BEC 2 - Financial Management Flashcards
Three common methods of computing the cost of retained earnings
1) Capital asset pricing model (CAPM)
2) Discounted cash flow (DCF)
3) Bond yield plus risk premium (BYRP)
What is the beta coefficient
A numerical representation of the volatility (risk) of the stock relative to the volatility of the overall market.
B=1 as risky as market
B>1 riskier
B<1 less risky
CAPM cost of retained earnings formula
=Risk-free rate + Risk premium
=Risk-free rate + (Beta x Market risk premium)
=Risk-free rate + [Beta x (Market return - Risk-free rate)]
DCF cost of retained earnings formula
D1 / P0 + g
P0 = Current market value of price of the outstanding common stock
g = The constant rate of growth in dividends
*D1 = D0 x (1+g)
**D0 is the dividend at the end of the current year, D1 is at the end of next year
BYRP cost of retained earnings formula
Pretax cost of long-term debt + Market risk premium
Growth Rate
ROA x Retention rate / 1 - (ROA x Retention rate)
or
ROE x Retention rate
Payout rate –> Retention rate
Payout rate = DPS / EPS
Retention rate = 1 - Payout
Return on Sales rate
Income before interest income, interest expense, tax expense, and taxes / Sales (net)
Return on investment (ROI)
Net income / Average invested capital
*Invested capital = A - operating liabilities
Return on assets (ROA)
Net income / Average total assets
Return on equity (ROE)
Net income / Average total equity
Value of a levered firm (firm with debt)
= Value of an unlevered firm + Present value of the interest tax savings
*PV of ITS = Corporate tax rate x (interest rate on debt x amount of debt) / interest rate on debt
Time interest earned ratio
Earnings before interest expense and taxes (EBIT) / Interest expense
*As ratio goes down, risk goes up
Net working capital
Difference between CA and CL
Reorder point
= Safety stock + (Lead time x Sales during lead time)
*Be consistent with lead time (days/weeks/months)
Economic order quantity (EOQ) formula
E = square root of (2SO/C)
E: Order size
S: Annual ales (in units)
O: Cost per Purchase Order
C: Annual Carrying cost per unit
*Be consistent in annual vs monthly measure
4 key management processes related to Supply Chain Operations Reference (SCOR)
1) plan
2) source
3) make
4) deliver
Annual cost of not taking advantage of a discount (APR of quick payment discount formula)
360/(Pay period - discount period) x Discount/(100-Discount %)
Dividend Discount Model
Write it down
Investors are likely to view a high P/E ratio as an indication that
Company is relatively overvalued OR there is higher growth potential
Profitability Index
Present value of cash flows / Cost (present value) of initial investment
Cost of preferred stock
Preferred stock dividends / Net proceeds of stock
- Net proceeds = selling price less an issuance costs
- *Not tax deductible so taxes do not play a role in this calculation
Effective Annual Percentage Rate
[1 + (i/p)]^p - 1
i = stated rate p = compounding periods per year
Effective Interest Rate
Interest paid per period / Net proceeds of loan
