BEC - B2: Financial Management Flashcards
How do we calculate the cost of a company’s preferred stock?
Dividend paid* / net proceeds**
(similar to effective rate of interest - with finance charge / net proceeds being the calculation)
- Dividend paid = par value * dividend %
- *Net Proceeds = selling price - flotation costs (costs to sell)
What are the three elements needed to estimate the cost of equity capital (formula) when determining a firm’s weighted average cost of capital?
- Current dividends per share (D)
- Expected growth rate in dividends (g)
- Current market price per share (P)
Formula is:
R (cost of capital: “return”) = (D1 / P0) + g
Under the discounted cash flow method, what is the cost of retained earnings calculation?
K (cost of retained earnings) = (D1/P0) + G
The overall cost of capital is the:
- Minimum rate a firm must earn on high-risk projects
- Maximum rate of return on assets
- Rate of return on assets that covers the costs associated with the funds employed
- Cost of the firm’s equity capital at which the market value of the firm will remain unchanged
- Rate of return on assets that covers the costs associated with the funds employed.
- Firms must earn at least a return rate on investments equal to their cost of capiatl, or the investments are losing money
How is the cost of debt most commonly measured?
Interest rate - tax savings
How do we calculate Market Capitalization?
Common shares outstanding * fair market value per share
The annual depreciation expense on an asset reduces income taxes by an amount equal to:
Firm’s marginal tax rate * depreciation amount
How do we calculate the price a firm will pay to buy shares of a company in two years, given a
- dividend growth rate of 5%
- discount rate (required return) of 10%
- current year dividend of $20
First, calculate what dividends will be in 2 years + 1
=20 * (1.05 * 1.05) * (1.05)
(you are buying the company in 2 years, so you are concerned about dividend payout in 2 years + 1)
Second, apply growth rate model to your calc:
=D (t + 1) / (R - G)
=23.15 / (10% - 5%)
How do we calculate quick ratio?
Quick Assets / Current Liabilities
Excludes inventory and prepaids from the current assets.
How do we calculate inventory turnover ratio?
COGS / Average Inventory
How do we calculate Accounts Receivable Turnover?
Net Credit Sales / Average Accounts Receivable
Which of the following are examples of carrying costs? Which are not?
- Handling costs
- Obsolescence
- Disruption of production schedules
- Quantity discounts lost
- Opportunity cost on inventory investment
- Spoilage
- Inspections
- Insurance
- Shipping
Yes, carrying costs:
- Obsolescence
- Opportunity cost on inventory investment
- Spoilage
- Insurance
No, not carrying costs:
- Handling costs
- Disruption of production schedules
- Quantity discounts lost
- Inspections
- Shipping
Which of the following provide a spontaneous source of financing for a firm?
- Preferred stock
- A/P
- A/R
- Debentures
A/P is spontaneous. The others take time to factor or issue in order to receive financing.
What’s the difference between a JIT (just-in time) inventory system and other traditional approaches?
- JIT “pulls through” inventory with customers orders driving the need for inventory. Push systems, on the other hand, begin with forecasting customer demand
- JIT inherently involves maintaining a lower level of inventory, and, in turn, request inventory from suppliers as needed. JIT is used when the focus is on reducing the carrying costs of maintaining inventory, while it also reduces the risk of inventory obsolescence.
Which SCOR model of supply chain ops process does “managing accounts receivable and collections from customers” fall into?
“Deliver”: encompasses all the activities of getting the “finished product into the hands of the ultimate consumers to meet their planned demand.” Managing accounts receivable and collections from customers falls into the “deliver” process
Which inventory management approach orders at the point where “carrying costs are nearly equal to restocking costs”, in order to minimize total inventory cost?
EOQ method of inventory control.
When a firm who manufactures its own inventory uses EOQ, ordering costs consist primarily of… ?
Production set up.
Not storage and handling.
How do we calculate the cost of a credit policy (in other words… the “annual interest cost”)?
=
number of days in the year (360) / (total pay period - discount rate)
- times *
discount % / (100% - discount %)
How do we calculate the Cash Conversion Cycle for a company?
DIO + DSO - DPO
DIO = (365) / Inv Turnover DSO = (365) / AR Turnover DPO = (365) / AP Turnover
Inv Turnover = COGS / avg int
AR Turnover = Net Credit Sales / avg AR
AP Turnover = COGS / avg AP
If…a company has $96,000 in additional Average A/R for the year,
and. .. required rate of return is 10%
and. .. Variable Cost Ratio is 60%
What is the pretax cost of carrying the additional investment in receivables?
96,000 average AR increase
60% of 96,000 = additional investment in AR (in terms of required VC’s to hold it)
10% of additional investment (required return is 10%) = pretax cost of carrying the AR.
What is the formula for a zero-growth model?
P = D / R
Price = Dividend / Rate of Return
What is the formula for P/E ratio?
PE Ratio = Current Market Price / Annual Earnings Per Share
PE ratio can either be calculated as a forward P/E (earnings expected in one year is used), or a trailing P/E (most recent earnings are used)
What is the formula for PEG ratio?
PEG = (P@0 / EPS@0) / (Growth % * 100)
What is the formula for a constant-growth dividend discount model?
P = D(t+1) / (Rate of Return% - Growth%)