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CPA- BEC > B3- Financial Management > Flashcards

B3- Financial Management Flashcards

1
Q

Capital Budgeting Projects:

3 Stages of Cash Flow

A

Step 1: Initial Outlay

Step 2: Operations

Step 3: TYCF

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2
Q

Capital Budgeting Projects:

3 Stages of Cash Flow:

Step 1: Initial Outlay

A

Invoice + Ship + Install

+ NWC Inc

- Cash Proceeds sale of old (net of tax)

= Net Initial Outflow

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3
Q

Capital Budgeting Projects:

3 Stages of Cash Flow:

Step 2: Operations

A

Net cash inflow after tax

+ Deprection * Tax

= Annual OCF

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4
Q

Capital Budgeting Projects:

3 Stages of Cash Flow

Step 3: TYCF

A

Net proceeds from sale (net of tax)

  • Disposal Expense (severance pay)

+ tax savings on donated asset

+ NWC Dec

=TY Net inflow

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5
Q

Net Present Value (NPV)

A

Annual After tax cash flow

+ Dep * tax

= Total Cash flow annually

* PV annuity factor (use only if =FCF)

= DFCF

_- Initial Outlay _

= NPV (Accept if +)

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6
Q

NPV vs. IRR

A

NPV method of capital investment valuation is considered to be SUPERIOR to IRR because it is flexible enough to handle uneven CF or inconsistent rates of return.

NPV rate of return- can use WACC, Target rate, or dependent on risk of project

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7
Q

Profitability Index =

A

Profitability index = PVFCF/initial outlay

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8
Q

Payback period method

(Discounted or undiscounted)

A

Payback period = initial outlay/ annual =CF

or initial outlay - unequal CF until reach 0

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9
Q

Operational and Financial Leverage

A

Leverage is the use of Fixed Costs

Risk Inc, but Potential Return Inc.

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10
Q

Operating Leverage

A
  • Capital Intensive Industry, PPE Inc
  • “Fixed” Salary- TC indep on sales
  • “Variable” Commission- TC dep on sales
  • FORMULA!
  • Degree of Operating Leverage (DOL)=
  • % change EBIT
  • % change Sales
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11
Q

Financial Leverage

A
  • Decided by Management, Capital Struct
  • Fixed- Debt- IE indep on profit
  • Variable- Equity- Div dep on profit

FORMULA!
Degree of Financial Leverage (DFL)=
% change EPS
% change EBIT

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12
Q

Combined (Total) Leverage

A

FORMULA!

Degree of Combined Leverage (DCL)=

% change EPS
% change Sales

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13
Q

Weighted Average Cost of Capital (WACC)

A

WACC = (cost of equity * % share of equity) +

(cost of debt * % share of debt)

** Want the lowest mixture of debt and equity to produce lowest WACC, easier to grow the business

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14
Q

Yield to Market (YTM)

OR

Weighted Average Interest Rate

A

YTM =

effective annual interest payment (outflow)

debt cash available (net inflow)

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15
Q

Cost of Capital Components

A
  • Cost of LTD = kdx (cheapest)
  • Cost of PS = kps
  • Cost of RE/CS = kre (most expensive)
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16
Q

Cost of LTD = kdx

A

FORMULA!

kdx = kdt (1-T)

  • Pre-tax cost of debt = kdt
  • After-tax cost of debt = kdx

cheapest b/c

  • int exp tax ded
  • assume least risk
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17
Q

Cost of PS = kps

A

FORMULA!

kps = Dps/Nps = outflow/inflow

  • PS Cash Div = Dps
  • Net Proceeds PS = Nps
  • kps > kdx
  • b/c div not tax dec & assume more risk
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18
Q

Cost of RE/CS = kre

A

3 Methods!

  • Capital Asset Pricing Model (CAPM)
  • Discounted Cash FLow (DCF)
  • Bond Yield plus Risk Premium (BYRP)
  • ** Use average of methods to compare

kre > kpr
b/c CS assume most risk

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19
Q

Capital Asset Pricing Model (CAPM)

A

CAPM

kre = krf + bi(km-krf)

  • kre= cost of retained earnings
  • krf= risk free rate
  • bi= beta coefficient
  • km= market rate
  • PMR = km-krf
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20
Q

Discounted Cash Flow (DCF)

A

DCF

kre = (D1/P0) + g

  • kre= cost of retained earnings
  • D1= div per share in 1 year = D0 * (1+g)
  • P0= current market value/price
  • g= growth rate
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21
Q

Bond Yield plus Risk Premium (BYRP)

A

BYRP

kre = kdt + PMR

  • kre= cot of retained earnings
  • kdt= pre-tax cost of LTD
  • PMR= market risk premium = km-krf
22
Q

