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BEC Pass Notes > Financial Analysis > Flashcards

Financial Analysis Flashcards

1
Q

Profitability Index

NPV

IRR

What holds the highest importance?

A

NPV/Initial Investment discounted (cannot be less than 1)

NPV FCF - NPV Investment (cannot be negative)

Cash Flows * Rate = Initial Investment

Profitability index

NPV NEXT

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2
Q

Cost Push Inflation

A

Factors that create a price increase

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3
Q

Cash Flows and depreciation

A

taxes paid is an outflow therefore effects cash flows

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4
Q

Cash Flow for Asset Disposal

A

Disposal Cost - Outflow
Salvage/Scrapping - Inflow
Basis + Disposal - Salvage * Tax % - Tax Savings from Loss INFLOW

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5
Q

Ranking Method

Screening Method

A

Find the actual profitability (profitability index)

Method don’t need to rely on time value of money

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6
Q

Accounting Rate of Return

A

Net Income/Initial Investment

IGNORE PRESENT VALUE

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7
Q

TRICK:

Depreciation usually goes with multiple choice answer

A

Higher depreciation higher outflow = HIGHER TAX DEDUCTION

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8
Q

Payback

IRR TRICK

A

Initial Investment/Cash Flow

IGNORE PRESENT VALUE

USED TO DETERMINE IRR FACTOR

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9
Q

Varying degrees of risk for investments should be calculated by using

A

Discount Rates that adjust for the risk

DISCOUNT RATE is the minimum required return on a project

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10
Q

Discount Rate and NPV relationship

A

Inverse; as you want a greater return the future value of the item will decrease

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11
Q

IRR

A

the purpose to have the present value = to the initial cash outlay, therefore wanting a zero balance

Relationship to positive NPV = means that the IRR is greater then the hurdle rate and the discount rate is
reduced

A time-adjusted rate of return from an investment

Present Value of inflows - Present Value of DISCOUNTED costs

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12
Q

Taxable Amounts
Gains
Losses

A

1 - Produce a tax liability that must be subtracted

2 - Produce a taxable deduction which can be added to the value or subtracted from the cash outflow

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13
Q

How to get PV rate

A

Investment Value/FCF (do not subtract out depreciation)

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14
Q

GDP deflator/inflator

A

Deflator - measures inflation

Inflator - not terminology used

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15
Q

IRR and NPV relationship

A

direct
positive NPV = higher IRR
negative NPV = lower IRR

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16
Q

Capital Budgeting Risk assessment

A

payback method

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17
Q

1- Floating Bonds

2 - Zero Coupon

A

1- Have a constant market value because interest rates fluctuate with changes in the market

2 - no interest payable

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18
Q

Which is risker long term or short term

Matching

A

Long-term; unless discussing the renewable option which makes short term credit more viable

Short-term should be matched with current
Long-term should be matched with noncurrent

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19
Q

Participating preferred shares dividends received

Cumulative preferred stock dividends receive

A

varies with companies earnings

fixed

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20
Q

Affirmative Covenant

A

requires company to maintain a certain level of working capital

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21
Q

WACC
Equity
Debt

A

DEBT factors in tax rate

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22
Q

Noncallable versus callable yield

A

noncallable will always have a lower yield because there is more risk however no option

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23
Q

1 - Treynor
2 - Sharpe
3 - Jensen

A

1 - Risk produced by fluctuations in the market & individual stock
(Portfolio return - Risk-free rate) ÷ Beta
2 - risk measure is the standard deviation of the portfolio rather than beta.
3 - measures the absolute value of performance of a portfolio on a risk-adjusted basis

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24
Q

Depreciation deductible amount formula

A

NI - depreciation * tax rate = deductible amount

IMPROVES THE CASH FLOW

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25
Q

Salvage Value Role in NPV

A

always is included as an INFLOW

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26
Q

efficient market hypothesis

WEAK

SEMI STRONG

STRONG

A

Market beliefs related to efficient markets take three forms: weak-form efficiency suggests that information about past prices would not be of use in predicting future performance;
semi-strong efficient markets suggest that all publicly available information is incorporated in market prices; and
strong-form efficient markets suggest that all available information is incorporated in current market prices

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27
Q

When PV multiplier is not given

A

payment/ 1 + %
payment/1+%1+%
payment/1+%1+%*1+%

28
Q

Define: Compounding Returns

A

Time Value of Money

29
Q

Firm’s target or optimal capital structure

A

minimum weighted cost of capital

30
Q

Why is equity more expensive then debt financing

A

debt guarantees a minimum payment and equity is paid after debt is settled

31
Q

Financial leverage

A

involves using borrowed funds to finance asset acquisition(s) which will generate returns exceeding the cost of borrowing. Thus, a higher debt to total assets ratio points toward the likelihood of more extensive financial leverage usage.

