BEC - Ratios and Calculations to Know Flashcards
How do we calculate effective annualized percentage cost of financing? (B1 - M4)
Finance charge / loan proceeds
(finance charge = interest charged - any interest earned on mandatory checking accounts)
(loan proceeds = amount from the loan that the company actually has use of)
How do we calculate annual percentage rate on debt (“annual percentage rate of interest”)? (B1 - M4)
Finance charge / net proceeds
(charge = interest charged)
(net proceeds = what you have able to invest)
How do we calculate the effective interest rate if a borrowing is in the form of a discounted note? (B1 - M4)
Effective interest rate = interest charge / net proceeds (reduced by interest charge)
(Say interest 9% on a loan of 100,000… 9% / 91% = effective rate)
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
How do we calculate Market Capitalization?
Common shares outstanding * fair market value per share
Cost of a company’s preferred stock (expected rate of return on preferred stock):
What is the formula we use?
Numerator: Annual dividend payment
Divided by
Denominator: Current market price of Preferred Stock
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 = Inventory Turnover Ratio for the year
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 income = cost ratio. Costs will go up 60% if you’re bringing in more A/R.
10% of additional investment (required return is 10%) = pretax cost of carrying the AR.
60% * 10% * 96,000 = 5,760
ROA is measured as:
At a divisional level:
Operating Income / Average Total Assets
