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Financial Management Flashcards

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1
Q

What is the WACC formula?

A

cost of equity * weight + after tax cost of dept * weight

Cost of RE * common weight + cost of preferred * weight + post tax cost of debt * weight

Need market value of capital to determine weight (common, preferred, bonds)

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2
Q

Dividends are or are not subject to the tax shield?

A

Are not.

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3
Q

The CAPM model/Cost of Retained Earnings =

A

= risk free rate + (Beta* (market return-risk free rate))

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4
Q

Financial leverage increases when

A

the debt-to-equity ratio increases

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5
Q

How do you calculate the dividend payout of a preferred stock?

A

Par value * the dividend rate

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6
Q

When a company does not have any debt how can you calculate the WACC?

A

WACC can be calculated using the CAPM formula

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7
Q

Cost of retained earnings using discounted cash flow (DCF) method =

A

Dividend next period/stock price + expected growth rate

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8
Q

What is the calculation for the annualized impact of offering a sales discount?

A

=[360/how many days you gained] * [discount %/100%-discount %]

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9
Q

What are the 3 primary motives for holding cash?

A
  • Transaction demand
  • precautionary demand
  • speculative demand
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10
Q

The optimal amount of inventory is affected by:

A

the time required to receive inventory, cost per unit/carrying cost, cost of placing an order/order size

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11
Q

What is the largest source of short-term credit for small firms?

A

Trade credit

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12
Q

The constant growth dividend model assumes what about dividend and stock price growth

A

They will both grow at the same rate

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13
Q

How to calculate the price paid for a stock using the constant growth dividend discount model formula (Gordon Growth Model)?

A

Price (at the period of purchase) = Dividend (at the period of purchase)/(Required rate of return - dividend growth rate)

Dividend (at period of purchase) = Dividend today *(1+growth rate)^ #periods+1

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14
Q

What does a high P/E ratio indicate?

A

Generally would indicate that investors are anticipating more growth and are bidding up the price in advance of performance.

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15
Q

What is the calculation for free cash flow?

A

The amount of cash the biz generates after taking into account reinvestments in non-current assets.

Net Income (or net profit after taxes) + non cash expenses - increase in working capital - capital expenditures

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16
Q

What is the zero growth model formula to calculate stock price?

A

Stock Price = Dividend/discount rate

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17
Q

How to calculate the P/E ratio?

A

Current Market Price/ANNUAL EPS

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18
Q

What is the PEG ratio?

A

P/E ratio to the anticipated growth rate

PEG = (P/E)/(G*100)

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19
Q

What are the underlying assumptions of black-scholes?

A

-Markets are efficient, and there are no opportunities for risk-free arbitrage.

-Frictionless Markets: No transaction costs, taxes, or restrictions on short selling.

-Lognormal Distribution: The price of the underlying asset follows a lognormal distribution because asset prices cannot be negative.

-Continuous Trading, Investors can buy or sell any fraction of an asset, Short Selling Allowed

-The model is designed for European options, which can only be exercised at expiration.

-The underlying asset pays no dividends during the option’s life.

-Perfect Hedging: Investors can construct a perfectly risk-free hedged portfolio by continuously rebalancing the positions in the option and the underlying asset.

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20
Q

What are the 3 methods for valuing a company’s intangible assets?

A

Grab the MIC:

Market data

Income

Cost

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21
Q

If a company is using the market(median) approach to value its intangible how does it calculate the amount?

A

It would take the middle value of similar transactions or if an even number of transactions it would take the 2 middle transactions and divide them by 2.

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22
Q

How do you calculate Payback Period

A

Initial cost/annual net cash inflows

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23
Q

What method should you use to evaluate projects when there is limited capital (capital rationing)?

A

NPV

24
Q

How do you calculate the Profitability Index (Excess Present Value Index) and what is a positive index number?

A

PI = present value of cashflows/cost of initial investment, you want a number greater than 1, the greater the better

25
Q

What are the main differences between Operating and Finance Leases?