Return on Investment (ROI)

A

ROI = _Income _

Investment Capital (Avg Assets, Avg PPE + Avg WC)

ROI = Profit Margin * Investment Turnover

Profit Margin = Income/Sales

Investment Turnover = Sales/Investment Capital

23
Q

Return on Assets (ROA)

A

ROA =

Net Income

Avg Total Assets

24
Q

Residual Income (RI)

A

RI = NI - Required Return ($)

Required Return ($) = NBV * Hurdle Rate

25
Q

Economic Value Added (EVA)

A

EVA = NI - Required Return ($)

Required Return ($) = Inv * WACC

26
Q

3 Measures of Financial Leverage (Risk)

A

Debt to Capital Ratio

Debt to Asset Ratio

Debt to Equity Ratio

27
Q

Debt to Capital Ratio

A

= Total Debt

Total Capital (Debt + Equity)

28
Q

Debt to Asset Ratio

A

= Total Debt

Total Assets

29
Q

Debt to Equity Ratio

A

= Total Debt

Total SEq

30
Q

Net Working Capital (NWC)

31
Q

Current Ratio

32
Q

Quick Ratio

A

= Cash + MS + Rec

CL

33
Q

Motives for holding cash

vs.

Disadvantages for high cash levels

A

ADV.

transaction motive- pay for operations

speculative motive- potential opportunities

precautionary motive- concern of treasurer: liquidity/safety

DISADV.

ROA Dec.

Negative Arbitrage- int % paid > int % rec

34
Q

Methods to Inc Cash Balance

A
  1. Customer Screening and Credit Policy
  2. Prompt Billing
  3. Payment discounts (2/10,n30), APR
  4. Expedite Deposits (EFT, Lockbox)
  5. Concentration Banking (one bank)
  6. Factoring A/R (selling)
35
Q

OC of not taking payment discount

A

APR = 360 * Discount

                  Pay Pd - Disc Pd                  100-Disc %
36
Q

Methods to Delay Disbursements

A

Defer Payments (take full adv of grace pd)

Drafts/Checks

Line of Credit

Zero Balance Accounts

37
Q

Other Cash Management Techniques

A

Managing Float (bank bal > book bal)

Overdraft Protection (benefit > cost)

Compensating/Minimum Balances (protects bank)

38
Q

Cash Conversion Cycle

A

Avg days to generate cash

= Int Conv Pd + Rec Coll Pd - Pay Def Pd

*Usually when Rec Coll Pd Dec, Inv Conv Pd Inc

39
Q

Inventory Conversion Period

A

= # of days to sell

= 356 / Inventory Turnover

Inventory Turnover = COGS/Avg Inv

40
Q

Receivables Collection Period

A

= # of days to collect

= 356 / AR Turnover

AR Turnover = Sales/Avg AR

41
Q

Payables Deferral Period

A

= # of days to pay

= 356 / AP Turnover

AP Turnover = COGS/Avg AP

42
Q

Factors influencing inventory levels

A

** depend on accuracy of sales forecasts

Lack of inv, then lost sales

too much inv, then carrying costs

43
Q

Optimal Levels of Inventory

A
  • Inventory Turnover
  • Safety Stock
  • Reorder Point
  • Economic Order Quantity (EOQ)
  • Materials Requirement Planning
44
Q

Reorder Point =

A

Safety Stock + (lead time * sales during lead time)

45
Q

Economic Order Quantity (EOQ)

A

When I say “two” you say “SOC”

= sqrt (2SO/C)

  • S= annual sales
  • O= order cost
  • C= carrying cost per unit
46
Q

Other Inventory management issues

A
  • just in time inventory (JIT)
  • Kanban inventory- visual reorder signals
  • computerized inventory- walmart
  • Materials reuirement planning (MRP)- ext of computerized
47
Q

Common Marketable Securities

A

(Highly liquid, low risk, low return)

  1. US T-Bills (CAPM “krf”)
  2. CDs
  3. Bankers Acceptance
  4. Commercial Paper- Notes/drafts
  5. Equity securities of public companies
  6. Eurodollars
  7. Hedge Transactions
49
Q

Overall cost of capital

A

WACC

Rate of return on assets that covers the costs associated with funds employed

50
Q

Benefits of debt financing over equity financing

A

When high marginal tax rates and few noninterest tax benefits

51
Q

What happens when a seller extends credit to a purchaser for a period of time longer than the PURCHASER’s operating cycle?

A

The seller

is, in effect, financing more than just the purchaser’s inventory needs

52
Q

How do you calculate the total investment for expansion?

A

Original investment

+ expansion of CA

- expansion of CL

= total investment for expansion

CPA- BEC (6 decks)

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