BAR 2 Financial Management

Question 1

Using CAPM, required rate of return ie cost of equity ie cost of retained earnings =

Answer 1

Risk free rate + Beta *(Market return - risk free rate)

Question 2

Using DCF method, cost of equity =

Answer 2

Expected dividend/ current share price + growth rate

Question 3

Debt ratio=

Answer 3

total debt ie liabilities / total assets

Question 4

Time Interest Earned =

Answer 4

EBIT (Earnings before Interest and Taxes) / Total interest expense or

Pretax income = income after tax / ( 1 - tax rate)
EBIT = pretax income + interest.. than follow regular formula

Question 5

EOQ=

Answer 5

[(2 × monthly sales × order cost)/monthly carrying cost per unit]

Question 6

In APR format, what is benefit to pay each invoice?

Answer 6

[(360 days in year /(payment terms - days when paid)) * discount % / 100% - discount %] - % rate money borrowed

Question 7

weighted-average cost of capital (WACC)

Answer 7

=Debit + Equity

Debt = debt market value $ / (debt market value + equity market value) * after-tax cost of financing of %

Equity = debt market value $ / (debt market value + equity market value) * % cost of equity capital

Question 8

Cost of preferred shares

Answer 8

= Dividends paid / Net proceeds

Dividends paid = $ par value * % dividends
Net proceeds = $ selling price - $ floatation

Question 9

Using constant growth discount mode, what is price to pay?

Answer 9

1) D(t+n)= Pt *(1+growth rate)^2

2) Pt= D(t+n) / (R-G)

Pt = Current price (price at period “t”)
D(t+1) = Dividend one year after period “t”
R = Required return
G = Growth rate

Question 10

expected return on stock

Answer 10

= ($expected rate - current $ price + $expected dividend) / current $ price

Question 11

FCF

Answer 11

= NI + noncash expenses - increase in working capital - capital expenditures

Question 12

Using zero growth model, what is price

Answer 12

Dividend / Growth rate

Question 13

P/E ratio

Answer 13

= market price / EPS

Question 14

Cost of Retained Earnings

Answer 14

[ (ordinary dividend per share * (ordinary dividend % + 1)) / common stock per share ] + ordinary dividend %

Question 15

Cost of preferred stock

Answer 15

[ % preferred stock * preferred stock par value $ share] / $ preferred stock per share

Question 16

After-tax cost of debt

Answer 16

pre tax cost * (1 - income tax annual rate)

Question 17

Total Market value of common stock

Answer 17

$ common stock in B/S / common stock par value $ share * common stock per share $

Question 18

Total Market value preferred stock

Answer 18

$ preferred stock in B/S / preferred stock par value $ share * preferred stock per share $

Question 19

Total market value of bonds

Answer 19

$ bonds in B/S * bonds trading at $ / $1000

Question 20

WACC

Answer 20

(Cost of RE * weight RE) + (cost of preferred stock * weight of preferred stock) + (post tax cost of bonds * weight of bonds)

Question 21

Total book value of equity

Answer 21

= net assets = total asset - total liab

Question 22

Market capitalization

Answer 22

common stock market value % per share * ( $common stock at part in B/S / common stock nominal par value per share )

Question 23

Total value of equity using sector P/E

Answer 23

$ NI * P/E ratio

Question 24

Total value of equity using dividend discount model

Answer 24

[ total dividends * (1+ growth rate of dividends)] / risk free rate + (beta * market risk premium) - growth rate of div %

Question 25

Total Market value of bonds

Answer 25

Bonds $ in B/S * bonds current market value $ per bond / 1,000