BEC 2 Flashcards
why you would use operating vs. capital lease
operating –> stronger financial ratios because liabilities appear lower
capital –> higher periodic cash flows
debt vs. equity
tax deductible
debt –> interest payments are tax deductible (the higher the tax rate, the more debt you should use)
equity –> dividends not tax deductible
debt vs. equity
risk level
debt has more risk
debt vs. equity
flexibility?
debt is not flexible, equity is
Weighted Average Cost of Capital
(cost of equity * % of equity) +
weighted average cost of debt * % of debt
Weighted Average Cost of Debt
effective annual interest payments / debt outstanding = pretax cost of debt
after tax cost of debt = pretax cost * (1 - tax rate)
Cost of Preferred Stock
preferred stock dividends / net proceeds of preferred stock
**preferred stock dividends = par x rate
**net proceeds = selling price less costs
What are the 3 methods to compute cost of RE
CAPM, DCF (discounted cash flows), and bond yield risk premium
CAPM Formula
Cost of RE = RFR + Risk Premium
Cost of RE = RFR + (beta x market risk premium)
Cost of RE = RFR + (beta x (market return - RFR))
DCF Formula
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
Bond Yield Risk Premium Formula
Cost of RE = pretax cost of debt + market risk premium
operating leverage vs. financial leverage
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)
times interest earned ratio
EBIT / interest expense
current ratio
current assets / current liabilities
quick ratio
cash + marketable sec + Accts. Receivable / current liabilities
cash ratio
cash + cash equivalents + marketable sec / current liabilities
cash conversion cycle
of days to sell + # of days to collect - # of days to repay
of days to sell
Inv. turnover = COGS / average inventory
Inventory conversion period = 365 / inv. turnover
of days to collect
AR turnover = Sales / average AR
AR conversion period = 365 / AR turnover
of days to repay
AP turnover = COGS / average AP
AP conversion period = 365 / AP turnover
Working Capital Turnover
Sales / Average Working Capital
LIFO inventory valuation
lower of cost or market
market price is middle of these 3:
replacement cost
Market ceiling = Net Realizable Value
Market Floor = NRV - profit margin
FIFO or weighted average inventory valuation
lower of cost or NRV
Re-Order Point
Safety Stock + (Lead Time x sales during lead time)
Economic Order Quantity
E = square root of 2SO/C
S = size in units O = cost per order C = carrying cost per unit
APR of discount (cost of not taking the discount)
APR = 360 / (pay period - discount period) x (discount % / (100 - discount %)
Zero Growth Stock Valuation Method
stock price = Dividend / Required Return
P = D / R
Constant Growth Dividend Discount Method
P0 = Div 1 / (R - G)
P1 = Div 2 / (R - G)
R = required return G = growth rate
Price to Earnings Ratio Valuation
P/E Ratio = P0 / E1
P0 = stock price today E1 = EPS expected in 1 year (E0 * 1 + G)
PEG Ratio
PEG = (P0 / E0) / (G * 100)
PEG Ratio Valuation
P0 = PEG * E1 * G
Price to Sales Ratio
P/S Ratio = P0 / S1
S1 = S0 * 1 + G
Price to Sales Ratio valuation
P0 = (P0 / S1) * S1
Price to CF Ratio
Price / CF Ratio = P0 / CF1
CF1 = CF 0 * 1 + G
Price to CF Ratio Valuation
P0 = (P/CF) * CF1
Price to Book Ratio
P/B Ratio = P0 / B0
Price to Book Ratio Valuation
P0 = (P/B) * B0
NPV accept/reject rule
positive accept, negative reject
profitability index
PV of net future cash inflows / PV of net initial investment
what is the internal rate of return
the discount rate where NPV = 0
IRR accept/ reject rule
if IRR > hurdle rate accept
if IRR < hurdle rate reject
