Corporate Finance Flashcards
average accounting rate of return calculation
AAR = average net income / average book value
profitability index calculation
PI = 1 + (NPV / IO)
capital budgeting decision rules
invest if
NPV is greater than 1
IRR is greater than r
PI is greater than 1
in calculating WACC, debt…
is calculated on after-tax basis. multiply by (1-t)
CAPM formula
Er = Rf + beta (Rm -Rf)
pure-play method, unlevered beta calculation
Bu = BlC / [ 1 + (1 - Tc)(Dc /Ec)]
lever the beta calculation
BlProject = BuC [1 + (1-Tp)(Dp / Ep)
Country equity premium calculation
= sovereign yield spread (annualized sd of equity index / annualized sd of sovereign bond market in terms of developed market currency)
DDM calculation
= D1/P0 + g
growth rate calculation
= (1 - D/EPS)*ROE
DOL calculation
= (Q(P-V)) / (Q(P-V) -F)
DFL calculation
= [Q(P-V) -F] / [Q(P-V) - F - C)
C is fixed financing cost
a DOL of x means
a 1% change in units sold results in a 1% * x change in operating income
a DFL of x means
a 1% increase in operating income would result in a 1 * x percent increase in net income
using financial leverage generally increases…
the variability of ROE
DFL is not affected by
tax rate
DOL tells of the sensitivity of
operating income to changes in revenue
DFL tells of the sensitivity of
net income to changes in operating income
DTL calculation
DOL * DFL
breakeven point
the number of units produced and sold at which the companys NI is zero (revenues equal costs)
breakeven calculation
= (F + C) / (P - V)
operating breakeven includes
only operating costs
operating breakeven calculation
= F / (P-V)
major drags on liquidity
uncollected receivables, obsolete inventory, tight credit
major pulls on liquidity
making payments early, reduced credit limits, limits on short-term lines of credit, low liquidity positions
operating cycle calculation
= DOH + DSO
net operating cycle aka…
cash conversion cycle
MMY calculation
= [(F-P) / P] * [360 / days to maturity]
BEY calculation
= [(F-P) / P] * [365 / days to maturity]
Discount Basis Yield calculation
= [(F-P) / F] * [360 / days to maturity]
short term fund mgmt. investment returns should be expressed as…
BEY’s, to allow for comparability
captive finance subsidiary
wholly owned subsidiary of the company that is established to provide financing of the sales of the parent company
float factor
float is the amount of money that is in transit between payments made by customers and the funds that are usable by the company. only measures how long it takes for checks to clear, not how long to receive, deposit
float factor calculation
= average daily float / (total amt of checks deposited / # of days)
costs of borrowing calculation
= (interest + dealers commission + backup costs) / (loan amount - interest)
divide by net proceeds only when interest rate is stated as “all inclusive”
developing country firm cost of equity using CAPM calculation
Cost of equity = Risk-free rate + Equity beta × (Equity risk premium + Country risk premium)
external analysts should rely on what value for components of current capital structure
market value, not book value
utilizing incremental cash flows arising from a project..
analyzed on an after-tax basis, externalities should be considered/included, financing costs and sunk costs excluded
independent directors must not have…
material relationships with the company with regard to employment, ownership, or remuneration
ESG investing. single factor
= thematic
ESG investing. best ESG scoring companies
= best in class
ESG investing. targeted social or environmental objectives
= impact
employee representatives are…
on supervisory boards (not management) and elected by employees
additional calculation for net profit margin
= ROA/asset turnover
additional calculation for financial leverage
= ROE/ROA
liquidity
renegotiating debt contracts
secondary source
liquidity
liquidating long term assets
secondary source
liquidity
trade credit
primary source
liquidity
centralized cash mgmt systems
primary source
operating cycle calculation
= DOH x DSO
no payables
when equity decreases by half, ROE…
would double
when net income decreases by x%, adjusted ROE would be
ROE (1-x)
affect on cash conversion cycle for receiving an increase in their number of days payable
reduce the cash conversion cycle by that many days
purchases calculation
= (changeInventory + COGS)
cost of borrowing. bankers acceptance
=(interest/net proceeds) * 12
divide interest for period
cost of borrowing. line of credit
=(interest + commitment fee)/usable loan amount *12
divide interest for period
cost of borrowing. commercial paper
=(interest + dealers commission + backup costs)/net proceeds * 12
divide interest for period
