B3- Financial Management

Question 1

Calculating NPV

Annual Outlay $20K
cash inflows - $4k/yr for 6 yrs (12/31)

NPV of inv. at 8% using factor below?

Answer 1

Inv Val. - $20K
LESS
Cash inflows at the rate of “PVal of Ordinary Annuity at 1% for 6 pds.”
$4,000*4.6228 - ($18,491.52)

=
NPV
($1,508.48)

Question 2

Diff. between ordinary annuity and ordinary Annuity Due

Answer 2

A more simplistic way of expressing the distinction is to say that payments made under an ordinary annuity occur at the end of the period while payments made under an annuity due occur at the beginning of the period.

Question 3

IRR definition

Answer 3

The discount rate at which the NPV of a project equals Zero

Net incremental investmentt (aka invest. required) / Net Annual Cash Flows = Factor of IRR

Question 4

Calc. Net Cash flow for the Third Year of Project

Answer 4

1) Calculate Tax purpose Dep (no sal val)
2) Calc Cash Flow
3) Cash Flow LESS Tax-purpose Dep.. you now have the number to multiply times TR

(100K - 21Kdep)*.4 = Tax Payment

4) Cash flow (2) - Tax Payment

Question 5

Net Cash Outflow

Answer 5

Money Spent

Question 6

Develop Fair Value of Common Shares

Answer 6

DCF, Discounted Cash Flow

Considered most rigorous and objective valuation method

Question 7

Calculate DCF (for whole life of project)

Answer 7

Period 0 = inc. in WorkCap of $35,000 X 1.00 PV = (35,000) Cash Flow

Period 5 (final) = $35,000 * Pval of $1 at 10%, yr 5 (.621) = 21,735

=
(13,265) overall discount

Question 8

Profitability index,

which is a variation of NPV

Answer 8

PVal of Net Future Cash Inflows / Present Value of Net Initial Investment = Profitability Index

Hope for 1+, which means inflows > outflows

*Create Capital Rationing using probability index rankings

Question 9

Annuity and Lump Sum Payments

Answer 9

PV Y1: $30K * .88
PV Y2: $30K * (1.65-.88)
PV Y3: $20K * (2.32-1.65)

Question 10

After-tax PVal using 10% discount factor?

Cash Inflows: $7,500/yr
Adj: $5,000/yr tax basis amortization
.4 TR

P-val $1 at 10% for 2 yrs = $1.74

Answer 10

PV, cash inflow = $7500 * 1.74
$13,050

PV, cash outflow for tax ($7500 - $5000) * .4 * 1.74 = ($1,740)

After-tax PV = $11,310

Question 11

How to calculate an After-Tax Cash Inflow

Answer 11

Annual cash inflows After-tax, PLUS depreciation tax shields

EG:

(1000 sales - 400 opex) * (1-.3TR) = $600 * .7 = $420
Dep tax sheild
=$150 * .3 = $45

Question 12

Types of DCFs

Answer 12

NPV
IRR
PI (Profitability Index)

Question 13

How do you “increase financial leverage?”

Answer 13

Increase D/E ratio… eg using a higher percentage of bonds for funding

Question 14

Compute:

Net Cost of Debt

Answer 14

EFFECTIVE (not coupon) rate, times (1-TR)

Question 15

CAPM (Capital Asset Pricing Model)

using Beta

Answer 15

C = rfr + B(mktReturn - rfr)

C= 6% + 1.25(14%-6%)

[No TR]

Question 16

Cost of Capital

Answer 16

K = Div/Stock Price + Growth

$3/$30 + 10%

10%+10%= 20% C of C

Question 17

Overall Cost of Capital

Answer 17

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

Question 18

Cost of Equity Cap

Answer 18

D= current divs per share
G = exp. growth rate per dividends
P = current mkt. price per share of C/S

RofR = D1 / (P+G)

[where D1 = D0 * (1+G)]

Question 19

Cost of Preferred Shares

Answer 19

Divs Paid
(par val * div. %) /DIVIDED BY/

Net Proceeds
(Selling Price - Float)

EG (20par * .09) = $1.80 / (40-5) = .051

Question 20

ROI

return on investment

Answer 20

ROI = Income / Investment
= (Rev - COGS - G&A exp.) / Investment

(note .. investment can be something like “Average val. of equipment”,

or “Avg Working Capital”; Avg. Plant and Equ.

Question 21

RI
residual income measure

“Income in excess of a desired minimum amount”

Answer 21

RI = Income - (Investment x Hurdle Rate)

income = rev-COGS-G&A

“hurdle rate” = relevant required rate of return

Question 22

Investment Turnover Formula

Answer 22

Inv. Turnover = sales / average investment

2.5 = sales / (avg. 22m and 18m)
2.5 = sales / 20m
sales = 2.5 * 20m
= 50m

Question 23

Calc. actual income earned??

