Ch.1 - Financial Management

Question 1

What is WACC (Weighted-Average Cost of Capital?)?

Commonly known as firm’s cost of capital

Answer 1

1) Calculate Capital Structre - (% of Debt & % Equity)

2)WACC for Equity - (Cost of Equity x Ratio of Equity)

3WACC for Debt - (Cost of Debt x Ratio of Debt) = WACC for debt, pre-tax
x(1-Tax Rate)
WACC for debt, post tax

4) Combine WACC
WACC for Equity + WACC for debt

Question 2

What is the Time Interest Earned Ratio?

Answer 2

Question 3

What is Return on Investment (ROI)?

Answer 3

Net Income/Average invested capital

Question 4

What is Price-to-Earning Ratio?

Answer 4

Market Price / Earnings Per Share

Question 5

What is Price-to-Sale Ratio?

Answer 5

Market Price / Expected Sales

Question 6

What is the Expected Rate of Return formula?

Answer 6

Annual Preferred Dividend ($) / Market Price ($)

Question 7

What is Price-to-Book ratio?

Answer 7

Market Price / Book Value (Equity)

Question 8

What is Book Value per share?

Answer 8

Book Value / Outstanding shares

Question 9

What is the Gordon Growth Model?

Answer 9

Question 10

What is Price-to-Cash Flow ratio?

Answer 10

Market Price / Cash Flows

Question 11

What is Depreciation Tax Shield?

Answer 11

Question 12

What is Asset Turnover?

Answer 12

Sales / Assets

Question 13

What is Accounts Receivable Turnover?

Answer 13

Sales,Net / Average Accounts Receivable, net