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My BEC Cards > Finance > Flashcards

Finance Flashcards

1
Q

Spot Rate vs Forward Rate

A

Spot Rate - the exchange rate of the currency for immediate delivery

Forward Rate - the exchange rate of the currency for future delivery

**The difference between these two is referred to as the discount or premium

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2
Q

Market Structures (4)

A
  1. Perfect (Pure)
  2. Monopolistic
  3. Oligopoly
  4. Monopoly
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3
Q

Forces that Affect the Competitive Environment (5)

A
  1. Barriers to entry
  2. Market competitiveness
  3. Existence of substitutes
  4. Bargaining power of customers
  5. Bargaining power of suppliers
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4
Q

Risk Preferences - 3

A
  1. Risk-indifferent behavior
  2. Risk-averse behavior
  3. Risk-seeking behavior
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5
Q

Certainty Equivalent

Formulas

A
  • CE = Certainty Equivalent
  • *EV = Expected Value
1. CE < EV
   Risk averse behavior
2. CE = EV
   Risk indifferent behavior
3. CE > EV
   Risk seeking behavior
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6
Q

Diversification

D-U-N-S

A

D - Diversifiable RIsk
U - Unsystematic Risk (non-mkt/firm specific)
N - Nondiversifiable Risk
S - Systematic Risk (Market)

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7
Q

Exposure Risks - 3

A
  1. Transaction exposure - individual transactions
  2. Economic exposure - cash flow
  3. Translation exposure - financial statements are translated from foreign to domestic currency
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8
Q

Calculating NonCash Tax Shields

FORMULA

A

NonCash Tax Shield Item (e.g. depreciation)
* Tax Rate
= Tax Savings

Add to the cash flow computation

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9
Q

Discounted Cash Flows for NPV Methods

Steps - 4

A 
Step 1: Calculate after tax CF 
           Annual NCFs * (1 - tax rate)
Step 2: Add depreciation benefit
           Depreciation * Tax Rate
Step 3: Multiply result by appropriate PV of an annuity
Step 4: Subtract initial cash outflow

RESULT - Net Present Value

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10
Q

Payback Period Method

A

Payback Period =
Net Initial Investment/Increase in Annual NATCFS

             OR

Initial Outflow/Annual Annuity

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11
Q

Accounting Rate of Return

Formula

A

Computes an approximate rate of return which ignores time value of money.
ARR = Annual NI/Avg (initial) investment

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12
Q

NPV Method Interpretation - 2

A
  1. Positive Result (result >= 0)
    MAKE INVESTMENT
  2. Negative Result (result < 0)
    DO NOT MAKE INVESTMENT
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13
Q

Sunk Costs

A

Committed costs that are not avoidable and are therefore irrelevant to the decision process.

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14
Q

Long-term Financing vs Short-term Financing

Differences

A

Short Term Debt:

  • Rates - Lower
  • Advantages - Increased liquidity and increased profitability
  • Disadvantages - Increased IR risk and increased credit risk
  • Strategy - Use with increased levels of temporary WC

Long Term Debt:
- Rates - Higher
- Advantages - Decreased IR risk and decreased credit risk
- Disadvantages - Decreased liquidity and decreased profitability
Strategy - Use with increased levels of permanent WC

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15
Q

Leverage Relationships

FORMULAS

A

DOL = % Change in EBIT / % Change in Sales

DFL = % Change in EPS / % Change in EBIT

DCL = % Change in EPS / % Change in Sales

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16
Q

CAPM Risks - 3

Formulas

A

B = 1 As Risky
B > 1 More Risky
B < 1 Less Risky

Formula: RF+[B(MR-RF)]

17
Q

Payment Discounts

FORMULA

A

APR of quick payment discount:

[360/(Pay Pd - Disc Pd)]*[Discount/(100 - Disc%)]

18
Q

Cash Conversion Cycle

Formula

A

Cash Conversion Cycle =

Inven Conv Pd (low) + Rec Collect Pd (low) - Pay Def Pd (high)

19
Q

Inventory Conversion Period

FORMULA

A

Days to Sell
Inventory Conversion Period =
Average Inventory / Average COGS per Day

20
Q

Receivables Collection Period

FORMULA

A 
# Days to Collect
Receivables Collection Period = 
   DSO = Average Receivables / Average Sales per Day
21
Q

Payables Deferral Period

FORMULA

A

Days to Pay
Payables Deferral Period =
Average Payables / Average Purchases per Day

22
Q

Weighted Annual IR: Trade Discounts

Steps - 4

A
  1. Computing annualized increment for discount:
    Days per year / Days O/S after discount
  2. Compute effective IR with discount
  3. Multiply the annualized increment by the rate
  4. Weight according to discounts associated with other similar debt
23
Q

Economic Order Quantity
Assumptions

S-O-M-I-I

A 
S - Storage
O - Obsolescence
M - Materials
I - Insurance
I - Interest
24
Q

EOQ Equation and Components

A

E = [sq.rt(2SO/C)]

E - Order Size
S - Annual Sales (in units)
O - Cost per order
C - Carrying cost per unit

25
Q

Capital Lease Requirements - 4

A
  1. Ownership transfers to lesee at the end of the lease
  2. Lease contains BPO at the end of the lease
  3. Lease term is 75% or more of the life of leased property
  4. The PV of minimum lease payments equals 90% or more of the FV of the leased property at the inception of the lease

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