FINAL B2 Flashcards
What is the impact when a company has a more conservative working capital policy?
Increase in the ratio of current assets to noncurrent assets
What is the Discounted cash flow method?
cost of equity =
Expected dividend share price
________________________
current share price + Growth rate
What is the least acceptable method for determining accounting estimates of fixed assets?
Industry consensus
What is not relevant when determining the risk premium on a specific security?
Earnings per share
Define internal rate of return
computes rate of return where NPV =0. The method equates the initial investment with the present value of future cash flows
What does the payback period emphasize?
Liquidity
- time period required for cash inflows to revoer the initial investment
If a project has a positive NPV, what is the required of return
ROR< IRR
What is the difference between the binomial (Coss-ross-Rubinstein) model and Black-Scholes option model?
The consideration of the option over a period of time and it can be used for stocks that pay dividends w/o model modification
What is the formula for the Cash conversion cycle?
Days in inv + Days in AR - days of payables outstanding
What determines the optimal capitalization
Lowest total WACC
What source has the lowest after tax cost?
Bonds (debt in general)
How is the cost of debt measured as
Actual int rate LESS tax savings
When is the implication of a bond sold at a premium?
The bond will sell at a premium when the stated coupon rate on the bond is greater that the market interest rate on the bond at a given date
How do you calculate the net cost of debt?
Effective int rate * net of tax
OR
Effective int rate * (1-T)
What is not a use for Capital budgeting decisions?
Financing short-term working capital needs
What is an advantage of the NPV method over the IRR model?
It can be used when there is no constant rate of return required for each year of the project
How do you calculate the depreciation tax savings(shield)?
Depreciation * tax rate
in the NPV method -> what rate are Cash flows reinvested in?
the discount rate used in the analysis
What does negative NPV mean?
the discount rate used is greater than the IRR
What is something that will impact net present value?
Proceeds from the sale of asset to be replaced
What is a limitation of the profitability index?
it requires detailed Long-term forecasts of the projects cash flows
How do you calc the total after tax cash flows?
(sales - Expense) * (1-T)
ADD: depreciation tax shield (dep*.tax rate)
Define the IRR of a project
The discount rate at which the NPV = 0
When is the IRR less reliable than the NPV?
When there are several alt periods of net cash inflows and net cash outflows
How do you calculate IRR?
Net incremental investment / Net annual cash flows
What part of the SCOR model is the following: collecting and processing vendor payments?
Source
what impacts the amount of safety stock?
Uncertain sales forecast
Dissatisfaction of customers
Uncertain lead times
How do you calc the cost/benefit of trade discounts?
360 / (difference in days) * x%/(100%-x%)
ex) 2% discount on 15 day.. required to be paid 45th day
360/(45-15) * 2%/98%
In an inflationary environment, how should cashflows and the discount be adjusted?
Increase in the estimated cash flows and increase in the discount rate
What is the formula for market capitalization?
Market price per share * Shares outstanding (CS/Par value per share)
What is the CAPM formula
RF rate + Beta(Mkrt return - RF rate)
What is the formula for sector P/E?
NI * P/E
what is the formula for the market value of bonds?
Bond par value * MV of bond/1000
What is a reason for a company to agree to a debt covenant limiting the % to its LT debt?
To reduce the coupon rate on the bonds being sold
What is the IRR?
Rate of interest that equates the PV of cashflows and PV of cash inflows
How to calc operating leverage?
Fixedcosts/Variable costs
