BEC Formulas (Capital Budgeting & Financial Mgmt) Flashcards
Cash Conversion Cycle (CCC)
Inventory Conversion Period (ICP) + AR Collection Period (RCP) - AP Deferral Period (PDP)
Inventory Conversion Period (ICP)
avg inventory / COGS per day
A/R Collection Period (RCP)
avg A/R / avg credit sales per day
A/P Deferral Period (PDP)
avg A/P / purchases per day (or COGS/365)
Number of days sales in A/R
360 / A/R turnover
Inventory Reorder Point
avg daily demand x avg lead time = reorder point without safety stock + safety stock = reorder point with a safety stock
Economic Order Quantity
Square root of:
2 x annual usage on inventory x cost of placing an order / cost of storing an individual unit of inventory
Number of days supply in avg inventory
360 / inventory turnover
Payback Period
initial investment / after tax annual net cash flows = number of years
Internal Rate of Return (IRR)
investment / annual cash flows = PV factor
Accounting Rate of Return
acctg income / avg investment = ROI
NPV
PV cash inflows - PV cash outflows / net PV
if positive it’s good
if negative it’s bad
Annual Financing Cost (AFC)
discount % / (100% - discount %) x 365 / (total pay period - discount period)
Current Yield
annual interest paid / bond market price
Operating Leverage (DOL) : measures how the size of a business’s fixed costs affects its performance when revenues change
% change in EBIT / % change in sales volume
Financial Leverage (DFL) : measures how much a business relies on debt financing
% change in EPS / % change in EBIT
or
% change in NI / % change in operating income
Cost of Debt Financing : after- tax cost of interest payments as measured by yields to maturity
Can be calculated 2 ways:
yield to maturity x (1 - eff. tax rate)
or
(int exp - tax deduction for interest) / CV of debt
Cost of Preferred Stock Financing
dividend / net issue price
Capital Asset Pricing Model (CAPM)
risk free rate + [ (expected market rate - risk free rate) ] x beta]
Divident Yield Plus Growth Rate: adds the current dividend (as a % of stock price) and the expected growth rate in earnings
net expected dividend / current stock price + expected growth in earnings = dividend yield plus growth rate
Cost of New Common Stock
net expected dividend / (current stock price - float costs) + expected growth in earnings = cost of new C/S
Profitability Index: provides a means to rank capital projects with differing amounts of investment.
PI = PV of Benefits / Cost
Cost of Common Equity
(dividend / share price) + growth percentage
