BEC 2

Question 1

why you would use operating vs. capital lease

Answer 1

operating –> stronger financial ratios because liabilities appear lower

capital –> higher periodic cash flows

Question 2

debt vs. equity

tax deductible

Answer 2

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

equity –> dividends not tax deductible

Question 3

debt vs. equity

risk level

Answer 3

debt has more risk

Question 4

debt vs. equity

flexibility?

Answer 4

debt is not flexible, equity is

Question 5

Weighted Average Cost of Capital

Answer 5

(cost of equity * % of equity) +

weighted average cost of debt * % of debt

Question 6

Weighted Average Cost of Debt

Answer 6

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

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

Question 7

Cost of Preferred Stock

Answer 7

preferred stock dividends / net proceeds of preferred stock

**preferred stock dividends = par x rate

**net proceeds = selling price less costs

Question 8

What are the 3 methods to compute cost of RE

Answer 8

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

Question 9

CAPM Formula

Answer 9

Cost of RE = RFR + Risk Premium

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

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

Question 10

DCF Formula

Answer 10

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

Question 11

Bond Yield Risk Premium Formula

Answer 11

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

Question 12

operating leverage vs. financial leverage

Answer 12

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)

Question 13

times interest earned ratio

Answer 13

EBIT / interest expense

Question 14

current ratio

Answer 14

current assets / current liabilities

Question 15

quick ratio

Answer 15

cash + marketable sec + Accts. Receivable / current liabilities

Question 16

cash ratio

Answer 16

cash + cash equivalents + marketable sec / current liabilities

Question 17

cash conversion cycle

Answer 17

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

Question 18

of days to sell

Answer 18

Inv. turnover = COGS / average inventory

Inventory conversion period = 365 / inv. turnover

Question 19

of days to collect

Answer 19

AR turnover = Sales / average AR

AR conversion period = 365 / AR turnover

Question 20

of days to repay

Answer 20

AP turnover = COGS / average AP

AP conversion period = 365 / AP turnover

Question 21

Working Capital Turnover

Answer 21

Sales / Average Working Capital

Question 22

LIFO inventory valuation

Answer 22

lower of cost or market

market price is middle of these 3:

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

Question 23

FIFO or weighted average inventory valuation

Answer 23

lower of cost or NRV

Question 24

Re-Order Point

Answer 24

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

Question 25

Economic Order Quantity

Answer 25

E = square root of 2SO/C

S = size in units
O = cost per order 
C = carrying cost per unit

Question 26

APR of discount (cost of not taking the discount)

Answer 26

APR = 360 / (pay period - discount period) x (discount % / (100 - discount %)

Question 27

Zero Growth Stock Valuation Method

Answer 27

stock price = Dividend / Required Return

P = D / R

Question 28

Constant Growth Dividend Discount Method

Answer 28

P0 = Div 1 / (R - G)

P1 = Div 2 / (R - G)

R = required return 
G = growth rate

Question 29

Price to Earnings Ratio Valuation

Answer 29

P/E Ratio = P0 / E1

P0 = stock price today 
E1 = EPS expected in 1 year (E0 * 1 + G)

Question 30

PEG Ratio

Answer 30

PEG = (P0 / E0) / (G * 100)

Question 31

PEG Ratio Valuation

Answer 31

P0 = PEG * E1 * G

Question 32

Price to Sales Ratio

Answer 32

P/S Ratio = P0 / S1

S1 = S0 * 1 + G

Question 33

Price to Sales Ratio valuation

Answer 33

P0 = (P0 / S1) * S1

Question 34

Price to CF Ratio

Answer 34

Price / CF Ratio = P0 / CF1

CF1 = CF 0 * 1 + G

Question 35

Price to CF Ratio Valuation

Answer 35

P0 = (P/CF) * CF1

Question 36

Price to Book Ratio

Answer 36

P/B Ratio = P0 / B0

Question 37

Price to Book Ratio Valuation

Answer 37

P0 = (P/B) * B0

Question 38

NPV accept/reject rule

Answer 38

positive accept, negative reject

Question 39

profitability index

Answer 39

PV of net future cash inflows / PV of net initial investment

Question 40

what is the internal rate of return

Answer 40

the discount rate where NPV = 0

Question 41

IRR accept/ reject rule

Answer 41

if IRR > hurdle rate accept

if IRR < hurdle rate reject