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B3: Financial Management Flashcards

1
Q

How do we calc Degree of Operating Leverage (DOL)?

A

% change in EBIT / % change in sales

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2
Q

How do we calc Degree of Operating Leverage (DOL)?

A

% change in EBIT / % change in sales

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3
Q

What is operating leverage?

A

degree to which a company uses fixed operating costs rather than variable operating costs (fixed costs / variable costs)

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4
Q

What is financial leverage?

A

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

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5
Q

How do we calc Degree of Financial Leverage (DFL)?

A

% change in EPS / % change in EBIT

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6
Q

How do we calc degree of total leverage?

A

DOL x DFL

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7
Q

How do we calc degree of total leverage?

A

DOL x DFL

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8
Q

How do we calculate the payback period?

A

net initial investment / increase in annual net after-tax cash flow

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9
Q

How do we calculate the payback period?

A

net initial investment / increase in annual net after-tax cash flow

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10
Q

How do we calc IRR factor?

A

net incremental investment / net annual CF

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11
Q

How do we calc profitability index?

A

PV net future cash inflows / PV net initial investment

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12
Q

What are Relevant costs?

A

costs that will change in response to the selection of different courses of action

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13
Q

What are Relevant costs?

A

costs that will change in response to the selection of different courses of action

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14
Q

What is the calc for WACC?

A

(cost of equity x % equity) + (weighted avg cost of debt x % debt)

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15
Q

What is the calc for WACC?

A

(cost of equity x % equity) + (weighted avg cost of debt x % debt)

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16
Q

What is the calc for weighted avg interest rate?

A

Effective annual interest payments / debt cash available

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17
Q

What is the calc for cost of preferred stock?

A

preferred stock dividends / net proceeds of preferred stock

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18
Q

What is the calc for cost of preferred stock?

A

preferred stock dividends / net proceeds of preferred stock

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19
Q

What are the 3 methods of computing the cost of retained earnings?

A

CAPM
DCF
BYRP

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20
Q

What is the CAPM cost of retained earnings formula?

A

Risk-free rate + Beta (market risk premium)

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21
Q

What is the DCF cost of retained earnings formula?

A

D1 / Po + g

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22
Q

What is the DCF cost of retained earnings formula?

A

D1 / Po + g

Dividend yield + growth

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23
Q

What is the BYRP cost of retained earnings formula?

A

pretax cost of LT debt (firm’s own bond yield) + market risk premium

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24
Q

What is the BYRP cost of retained earnings formula?

A

pretax cost of LT debt (firm’s own bond yield) + market risk premium

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25
When is debt financing more favorable than equity financing?
High marginal tax rates and few noninterest tax benefits
26
How is the net cost of debt calculated?
Effective annual interest rate x (1-T)
27
What is the calc for WACC?
(cost of equity x % equity) + (cost of debt (1-T) x % debt)
28
How is the net cost of debt calculated?
Effective annual interest rate x (1-T)
29
What are the two ways of calculating ROI?
Income / investment capital (debt + equity) Profit margin (NI/sales) x investment turnover (sales/assets)
30
What is the formula for ROA?
NI / avg total assets
31
What is the formula for ROA?
NI / avg total assets
32
What is the formula for ROE?
NI / total equity (A-L)
33
What are the components of DuPont ROE?
``` Net profit margin (NI/sales) x Asset turnover (sales/avg total assets) x Financial leverage (avg total assets/equity) ``` Or ROA x DFL
34
How does the extended DuPont Model break out net profit margin?
3 distinct components: ``` Tax burden: NI / pretax income x Interest burden: Pretax income / EBIT x Operating income margin: EBIT / sales ```
35
What is the residual income formula?
net income - required return required return = NBV equity x hurdle rate
36
How do we calculate EVA?
NOPAT - $WACC same as EBIT (1-T) - (Investment x cost of capital (WACC))
37
How do we calculate EVA?
NOPAT - $WACC same as EBIT (1-T) - (Investment x cost of capital (WACC))
38
What is the formula for Times Interest Earned ratio?
EBIT / interest expense
39
What is the formula for the quick ratio?
cash + marketable securities + receivables / current liabilities OR cash - inventory - prepaids / current liabilities
40
What is the formula for the quick (acid-test) ratio?
cash + marketable securities + receivables / current liabilities OR cash - inventory - prepaids / current liabilities
41
How do we find the APR cost of a quick payment discount?
(360 / pay period - discount period) x (discount / 100-discount %)
42
What is the cash conversion cycle?
inventory conversion period + receivables collection period - payables deferral period operating cycle = # of days to sell + # of days to collect
43
What is the cash conversion cycle (net operating cycle)?
inventory conversion period + receivables collection period - payables deferral period operating cycle = # of days to sell + # of days to collect
44
How do we calculate the inventory conversion period (# days to sell) ?
inventory turnover = COGS / avg inventory inventory conversion period = 365 / inventory turnover
45
How do we calculate the receivables collection period (# days to collect) ?
A/R turnover = sales / avg A/R Receivables collection period = DSO = 365 / A/R turnover
46
How do we calculate the payables deferral period (# days to pay) ?
A/P turnover = COGS / avg A/P A/P deferral period = 365 / A/P turnover
47
How is the reorder point calculated?
safety stock + (lead time x sales during lead time)
48
What is the residual income formula?
net income - required return required return = NBV x hurdle rate
49
How is the reorder point calculated?
safety stock + (lead time x sales during lead time)
50
What is the equation for EOQ?
E = sqrt of (2SO/C) ``` E = order size (EOQ) S = annual sales (units) O = cost per purchase order C = carrying cost per unit ```
51
How do we calc the operating cycle?
A/R turnover in days + Inventory turnover in days
52
How do we calc return on common equity?
(NI - preferred dividends) / avg common equity
53
How do we calc working capital turnover?
Sales / avg working capital
54
How do we calculate the receivables collection period (# days to collect) ?
A/R turnover = sales / avg A/R Receivables collection period = DSO = 365 / A/R turnover
55
How do we calc working capital turnover?
Sales / avg working capital
56
How do we calc the effective interest rate?
amt paid on loan / net proceeds
57
How do we calc the effective interest rate?
amt paid on loan / net proceeds
58
How do we find IRR?
internal rate of return is equal to the discount rate at which the net present value of the investment is equal to zero
59
How is CF calculated from NI?
Add back non-cash expenses
60
How do we calc working capital?
current assets - current liabilities
61
What are 4 popular methods for converting A/R to cash?
collection agencies factoring cash discounts EFTs
62
What is the formula for computing cost/benefit % for trade discounts?
360 / (total pay period - discount period) x (discount / (100-discount))
63
What securities are common marketable securities?
``` US T-bills negotiable CDs Banker's acceptances Commercial paper Equity securities Eurodollars ```
64
What are the 3 primary reasons for holding cash?
Transaction Precaution Speculative
65
How do we calc firm's avg receivable balance?
avg daily sales x avg collection period
66
How do we calc DSO?
avg net receivables / (net credit sales / 365)
67
How do we calc ROA?
NI / avg total assets
68
What is the description of the required return in the residual income approach?
target return on investment set by company's management
69
What is economic value added?
residual income of project earnings in excess of the cost of capital associated with the invested capital

BEC (6 decks)

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