32
Q

Commercial Paper limits

A

use of those allowed to use by only large high credit worthy companies

33
Q

Zero Balance Account

Depository Transfer check

A

Put only enough in account to cover checks payable

only to be deposited in one central bank

34
Q

1- in-exchange premise

2- in-use premise

A

1 - assumes that the maximum value of the subject item would come from the purchaser’s perspective when the item is used alone.

2- assumes that the maximum value of the subject item would come from the purchaser’s perspective when the item is used in conjunction with other assets as a group.

35
Q

1- Cost approach

2- The market approach

A

1- is a valuation method based upon what it would cost to replace the subject item with an asset of like function and capacity.
2- is a valuation approach that uses market comparisons of identical or comparable assets or liabilities

36
Q

IRS Ruling 68-608

A

The past earnings used in the valuation process should fairly reflect the probable future earnings

37
Q

Fair value versus FMV

A

Fair market value defines the seller as hypothetical, whereas fair value assumes a specific seller.

38
Q

principal market

A

the holder of the asset or liability could find the greatest volume of asset sales or liability transfers of items similar to the one being valued

39
Q

Financial leverage

A

Financial leverage refers to the extent to which debt and preferred stock (i.e., fixed income securities) are used in the capital structure. The larger the percentage of debt and preferred stock that is used for financing, then the greater the risk that the company will not earn enough to cover the fixed interest and dividend payments. The more leverage, the greater the risk, and the higher the cost of capital

40
Q

DOL fixed and variable cost effect

A

A firm can change the DOL by changing the proportion of fixed costs to variable costs. The larger the proportion of fixed costs, the higher the DOL and the higher the breakeven point. The higher the proportion of variable costs, the lower the DOL and the lower the breakeven point

41
Q

1- Market or systemic risk

2 - Company Risk

A

1- is risk that cannot be eliminated through diversification

2 - not offset through diversification

42
Q

1- financial risk /interest rate risk
2 - business risk
3- marginal risk

A

1- concept of financial leverage and the cost of debt
2- uncertainty associated with the ability to forecast EBIT (earnings before interest and taxes) due to such things as sales variability and operating leverage EQUITY
3- risk that is assumed by the issuer of a foreign exchange contract or debt (forward contract) in the event that the investor goes bankrupt. It is related to the risk of the last dollar of a transaction defaulting DEBT

43
Q

Cost of debt

Basis Points

A

current market value of the debt

Basis Points/100 = Percentage Value

44
Q

Debt to Equity (Financial Leverage) and relation to risk

A

Higher Financial Leverage Higher Risk

45
Q

Early predictor of inflation

A

wholesale price index

46
Q

Deflation

Inflation

A

less money so higher purchasing power = lower prices

more money so lower purchasing power = high prices

47
Q

Inflation is measured

A

HISTORICAL DOLLARS -

48
Q

Carrying Cost

Setup Cost

A

increase w/ more

decrease w/ more

49
Q

Return % from taking a discount

A

360/(total credit period - discount period) * % of discount/( 100 - discount %)

50
Q

noncallable bond versus callable

A

noncallable less risky therefore lower yield

51
Q

cost of preferred stock

A

% / SP - issue

52
Q

Income Taxes

A

Income - Income Tax %

53
Q

Outcome of IRR

A

make the PV FCF = initial investment

NPV of ZERO

54
Q

cost of debt most frequently measured at

A

actual interest rate - tax savings

55
Q

Deprecation and TR

A

used in the calculation of tax rate but not deducted from CASH FLOWS/ ONLY income tax is deducted

56
Q

Tax credits

A

decrease IRR because it decreases amount deducted

57
Q

Collection Ratio

A

Average Receivables/Daily Sales

58
Q

Average Collections

A

Days in Year/ AR Turnover

59
Q

Reorder Point

A

(Average weekly demand × Lead time) + Safety stock

60
Q

Materials requirements planning (MRP)

EOQ

JIT

A

is a push system; i.e., the demand for raw materials is driven by the forecasted demand for the final product as programmed into the system.

Trade off between Carrying Costs & Ordering Costs

Demand Pull focuses on actual demand

61
Q

Liquidity Ratio

Leverage Ratio

A

Assets

DEBT

62
Q

Declaration of a Dividend

A

increase AP

63
Q

NPV inflows valuation

A

inflows are valuated as being greatest in value earlier in the investment

64
Q

mutual exclusive

A

choose one with the highest value

65
Q

PAST COST IN CAPITAL BUDGETING

A

IGNORED BECAUSE SUNK

66
Q

total borrowings

A

amount borrowed/ 100% - compensating balance

67
Q

what constitutes as INVESTMENT

A

PPE & WORKING CAPITAL

BEC Pass Notes (7 decks)

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