Chapter 5 - Financial Management & Capital Budgeting Flashcards
What is the formula for the cash conversion cycle? What is the the cash conversion cycle?
CCC = ICP + RCP - PDP
Cash conversion cycle = inventory conversion period + accounts receivable collection period - accounts payable deferral period
The cash conversion cycle measures the number of days from when a business pays for its inputs to when the business collects cash from the sale of finished goods.
What is the inventory conversion period? What is the formula for it?
Inventory conversion period is the average number of days required to convert inventory to sales
ICP = average inventory/COGs per day (or sometimes sales per day)
Average inventory = (Beg inventory + ending inventory)/2
What is the accounts receivable collection period? What is the formula for it?
The accounts receivable collection period is the average number od days required to collect accounts receivables
RCP = average accounts receivable/ average credit sales per day
What is the accounts payable deferral period? What is its formula?
Accounts payable deferral period is the average number of days between buying inventory and paying for it
PDP = average payables / purchases per day (or COGS/365)
How can you minimize the cash conversion cycle?
- Stretch out the accounts payable deferral period
- Shorten the receivable collection period
- Manufacture goods faster and shorten the inventory collection period
What is the formula for accounts receivable turnover?
Net credit sales / average accounts receivable
What is the equation for the number of days sales in average receivables?
365/ accounts receivables turnover
What is the equation to find the re-order point for inventory?
What is the equation for economic order quantity?
What is the equation for inventory turnover?
COGS / average inventory
What is the equation for number of days supply in average inventory?
365 / inventory turnover
What is the equation for payback period (# of years)?
Initial investment / After tax annual net cash inflows
What is internal rate of return? What is the equation for it?
The internal rate of return is the discount rate at which the net present value is zero. It is the rate where PV cash outflows is equal to PV cash inflows.
IRR = Investment / annual cash flows
What is the equation for the accounting rate of return?
ARR = accounting income / average (or initial) investnment
What is the calculation of NPV?
NPV = Present value of future cash flows - required investment
How are NPV and IRR related?
What is the equation for the depreciation tax shield?
Depreciation tax shield = tax rate x depreciation
What is the equation for annual financing costs?
Annual financing costs = (discount % / (100% - discount %)) x (365 / (total pay period - discount period))
What is the equation for the cost of a loan?
Cost of a loan = interest paid / (net funds available (principal - compensating balance))
What is the capital asset pricing model (CAPM)? What is its equation?
Model that assumes the expected return of a stock depends on its volatility relative to the overall stock market (beta)
CAPM = (beta x excess of normal market return over risk free) + return on risk free
What is the equation for degree of operating leverage?
What is DOL?
DOL = % change in EBIT (earnings before interest and taxes) / % in sales volume
DOL is how the size of a business’s fixed costs affects its performance when revenue change
What is the equation for degree of financial leverage? What is the degree of financial leverage?
DFL = % change in earnings per share / % changes in EBIT (earnings before interest and taxes)
DFL is how much the business relies on debt financing.
What is the equation for gross margin?
Gross margin = gross profit / net sales
What is the equation for operating profit margin?
Operating profit margin = operating profit / net sales
