BAR - Deck 3 Flashcards
annual cost of credit
annual cost of credit = [360 / (pay period - discount period)] X [discount % / (100 - discount %)]
3 primary motives for holding cash
transactions demand
precautionary demand
speculative demand
Effective IR
Effective IR = Interest paid / net proceeds
net proceeds = loan amt X (100% - req compensating balance)
largest source of ST credit for small firms
grade credit
optimal level of inventory is affected by…
the time req to receive inv
cost per unit of inv, which will have a direct impact on inv carrying costs
cost of placing an order impacts order frequency, which affects order size and optimal inventory levels
does ST financing typically have inc or dec IR risk to the borrower
typically, LT IRs are higher than ST IRs »_space;> cost of borrowing is less w/ ST financing
operating cycle
operating cycle = days in inventory + days in accts rec
Formula to calc price of stock
Pt = D(t+1) / (R - G)
Pt = current price (price @ period t)
D(t+1) = dividend one yr after period t
R = req return
G = growth rate
formula for expected return
expected return = div + inc in stock value
Describe P/E ratio
measures the amt investors are willing to pay for each dollar of earnings per share
P/E ratio = current mrkt price / annual EPS
- Higher P/E ratios»_space;> indicate investors are anticipating more growth and are bidding up the price of the shares in advance of performance
- can be current or forecasted EPS
- can be forward P/E w/ earnings expected in one yr or trailing P/E w/ most recent earnings
PEG ratio
PEG ratio = P/E ratio / (anticipated growth rate X 100)
Free Cash Flow (FCF)
FCF is amt of cash that a biz generates after taking into acct reinvestments in non-current assets
Free Cash Flow (FCF) = NI or Net op profit after taxes + Noncash exp - Inc in working capital - Capital Expenditures
zero growth model
zero growth model »_space;> Price of comp stock = Div / discount rate
bond price
bond price = annual interest / (1+mrkt rate)^1 + annual interest / (1+mrkt rate)^2 + annual interest / (1+mrkt rate)^3…………
Black-Scholes model
Used to det the FV for call and put options.
Underlying assumptions of the model is thtat there are no transactions costs for buying or selling the option itself or the underlying stock
Underlying assumption is that the underlying stock does not pay dividends although the model can be adapted to acct for dividends paid
Inputs to the Black-Scholes model: current price of th underlying stock, the option exercise price, the risk-free interest rate, time to expiration, and a meas of risk (volatility)
Ways to evaluate intangibles
Cost approach
Income approach
Mrkt approach - typically look at median value in mrkt
total after tax CFs
Total after tax CFs = Annual cash inflows after tax (aka sales - cash op exp times 1-tax) + Depr Shield (aka Depr X tax rate)
Is tax depr method relevant to capital budgeting decisions
capital budgeting decisions require after-tax CFs; therefore, the tax depr method is relevent
what type of depr method provides tax shields that are advantageous from a PV point of view
accelerated methods
PV calcs apply higher weights to CFs occurring in the near future; having larger tax deductions early on will provide greater benefits from a PV perspective
When should you accept an NPV project
positive NPV (including zero)
project’s rate of return is greater than the discount percentage rate (hurdle rate) used in the NPV computation
what does the IRR method determine
the discount rate that yields NPV=0
accept if IRR > hurdle rate (b/c pos net returns)
payback period
initial cost / annual net cash inflows
economic value added (EVA)
NOPAT (net operating profit after tax) - Req return
If EVA is higher than residual income»_space;> cost of capital is less than the hurdle rate
EVA method uses cost of capital
Residual income method uses a hurdle rate
Working capital
CAs - CLs
When to accept special orders
if available capacity, min cost per unit of special order = VC per unit. FCs are irrelevant
Opportunity costs
when at capacity, min price for special order = variable costs of current utilization + CM from next best alternative
opportunity cost = value of the next best alternative
implicit costs = opportunity costs
opportunity cost»_space;> potential benefit lost by selecting a particular course of action (aka what will not occur if option A occurs)
opportunity costs are costs that would have been saved or the profit that would have been earned if another decision alternative had been selected
what happens to op inc when adding a job w/ positive CM within available capacity
increase to op income
What does a keep or drop decision depend on
depends on if CM of segment exceeds avoidable fixed costs (if the segment didn’t exist)
ignore unavoidable FCs
