B3- Financial Management Flashcards
Calculating NPV
Annual Outlay $20K
cash inflows - $4k/yr for 6 yrs (12/31)
NPV of inv. at 8% using factor below?
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)
Diff. between ordinary annuity and ordinary Annuity Due
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.
IRR definition
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
Calc. Net Cash flow for the Third Year of Project
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
Net Cash Outflow
Money Spent
Develop Fair Value of Common Shares
DCF, Discounted Cash Flow
Considered most rigorous and objective valuation method
Calculate DCF (for whole life of project)
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
Profitability index,
which is a variation of NPV
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
Annuity and Lump Sum Payments
PV Y1: $30K * .88
PV Y2: $30K * (1.65-.88)
PV Y3: $20K * (2.32-1.65)
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
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
How to calculate an After-Tax Cash Inflow
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
Types of DCFs
NPV
IRR
PI (Profitability Index)
How do you “increase financial leverage?”
Increase D/E ratio… eg using a higher percentage of bonds for funding
Compute:
Net Cost of Debt
EFFECTIVE (not coupon) rate, times (1-TR)
CAPM (Capital Asset Pricing Model)
using Beta
C = rfr + B(mktReturn - rfr)
C= 6% + 1.25(14%-6%)
[No TR]
Cost of Capital
K = Div/Stock Price + Growth
$3/$30 + 10%
10%+10%= 20% C of C
Overall Cost of Capital
Rate of Return on assets that covers the costs associated with the funds employed
Cost of Equity Cap
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)]
Cost of Preferred Shares
Divs Paid
(par val * div. %) /DIVIDED BY/
Net Proceeds
(Selling Price - Float)
EG (20par * .09) = $1.80 / (40-5) = .051
ROI
return on investment
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.
RI
residual income measure
“Income in excess of a desired minimum amount”
RI = Income - (Investment x Hurdle Rate)
income = rev-COGS-G&A
“hurdle rate” = relevant required rate of return
Investment Turnover Formula
Inv. Turnover = sales / average investment
2.5 = sales / (avg. 22m and 18m)
2.5 = sales / 20m
sales = 2.5 * 20m
= 50m
Calc. actual income earned??
Sales * rate of return on sales
Asset Turnover
AT =Sales / Assets
eg.
2= 1.5MIL / Assets assets = 750K
Profit Margin
PM = Net Income / Sales
eg.
3% = NI / 1,500,000 NI = $45K
Imputed Interest Rate Def.
Historical Weighted Avg. C. of C. for the company
Which one is the Company’s Profitability ratio?
Gross Margin ratio
Times Interest Earned ratio
TIE = Earnings before Int. and Taxes (EBIT) / Total Int. Expense
How to compute Pre-tax income
After Tax Income = Pretax Income x (1-TR)
5.4mil = pretax * (1-.4)
Economic Value-Added (EVA) –
After-tax income in excess of req. return
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))
ROE
Return on Equity
ROE = NI/sales * sales/assets * assets/equity
Float (Definition)
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
how to increase working cap?
If assets are increased
If liabilities are decreased
Quick Ratio
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)
Days sales in AR
Days Sales = Ending AR / avg. daily sales
Inventory Turnover
COGS / Avg. Inventory (avg. BI + EI)
Rule about Working Capital Policy becoming more conservative?
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
Cost of Credit Discounts
hint: answer is a %
Cost of credit disc. = 360 / (total pay pd. - disc. pd.) * (disc. % / (100%-disc%))
= [360 / (60-15)] * [3% / (100%-3%)]
= 8 * .0309
=.247
what does evaluating a company’s average collection period show u?
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
Economic Order Quantity
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
Cost of Factoring in a 360-day year
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
Carrying Costs = Restocking costs, to minimize total inventory
Economic Order Quantity
It also assumes that periodic demand is known, and a crucial var. in hte EOQ formula.
The Effective Rate
OR
Cost of Financing Arrangements
Amount Paid on Loan / Net Proceeds
Int. Proceeds (200K * .12) = 24,000 Net Proceeds (200K * 100% - 20% compensating balance) = 160,000
24K/160K
Cash Conversion Cycle
Inventory Conversion Period + Receivables Collection Period (aka the (net terms)) - Payable Deferral Pd. ((max. days you have in the discount pd.)
% rate on failure to take a discount
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
AR Turnover Ratio
Sales / AR
Working Capital
Current Assets - Current Li.
