BEC 2: Financial Management Flashcards
what are the 3 elements needed to estimate the cost of equity capital?
- current dividends per share (D)
- expected growth rate (g)
- current market price per share of common stock (P)
what is the formula for cost of retained earnings aka capital asset pricing model (CAPM)?
risk-free rate + (beta x market risk premium)
what is the formula for market risk premium?
market return - risk free rate
what is the formula for cost of debt?
interest expense/total debt x (1-tax rate)
the cost of debt is mostly measured as:
actual interest rates minus tax savings
what is the formula for cost of preferred stock?
perferred stock dividends / net proceeds of preferred stock
*annualize it
what would cause a current ratio to increase?
paying on accounts payable is one reason - cash would decrease and the payment would reduce current liability. (use actual numbers to understand)
inventory turnover formula:
cogs / average inventory
what is the cost of credit formula aka APR of quick payment discount?
(360 / pay period - discounted period) x (discount % / 100% - discount %)
what are the reasons a company would use just-in-time inventory?
- reduce the lag time between inventory arrival and use
- reduce carrying costs of inventory
once you’ve figured out the APR, and the problem states that “the entity can borrow money at a specific rate”, what do you do with the specific rate to get the right answer?
subtract that rate from the cost of credit aka APR to get the right answer.
example: the apr is 36.7% and borrowed money specific rate is 5%, subtract this and get 31.7%
what are the components of economic order quantity’s (EOQ) formula?
E = order size
S = sales
O = cost per purchase order
C = carrying cost per unit
why would you use the economic order quantity model?
to minimize total ordering and carrying costs because its the number of units added to inventory with each order to minimize the total cost of inventory
if the storage cost rises, what would happen to the order size associated with the economic order quantity model?
it would decrease the amount ordered because the cost of inventory would be more with the increase in storage costs
what are the 3 primary motives for holding cash?
- transaction demand - hold cash to meet payments from ordinary course of business
- precautionary demand - cash on hand to maintain safety cushion to meet unexpected needs
- speculative demand - cash needed to take advantage of temporary opportunities