BEC Formulas (Capital Budgeting & Financial Mgmt)

Question 1

Cash Conversion Cycle (CCC)

Answer 1

Inventory Conversion Period (ICP) + AR Collection Period (RCP) - AP Deferral Period (PDP)

Question 2

Inventory Conversion Period (ICP)

Answer 2

avg inventory / COGS per day

Question 3

A/R Collection Period (RCP)

Answer 3

avg A/R / avg credit sales per day

Question 4

A/P Deferral Period (PDP)

Answer 4

avg A/P / purchases per day (or COGS/365)

Question 5

Number of days sales in A/R

Answer 5

360 / A/R turnover

Question 6

Inventory Reorder Point

Answer 6

avg daily demand x avg lead time = reorder point without safety stock + safety stock = reorder point with a safety stock

Question 7

Economic Order Quantity

Answer 7

Square root of:

2 x annual usage on inventory x cost of placing an order / cost of storing an individual unit of inventory

Question 8

Number of days supply in avg inventory

Answer 8

360 / inventory turnover

Question 9

Payback Period

Answer 9

initial investment / after tax annual net cash flows = number of years

Question 10

Internal Rate of Return (IRR)

Answer 10

investment / annual cash flows = PV factor

Question 11

Accounting Rate of Return

Answer 11

acctg income / avg investment = ROI

Question 12

NPV

Answer 12

PV cash inflows - PV cash outflows / net PV

if positive it’s good
if negative it’s bad

Question 13

Annual Financing Cost (AFC)

Answer 13

discount % / (100% - discount %) x 365 / (total pay period - discount period)

Question 14

Current Yield

Answer 14

annual interest paid / bond market price

Question 15

Operating Leverage (DOL) : measures how the size of a business’s fixed costs affects its performance when revenues change

Answer 15

% change in EBIT / % change in sales volume

Question 16

Financial Leverage (DFL) : measures how much a business relies on debt financing

Answer 16

% change in EPS / % change in EBIT
or
% change in NI / % change in operating income

Question 17

Cost of Debt Financing : after- tax cost of interest payments as measured by yields to maturity

Answer 17

Can be calculated 2 ways:

yield to maturity x (1 - eff. tax rate)
or
(int exp - tax deduction for interest) / CV of debt

Question 18

Cost of Preferred Stock Financing

Answer 18

dividend / net issue price

Question 19

Capital Asset Pricing Model (CAPM)

Answer 19

risk free rate + [ (expected market rate - risk free rate) ] x beta]

Question 20

Divident Yield Plus Growth Rate: adds the current dividend (as a % of stock price) and the expected growth rate in earnings

Answer 20

net expected dividend / current stock price + expected growth in earnings = dividend yield plus growth rate

Question 21

Cost of New Common Stock

Answer 21

net expected dividend / (current stock price - float costs) + expected growth in earnings = cost of new C/S

Question 22

Profitability Index: provides a means to rank capital projects with differing amounts of investment.

Answer 22

PI = PV of Benefits / Cost

Question 23

Cost of Common Equity

Answer 23

(dividend / share price) + growth percentage