A

Finance leases has at least one of the OWNES criteria, end up with depreciation and interest. Operating leases have rent expense.

26
Q

What is the difference between annuity due vs. annuity?

A

The payment on the annuity due is done at the beginning of the period vs. the end of the period for the annuity.

27
Q

What is the discounted payback method, also known as?

A

Breakeven Time Method

28
Q

How do you calculate a present value factor?

A

PVF = 1/(1+required rate of return)^n

n= the number of periods

29
Q

What is the formula for NOPAT (net operating proft after taxes)?

A

NOPAT = EBIT*(1-tax rate)

30
Q

How to calculate EVA (economic value added)?

A

EVA = NOPAT - (investment * WACC)

investment*WACC is also called hurdle

31
Q

How do you calculate invested capital?

A

interest bearing debt + preferred equity + common equity OR
total assets - operating liabilities (non interest bearing liabilities)

32
Q

What is the formula for working capital?

A

Current assets - current liabilities

33
Q

How do you calculate NPV?

A

add up the present value of all cash flows. The cash flows for future years would be brought to the present value by dividing by the present value factor for each year.

34
Q

What is the residual income of investment formula?

A

RI = NOI − (required rate of return)

35
Q

What is the key to determining a “Sell or Process Further” decision?

A

incremental revenue vs. incremental cost

36
Q

When making the determination to take a special order which factors should be taken into account: Opportunity cost, variable cost, fixed cost

A

If you are at capacity, opportunity cost and variable cost. If you are under capacity, variable cost only.

37
Q

Opportunity cost is equal to

A

the value of the next best use.

38
Q

What are opportunity costs?

A

Costs that would have been saved or the profit that would have been earned if another decision alternative had been selected.

39
Q

What are explicit costs?

A

Documented out of pocket expenses.

40
Q

What are implicit costs?

A

Implicit costs are opportunity costs and should be ignored for financial accounting.

41
Q

How do you calculate the tax shield of an expense on your income statement?

A

The tax shield (most likely depreciation) is equal to the expense times the tax rate.

42
Q

What should be one of the company’s objectives in relation to WACC?

A

The optimal capital structure is the mix of financing instruments that produces the lowest WACC.

43
Q

What does the beta coefficient represent in the CAPM model?

A

Measure of a particular stock’s percentage change compared to the percentage change in the market over the same period. (% change in stock price/% change in market price)

44
Q

What is the R squared (coefficient of determination) in a multiple regression equation?

A

The proportion of the total variation in the dependent variable (y) explained by the independent variable (x).

45
Q

What is the formula to calculate total costs

A

Total Costs = Fixed Costs + Variable Costs per unit*# of units

46
Q

How do you calculate Variable Costs Per Unit in a high/low scenario?

A

Difference in $ for high and low/difference in units for the high and low

47
Q

What is the total contribution margin under variable costing calculation?

A

Sales - variable costs
Variable costs can be: direct materials, direct labor, variable mf OH, variable sg&a

48
Q

What is the difference in variable and absorption costing?

A

For variable costing, only variable costs are included in inventory. Fixed costs are expenses under variable costing.

49
Q

How would you calculate the D1 of a dividend at time 0?

A

D1 = D0 * (1+ growth rate)

50
Q

Calculation for cost of preferred stock

A

Preferred dividends/net proceeds of preferred (market value)

51
Q

How do you calculate after-tax cost of debt?

A

pre-tax cost of bonds * (1-tax rate)

52
Q

How to calculate equity use Sector P/E

A

NIxPE multiple

53
Q

DDM (div disc model)=

A

Current Dividends * (1+growth rate) / Cost of Equity - growth rate)

Cost of equity can be found using CAPM

54
Q

What is the formula for the operating cycle and how is it different from the CCC?

A

Days sales in AR + Days in inventory = OC

OC - Days of Payables outstanding

55
Q
A

BAR (5 decks)

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