Corporate Finance Flashcards

Question 1

Q

WACC

Answer

A

w_d[k_dbt(1-t)] + w_psk_ps + w_cek_ce

or

w_dk_d+ w_psk_ps + w_cek_ce

= weight * after tax cost of debt

+ weight * cost of preferred stock

+ weight * cost of common equity

Question 2

Q

After Tax Cost of Debt

k_d

Answer

A

k_dbt(1 - t)

Market interest rate (YTM) at which firms can issue new debt (k_d) net of the tax savings.

Question 3

Q

Cost of Preferred Stock

k_ps

Answer

A

D

———

P

Question 4

Q

Cost of Common Equity

k_ce

CAPM Model

Answer

A

ß[E(r_mkt) - r_rf] + r_rf

Question 5

Q

Cost of Common Equity

k_ce

Dividend Discount Model

Answer

A

k_ce = (D₁ / P) + g

or

P = D₁ / (k_ce - g)

Question 6

Q

Cost of Common Equity

kce

Bond-Yield-Plus-Risk-Premium Approach

Answer

A

k_dbt + Risk Premium

or

[k_d/(1 - t)] + Risk Premium

Before tax cost of debt plus risk premium of equity over debt.

Question 7

Q

Growth Rate

g

Question 8

Q

Dividend Payout Rate

D_p

Question 9

Q

Retention Rate

RR

Question 10

Q

Profitability Index

PI

Answer

A

NPV / CF₀ + 1

Question 11

Q

Break Point for

Marginal Cost of Capital

MCC

Answer

A

Dollar Amount

————————

Weight

Question 12

Q

Bank Discount Yield

BDY

Answer

A

[(F - P) / F] * (360/n)

Question 13

Q

Cost of Trade Credit

(Payables with discounts)

Answer

A

(1 + %Disc/(1 - %Disc)^(365/n) - 1

The cost of not paying based on discount terms

eg:2/10 net 40

Question 14

Q

Operating Cycle

Answer

A

DOP + DOH

Question 15

Q

Operating Break-Even Point

Answer

A

Fixed Costs

———————————

Contribution Margin

Question 16

Q

Optimal Capital Budget

Answer

A

The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.

MCC = IOS

The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)

Question 17

Q

Cash Flow Forecasting Techniques

Answer

A

Short Term

Simple Projections

Medium Term

Project Models & Averages

Long Term

Statistical Models

Question 18

Q

Business Risk

Answer

A

Sales Risk + Operating Risk

Question 19

Q

Equity Beta

ß_Equity

Answer

A

ß_Asset^*[1 + (1 - t)(D/E Ratio)]

Question 20

Q

Degree of Financial Leverage

DFL

Answer

A

Operating Income

——————————

EBT

Question 21

Q

Degree of Total Leverage

DTL

Answer

A

(Revenue - Variable Costs)

——————————————

Net Income

Question 22

Q

Degree of Operating Leverage

DOL

Answer

A

Q * Contribution

—————————————

Q * Contribution - Fixed

Question 23

Q

Book Value

Answer

A

Owners Equity

———————————

Shares Outstanding

Question 24

Q

The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.

MCC = IOS

The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)

Answer

A

Optimal Capital Budget