Financial Management

Question 1

Dividend Yield Formula

Answer 1

Dividends per share/Market price per share

Question 2

Inventory Turnover Formula

Answer 2

COGS/Average Inventory

Question 3

How does one calculate NPV?

Answer 3

Take the difference between PV of future cash inflows and the initial cost of the investment

Question 4

The benefits of debt financing over equity financing are likely to be highest in which of the following situations?

Answer 4

High marginal tax rates and few noninterest tax benefits

Question 5

EVA formula

Answer 5

EVA = After-tax operating income - (Initial Investment x WACC)

Question 6

Cost Reorder Point formula

Answer 6

Lead time quanity + Safety Stock

Question 7

Safety stock formula

Answer 7

(Maximum lead time - avg lead time) x Daily usage

Question 8

Pursuant to the Sarbanes-Oxley Act of 2002, an accountant who destroys documents to impede an investigation by a U.S. agency can be:

Answer 8

Fined and/or imprisoned for 20 years.

Question 9

After-tax cost of equity formula

Answer 9

Cost = [(Dividend x (1 + Growth))/ Price per share] + Growth rate

Question 10

Times Interest Earned Ratio

Answer 10

EBITDA/ Interest Expense

Question 11

Cost of debt formula

Answer 11

(1- Tax Rate) x Before-tax cost of debt

Question 12

DIO

Answer 12

Average Inventory/COGS per day

Question 13

DSO

Answer 13

Average AR/Sales per day

Question 14

DPO

Answer 14

Average AP/COGS per day

Question 15

Cash Conversion Cycle

Answer 15

DIO + DSO - DPO

Question 16

Which of the following methods is best suited for evaluating the performance of a firm’s capital in any given year?

A. IRR
B. NPV
C. EVA
D. Payback

Answer 16

C. EVA

Question 17

Dividend Yield (Common Stock)

Answer 17

Div Yield = (Cash Dividend per common share/Market Price per share) x 100

Question 18

Required Rate of Return

Answer 18

RR = RFR + Beta (ERR - RFR)

Question 19

Which of the following metrics equates the present value of a project’s expected cash inflows to the present value of the project’s expected costs?

Answer 19

IRR

Question 20

Capital Turnover Ratio

Answer 20

Total Sales/SHE

Question 21

Residual Income Formula

Answer 21

Operating Income - (target return % x invested capital)

Question 22

Investment Turnover

Answer 22

Sales/Invested Capital

Question 23

Cost of Preferred Stock

Answer 23

(% x par value) /net issuance price

Question 24

ROI Formula

Answer 24

Net Income/Invested Capital

Question 25

Expected Return

Answer 25

[(Ending price + Dividends)/Opening Price] - 1

Question 26

The DuPont analysis is affected by what 3 concepts?

Answer 26

Operating efficiency, asset use efficiency and financial leverage

Question 27

Will the IRR of a project be lower or higher if cash inflows are received later in the life of the project?

Answer 27

Lower - this is because later cash inflows have a lower PV than earlier cash inflows.

Question 28

Profit Margin x Asset turnover x leverage equals what?

Answer 28

ROE

Question 29

PV of future inflows - initial investment

Answer 29

Net Present Value