B3 - Capital Management, Including Working Capital

Question 1

How would financial leverage best be described?

Answer 1

Fixed cost related to debt

Question 2

How is degree of operating leverage calculated?

Answer 2

% change in EBIT / % change in sales

Question 3

How is degree of financial leverage calculated?

Answer 3

% change in EPS / % change in EBIT

Question 4

How is degree of combined leverage calculated?

Answer 4

% change in EPS / % change in sales

Question 5

How is WACC calculated?

Answer 5

(Cost of capital x % capital) + ((interest rate * (1 - tax rate)) * % debt)

Question 6

How is CAPM calculated?

Answer 6

Risk-free rate + (beta x (market - risk free))

Question 7

How is DCF calculated?

Answer 7

(Forecasted dividend / current price) + growth rate

Question 8

How is bond yield plus risk premium (BYRP) calculated?

Answer 8

Pre-tax cost of debt + market risk premium

Question 9

How is investment turnover calculated?

Answer 9

Sales / invested capital

Question 10

How is return on assets calculated?

Answer 10

Net income / average total assets

Question 11

How is return on investment calculated?

Answer 11

Income / invested capital OR profit margin x investment turnover

Question 12

How is residual income calculated?

Answer 12

Net income - required return (i.e. NBV x hurdle rate)

Question 13

What is the only difference between the economic value added (EVA) and the residual income formulas?

Answer 13

The EVA uses WACC and residual income uses a rate set my management

Question 14

How is APR of quick payment discount calculated?

Answer 14

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

Question 15

Inventory turnover

Answer 15

COGS / average inventory

Question 16

Inventory conversion period

Answer 16

365 / inventory turnover

Question 17

A/R turnover

Answer 17

Sales / average A/R

Question 18

Receivables collection period = days sales outstanding (DSO)

Answer 18

365 / A/R turnover

Question 19

A/P turnover

Answer 19

COGS / average A/P

Question 20

A/P deferral period

Answer 20

365 / A/P turnover

Question 21

What is the cash conversion cycle formula?

Answer 21

Inventory conversion period + A/R collection period + A/P deferral period

Question 22

How is reorder point calculated?

Answer 22

Safety stock + (lead time x sales during lead time)

Question 23

How is economic ordering quantity (EOQ) calculated?

Answer 23

Square root ((2 x annual sales units x cost per order) / carrying cost per unit)

Question 24

How is imputed interest calculated?

Answer 24

Interest rate x average total assets

Question 25

Times interest earned

Answer 25

EBIT / interest expense

Question 26

Asset turnover

Answer 26

Net sales / average total assets