EXTRA (Financial Mgmt)

Question 1

What is the formula for forgoing a trade discount?

Answer 1

[(Discount %) / (1 - Discount %)] x [(365 days) / (Total pay period - Discount Period)]

Question 2

Formula: annual cost of carrying inventory?

Answer 2

(Avg Inv Level) x (Unit Costs) x (Cost of Capital)

Note:
Avg Inv Level = (Order Size) / 2

Question 3

What does Degree of Financial Leverage measure, and what is the formula?

Answer 3

Degree of financial leverage measure the sensitivity of a company’s EPS to fluctuations in its operating income.

The higher the degree of financial leverage the more volatile the EPS.

DFL = (EBIT) / (EBIT - Interest)
or
DFL = (% change in EPS) / (% change in EBIT)

EBIT = Earning become interest and tax

(DFL) x (Change in EPS) = shows how much EPS % would change if Earnings before Interest and Tax changed

Question 4

What is the Degree of Operating Leverage?

Answer 4

Degree of Operating Leverage measures the degree which a firm builds fixed costs into its operations.

High degrees of operating leverage will trigger greater increases in return on equity.

DOL = (% change in operating income) / (%change in unit volume)

Question 5

Economic Order Quantity

Answer 5

[ (2AD) / (k) ] ^ (0.5)

A = Cost of placing an order 
D = Annual Demand 
k= cost of carrying a unit of inventory

Question 6

Formula: Cash Conversion Cycle?

Answer 6

Inv Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
= Cash Conversion Cycle

Question 7

Formula: Days of Sales Outstanding?

Answer 7

(Receivables) / (Sales per Day)