Interest burden (definition & formula)

A

-Reflects how much in pretax income a company retains after paying interest to debt holders
Pretax income/EBIT

39
Q

Operating income margin (definition & formula)

A

-A measure of company profits earned on sales after paying operating costs
EBIT/Sales

40
Q

Residual income (definition & formula)

A

-Measures the excess of actual income earned by an investment over the return required by the company
=Net income-Required Return
(required return=NBV* hurdle rate)

41
Q

Economic Value Added (definition & formula)

A

-Computes required return based on a hurdle rate determined my management, and the EVA measures the excess of income after taxes earned by an investment over the return rate defined by the company’s overall WACC
-Step 1: investment*cost of capital=required return
-Step 2: NOPAT-required return
(NOPAT=net operation profit after taxes)

42
Q

Working capital management

A

Involves managing cash so that a company can meet its short term obligations and include all aspects of the administration of current assets and current liabilities

43
Q

Current ratio

A

current assets/current liabilities

44
Q

Quick ratio

A

(Cash + marketable securities + receivables)/current liabilities

45
Q

The optimal level of inventory is affected by…(3 things)

A
  1. The time required to receive inventory
  2. The cost per unit of inventory, which will have a direct effect on carrying costs
  3. The cost of placing an order impacts order frequency, which affects order size, and optimal inventory levels
46
Q

The commercial paper market has 3 main benefits

A
  1. Avoids the expense of maintaining a compensating balance with a commercial bank
  2. Provides a broad distribution for borrowing
  3. Accrues a benefit to the borrower because its name becomes more widely known
47
Q

Advantages of the NPV method

A
  • flexible

- doesn’t require a constant rate of return

48
Q

Disadvantages of the NPV method

A

limited by providing the true rate of return on the investment

49
Q

Net profit margin definition

A

Net income expressed as a percentage of sales

50
Q

Investment turnover definition

A

Sales expressed as a percentage of invested capital

51
Q

Extended DuPont model 5 distinct components

A
  1. Tax burden
  2. Interest burden
  3. Operating income margin
  4. Asset turnover
  5. Financial leverage
52
Q

Investment turnover calculation

A

Sales/Assets

53
Q

Debt to Total Capital Ratio

A

Total debt/total capital

54
Q

Debt to total capital interpretation

A

Provides indicators related to an organization’s long term debt paying ability. The lower the ratio, the greater the level of solvency and the greater the presumed ability to pay debts

55
Q

Debt to assets ratio

A

Total debt/total assets

56
Q

Debt to assets interpretation

A

Long-term debt paying ability, the lower the ratio, the better protection afforded to creditors

57
Q

Debt to equity ratio

A

Total debt/Total shareholders equity

58
Q

Debt to equity interpretation

A

Relates the two major categories of capital structure to each other and indicates the degree of leverage used, the lower the ratio, the lower the risk involved

59
Q

Times interest earned ratio

A

Earnings before interest and taxes (EBIT)/interest expense

60
Q

Times interest earned interpretation

A

The times interest earned ratio measures the ability of the company to pay its interest charges as they come due. It is a measure of long-term solvency.

61
Q

Aggressive working capital management

A

Increase the ratio of current liabilities to non-current liabilities (more current assets financed with current liabilities)

62
Q

Conservative working capital management

A

Increase the ratio of current assets to non-current assets (more current assets financed by non-current liabilities)

63
Q

Methods to speed collections of cash

A
  • customer screening and credit policy
  • prompt billing
  • payment discounts
  • expedite deposits (EFT & lockbox systems)
  • concentration banking
  • factoring accounts receivable
64
Q

APR of quick payment discount formula

A

(360/pay period-discount period)* (discount/100-discount%)

65
Q

Methods to delay disbursements

A
  • defer payments
  • drafts/checks
  • line of credit
  • zero balance accounts
66
Q

Cash conversion cycle explanation

A

the length of time from the date of the initial expenditure for production to the date cash is collected from the customers and the vendors are paid for initial expenditures

67
Q

Cash conversion cycle formula

A

inventory conversion period+receivables collection period-payables deferral period

68
Q

Calculating the inventory conversion period

A
  1. inventory turnover= cost of goods sold/average inventory

2. inventory conversion period=365/inventory turnover

69
Q

Inventory turnover ratio explanation

A

the number of times a year inventory is sold

70
Q

Inventory conversion period explanation

A

the average number of days inventory is held before it is sold

71
Q

Calculating the receivables collection period

A
  1. AR turnover=sales/average AR

2. Receivables collection period=365/AR turnover

72
Q

Accounts receivable turnover explanation

A

measures the number of times receivables are collected over an accounting period

73
Q

Receivables collection period (days sales outstanding)

A

measures the number of days after a typical credit sale is made until the firm receives payment

74
Q

Calculating payables deferral period

A
  1. AP turnover=cost of goods sold/average AP

2. AP deferral period= 365/AP turnover

75
Q

Accounts payable turnover explanation

A

the number of times a year a company pays its suppliers

76
Q

Accounts payable deferral period explanation

A

the average number of days it takes for a company to pay its suppliers

77
Q

Reorder point (explanation & formula)

A

The inventory level at which a company should order or manufacture additional inventory to meet demand and to avert incurring stockout costs
=safety stock + (lead time*sales during lead time)

78
Q

Stockout costs

A

Include loss of income from product unavailability, the cost of restoring goodwill, and additional expenses incurred to expedite shipping.

79
Q

Economic order quantity (EOQ) (explanation & assumptions)

A

An inventory model that attempts to minimize both ordering and carrying costs. Assumes that demand is known and is constant throughout the year, does not consider stockout costs, nor does it account for costs of safety stock, also assumes that carrying and ordering costs are fixed.

80
Q

EOQ formula

A

E=square root (2Sales*Order cost/Carrying cost per unit)

Business Environment & Concepts (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions