Capital Management Flashcards
What is the degree to which a firm uses fixed operating costs, as opposed to variable operating costs?
Operating leverage
Formula for Degree of Operating Leverage
% change in EBIT / % change in Sales
What is the degree to which a firm’s use of debt to finance the firm magnifies the effects of a given percentage change in EBIT?
Financial Leverage
Formula for Degree of Financial Leverage
% change in EPS / % change in EBIT
Formula for Combined Leverage
DOL x DFL; % change in EPS / % change in Sales
Compute Weighted-average interest rate
Effective annual interest payments / debt cash available
kdx=
Cost of long-term debt
kdt=
Pre-tax cost of debt
kps=
Cost of preferred stock
Nps=
Net proceeds of preferred stocks
Dps=
Preferred stock cash dividends
Formula for Cost of preferred stock
Preferred stock cash dividends / Net proceeds of preferred stocks
krf=
Risk-free rate
PMR=
Market risk premium
Compute risk premium
Beta coefficient(bi) x market risk premium(PMR)
Compute PMR
market rate - risk-free rate(krf)
Formula for Cost of retained earning(kre) CAPM method
krf + (bi x (km - krf))
Formula for cost of retained earning(Discounted cash flow)
(D1/P0) + g
D1=
Dividend per share
G=
Growth rate in dividends
P0=
Current market value or price
Compute Dividend per share
D0 + (1+g)
Compute cost of retained earnings(Bond yield plus risk premium)
kdt + PMR
Compute Return on Investment
Income / Investment capital; Profit margin x investment turnover
Compute Return on assets
Net income / average total assets
Compute residual income
Net income - required return
Compute required return
NBV x Hurdle rate
Compute economic value added
Investment x cost of capital = required return; Income after taxes - required return = economic value added
Compute working capital
Current assets - Current liabilities
Compute current ratio
Current assets / Current liabilities
Compute quick ratio
(Current assets - Inventory - Prepaids) / Current liabilities
Compute APR of quick payment discount
(Disc% x 365) / (100 - Disc%) x (Disc period - Pay period)
Formula for cash conversion cycle
Inventory conversion + Receivables collection - Payables deferral
What are the 3 components of the Economic Order Quantity?
Annual sales, Order cost, and carrying cost per unit
What type of leverage is the result of industry characteristics?
Operating leverage
What type of leverage deals with capital structure?
Financial leverage
Calculation for Weighted-Average Cost of Capital
(Cost of equity x %equity in capital structure) x ((after tax)cost of debt x %debt in capital structure)
Calculation for after-tax cost of long-term debt
Kdt x (1 - tax rate)
Aggressive working capital means to increase current liabilities or assets?
Current liabilities
Conservative Working Capital means to increase current liabilities or assets?
Current assets
Calculation for cost of factoring
Net cost / average amount invested
Calculation for cost savings
(Cost of sales / inventory turnover) x interest rate
Calculation for required costs to achieve target
Asset base x interest rate + income target - revenue forecast
Calculation for net cost of debt
Effective interest rate x (1-tax rate)
Calculation for economic value added
After tax income - required return
Calculation for times interest earned
EBIT / Total interest