Answer 23

Sales * rate of return on sales

Question 24

Asset Turnover

Answer 24

AT =Sales / Assets

eg.

2= 1.5MIL / Assets
assets = 750K

Question 25

Profit Margin

Answer 25

PM = Net Income / Sales

eg.

3% = NI / 1,500,000
NI = $45K

Question 26

Imputed Interest Rate Def.

Answer 26

Historical Weighted Avg. C. of C. for the company

Question 27

Which one is the Company’s Profitability ratio?

Answer 27

Gross Margin ratio

Question 28

Times Interest Earned ratio

Answer 28

TIE = Earnings before Int. and Taxes (EBIT) / Total Int. Expense

Question 29

How to compute Pre-tax income

Answer 29

After Tax Income = Pretax Income x (1-TR)

5.4mil = pretax * (1-.4)

Question 30

Economic Value-Added (EVA) –

After-tax income in excess of req. return

Answer 30

you basically “weight” the debt and equity, and multiply each times their rate of return.

You less THAT^^.. from AFTER-TAX operating Profit (pretax prof * (1-TR))

Question 31

ROE

Return on Equity

Answer 31

ROE = NI/sales * sales/assets * assets/equity

Question 32

Float (Definition)

Answer 32

Difference between the balance of checks outstanding which have not cleared the bank, and deposits made which have not cleared

10,000 * 5 days to be deducted from payer = 50,000
10,000 * 4 days to receive and clear = 40,000

=10,000 positive float

Question 33

how to increase working cap?

Answer 33

If assets are increased

If liabilities are decreased

Question 34

Quick Ratio

Answer 34

Cash + AR / Current Liabilities

it is a more rigorous test than current ratio (excludes liquid current assets from the numerator, incl. pre-paids and inventory so basically current assets)

Question 35

Days sales in AR

Answer 35

Days Sales = Ending AR / avg. daily sales

Question 36

Inventory Turnover

Answer 36

COGS / Avg. Inventory (avg. BI + EI)

Question 37

Rule about Working Capital Policy becoming more conservative?

Answer 37

When this happens, they are INCREASING the amnt of: long-term assets, permanent current assets, and temporary current assets … to be funded by LONG TERM financing

Question 38

Cost of Credit Discounts

hint: answer is a %

Answer 38

Cost of credit disc. = 360 / (total pay pd. - disc. pd.) * (disc. % / (100%-disc%))

= [360 / (60-15)] * [3% / (100%-3%)]
= 8 * .0309
=.247

Question 39

what does evaluating a company’s average collection period show u?

Answer 39

evaluate liquidity of the firm thru. the calculation of the cash conversion cycle

liquidity measures focus on ability of co. to meet obligations as they come due

Question 40

Economic Order Quantity

Answer 40

EOQ (order size) = sq. root of 2* annual sales in units* cost per purch order // annual cost of carrying one U. of stock for the year

Question 41

Cost of Factoring in a 360-day year

Answer 41

Company Avg. Receivables * Fee on rec. purchased * (yearly/Collection pd)

$125,000 * .02 * (360/30) = $30,000

Amnt subject to interest:
Working Cap * int. on rec = 100K * 10% = $10,000

Cost of factoring = $40,000
LESS - controller est. expenses saved due to outsourcing ($24,000)

= $16,000

Question 42

Carrying Costs = Restocking costs, to minimize total inventory

Answer 42

Economic Order Quantity

It also assumes that periodic demand is known, and a crucial var. in hte EOQ formula.

Question 43

The Effective Rate

OR

Cost of Financing Arrangements

Answer 43

Amount Paid on Loan / Net Proceeds

Int. Proceeds (200K * .12) = 24,000
Net Proceeds (200K * 100% - 20% compensating balance) = 160,000

24K/160K

Question 44

Cash Conversion Cycle

Answer 44

Inventory Conversion Period + Receivables Collection Period (aka the (net terms)) - Payable Deferral Pd. ((max. days you have in the discount pd.)

Question 45

% rate on failure to take a discount

Answer 45

1) You do DAYS OF THE YEAR 360… DIVIDEDD BY total days - net days

eg.
360/(30-10)

2) You do Disc. Rate. divided by (100-disc)

.02/1-.02

3) Multiply the two

Question 46

AR Turnover Ratio

Answer 46

Sales / AR

Question 47

Working Capital

Answer 47

Current Assets - Current Li.