BEC 2 Flashcards

1
Q

why you would use operating vs. capital lease

A

operating –> stronger financial ratios because liabilities appear lower

capital –> higher periodic cash flows

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2
Q

debt vs. equity

tax deductible

A

debt –> interest payments are tax deductible (the higher the tax rate, the more debt you should use)

equity –> dividends not tax deductible

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3
Q

debt vs. equity

risk level

A

debt has more risk

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4
Q

debt vs. equity

flexibility?

A

debt is not flexible, equity is

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5
Q

Weighted Average Cost of Capital

A

(cost of equity * % of equity) +

weighted average cost of debt * % of debt

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6
Q

Weighted Average Cost of Debt

A

effective annual interest payments / debt outstanding = pretax cost of debt

after tax cost of debt = pretax cost * (1 - tax rate)

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7
Q

Cost of Preferred Stock

A

preferred stock dividends / net proceeds of preferred stock

**preferred stock dividends = par x rate

**net proceeds = selling price less costs

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8
Q

What are the 3 methods to compute cost of RE

A

CAPM, DCF (discounted cash flows), and bond yield risk premium

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9
Q

CAPM Formula

A

Cost of RE = RFR + Risk Premium

Cost of RE = RFR + (beta x market risk premium)

Cost of RE = RFR + (beta x (market return - RFR))

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10
Q

DCF Formula

A

Cost of RE = (D1 / P0) + G

D1 = D0 * (1 +G)

**dividend expected in 1 year, divided by the current price of the outstanding common stock, plus the growth rate

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11
Q

Bond Yield Risk Premium Formula

A

Cost of RE = pretax cost of debt + market risk premium

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12
Q

operating leverage vs. financial leverage

A

operating –> degree to which fixed costs are used rather than variable costs (when high, you have greater risks but greater possible returns )

financial leverage –> degree to which debt is used rather than equity (must produce enough EBIT to cover fixed interest costs)

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13
Q

times interest earned ratio

A

EBIT / interest expense

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14
Q

current ratio

A

current assets / current liabilities

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15
Q

quick ratio

A

cash + marketable sec + Accts. Receivable / current liabilities

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16
Q

cash ratio

A

cash + cash equivalents + marketable sec / current liabilities

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17
Q

cash conversion cycle

A

of days to sell + # of days to collect - # of days to repay

18
Q

of days to sell

A

Inv. turnover = COGS / average inventory

Inventory conversion period = 365 / inv. turnover

19
Q

of days to collect

A

AR turnover = Sales / average AR

AR conversion period = 365 / AR turnover

20
Q

of days to repay

A

AP turnover = COGS / average AP

AP conversion period = 365 / AP turnover

21
Q

Working Capital Turnover

A

Sales / Average Working Capital

22
Q

LIFO inventory valuation

A

lower of cost or market

market price is middle of these 3:

replacement cost
Market ceiling = Net Realizable Value
Market Floor = NRV - profit margin

23
Q

FIFO or weighted average inventory valuation

A

lower of cost or NRV

24
Q

Re-Order Point

A

Safety Stock + (Lead Time x sales during lead time)

25
Economic Order Quantity
E = square root of 2SO/C ``` S = size in units O = cost per order C = carrying cost per unit ```
26
APR of discount (cost of not taking the discount)
APR = 360 / (pay period - discount period) x (discount % / (100 - discount %)
27
Zero Growth Stock Valuation Method
stock price = Dividend / Required Return P = D / R
28
Constant Growth Dividend Discount Method
P0 = Div 1 / (R - G) P1 = Div 2 / (R - G) ``` R = required return G = growth rate ```
29
Price to Earnings Ratio Valuation
P/E Ratio = P0 / E1 ``` P0 = stock price today E1 = EPS expected in 1 year (E0 * 1 + G) ```
30
PEG Ratio
PEG = (P0 / E0) / (G * 100)
31
PEG Ratio Valuation
P0 = PEG * E1 * G
32
Price to Sales Ratio
P/S Ratio = P0 / S1 S1 = S0 * 1 + G
33
Price to Sales Ratio valuation
P0 = (P0 / S1) * S1
34
Price to CF Ratio
Price / CF Ratio = P0 / CF1 CF1 = CF 0 * 1 + G
35
Price to CF Ratio Valuation
P0 = (P/CF) * CF1
36
Price to Book Ratio
P/B Ratio = P0 / B0
37
Price to Book Ratio Valuation
P0 = (P/B) * B0
38
NPV accept/reject rule
positive accept, negative reject
39
profitability index
PV of net future cash inflows / PV of net initial investment
40
what is the internal rate of return
the discount rate where NPV = 0
41
IRR accept/ reject rule
if IRR > hurdle rate accept if IRR < hurdle rate reject