Finance Flashcards
Spot Rate vs Forward Rate
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
Market Structures (4)
- Perfect (Pure)
- Monopolistic
- Oligopoly
- Monopoly
Forces that Affect the Competitive Environment (5)
- Barriers to entry
- Market competitiveness
- Existence of substitutes
- Bargaining power of customers
- Bargaining power of suppliers
Risk Preferences - 3
- Risk-indifferent behavior
- Risk-averse behavior
- Risk-seeking behavior
Certainty Equivalent
Formulas
- CE = Certainty Equivalent
- *EV = Expected Value
1. CE < EV Risk averse behavior 2. CE = EV Risk indifferent behavior 3. CE > EV Risk seeking behavior
Diversification
D-U-N-S
D - Diversifiable RIsk
U - Unsystematic Risk (non-mkt/firm specific)
N - Nondiversifiable Risk
S - Systematic Risk (Market)
Exposure Risks - 3
- Transaction exposure - individual transactions
- Economic exposure - cash flow
- Translation exposure - financial statements are translated from foreign to domestic currency
Calculating NonCash Tax Shields
FORMULA
NonCash Tax Shield Item (e.g. depreciation)
* Tax Rate
= Tax Savings
Add to the cash flow computation
Discounted Cash Flows for NPV Methods
Steps - 4
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
Payback Period Method
Payback Period =
Net Initial Investment/Increase in Annual NATCFS
OR
Initial Outflow/Annual Annuity
Accounting Rate of Return
Formula
Computes an approximate rate of return which ignores time value of money.
ARR = Annual NI/Avg (initial) investment
NPV Method Interpretation - 2
- Positive Result (result >= 0)
MAKE INVESTMENT - Negative Result (result < 0)
DO NOT MAKE INVESTMENT
Sunk Costs
Committed costs that are not avoidable and are therefore irrelevant to the decision process.
Long-term Financing vs Short-term Financing
Differences
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
Leverage Relationships
FORMULAS
DOL = % Change in EBIT / % Change in Sales
DFL = % Change in EPS / % Change in EBIT
DCL = % Change in EPS / % Change in Sales
CAPM Risks - 3
Formulas
B = 1 As Risky
B > 1 More Risky
B < 1 Less Risky
Formula: RF+[B(MR-RF)]
Payment Discounts
FORMULA
APR of quick payment discount:
[360/(Pay Pd - Disc Pd)]*[Discount/(100 - Disc%)]
Cash Conversion Cycle
Formula
Cash Conversion Cycle =
Inven Conv Pd (low) + Rec Collect Pd (low) - Pay Def Pd (high)
Inventory Conversion Period
FORMULA
Days to Sell
Inventory Conversion Period =
Average Inventory / Average COGS per Day
Receivables Collection Period
FORMULA
# Days to Collect Receivables Collection Period = DSO = Average Receivables / Average Sales per Day
Payables Deferral Period
FORMULA
Days to Pay
Payables Deferral Period =
Average Payables / Average Purchases per Day
Weighted Annual IR: Trade Discounts
Steps - 4
- Computing annualized increment for discount:
Days per year / Days O/S after discount - Compute effective IR with discount
- Multiply the annualized increment by the rate
- Weight according to discounts associated with other similar debt
Economic Order Quantity
Assumptions
S-O-M-I-I
S - Storage O - Obsolescence M - Materials I - Insurance I - Interest
EOQ Equation and Components
E = [sq.rt(2SO/C)]
E - Order Size
S - Annual Sales (in units)
O - Cost per order
C - Carrying cost per unit
Capital Lease Requirements - 4
- Ownership transfers to lesee at the end of the lease
- Lease contains BPO at the end of the lease
- Lease term is 75% or more of the life of leased property
- The PV of minimum lease payments equals 90% or more of the FV of the leased property at the inception of the lease
