FINANCIAL MANAGEMENT Flashcards
3 generic strategies by Michael Porter?
cost leadership, differentiation, and focus
which framework is for gauging the attractiveness of the competitive environment of an industry?
five forces
what are the five forces?
1-threat of new competition entering the market2-threat of substitute goods or services3-bargaining power of buyers of the industry good or service4-bargaining power of suppliers of the inputs used in the industry5-intensity of rivalry
what does SWOT stand for?
strengths and weaknesses of the entity, and the opportunities and threats faced by the entity
how is weighted avg cost of capital calculated?
the required rate of return on each source of capital weighted by the proportion of total capital provided by each source and then those amounts are summed.debt:30%x(10% 1-30% tax rate)=2.1%CS: 60%x12%= 7.2%PS: 10%x10%= 1%WACC= 10.3%
what is a compensating balance and how is the effective interest rate calculated?
an amount the borrower has to maintain in an account with a lender.the effective int rate is the cost of borrowing divided by the funds available for use.If the interest each year is 40,000 and the only amount you can actually use is 400,000, then the effective rate is 10%.
how is the required rate of return calculated?
risk free rate + Beta(expected rate - risk free rate)
basic approach to capitalize earnings to determine value of business?
annual earnings / required rate of return.
what is a time series model?
models based on extrapolation of past data to predict a future value
delphi method?
form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast.
diff in quantitative & qualitative forecasting?
quantitative is objective and rely on math and calculations. qualitative are subjective and rely on judgement and opinion
what is the profitability index approach?
the relative economic ranking of projects by taking into account the cost & net present value of projects
average accounting rate of return?
avg annual after tax net income / avg cost of investment.the avg cost of investment is the beg book value + ending bv then divided by 2.
can board of directors change the articles of incorporation?
no, only stockholders can do that
the purchase and sale of commodities for current delivery is what:
the spot market. the futures market is for delivery in the future
what is a call option?
the right to purchase a security at a specified price for a defined period of time.
what is a put option?
it lets you sell a stock at a certain price for a period of time.
what is transfer pricing?
the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.
capital structure refers to:
all long-term debt and equity
the market price of a bond is the present value of the principal amount plus:
the present value of future interest payments at the market rate of interest
cost of capital for newly issued preferred stock?
net proceeds per share / annual costs40 sales price less 5 issuance costs = 35.if par value is 20, @9% int. payments are 1.80calculation is 1.8/35=5.1%
what is the CAPM formula?
Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market
between 2 investments with the same expected return, choose the one with:
lower projected standard deviation
between 2 investments with different expected returns and standard deviations, choose the one with:
lower coefficient of variation
What is NPV?
net present value is the present values of future cash flows less the cost of the investment. If the NPV is above zero then it’s a good investment.
How do you calculate NPV?
it’s the present value of future cash flows discounted to present value using the COST OF CAPITAL
what is the basic FV calculation?
FV= current amount x(1+i)^nor1,000 times(1+0.1)^5
what is the rule of 72?
a very close estimate for seeing how long it takes for an investment to double. You just divide 72 by the interest rate. If the interest rate is 8% you divide 72/8=9
what does the security market line(SML) graph?
the relationship between expected return and risk as measured by the beta coefficient
How to calculate the benefit cost (profitability) index?
present value of cash flows / net investment. an index greater than 1 means the project is acceptable
what does the equivalent annual annuity(EAA) technique evaluate?
projects that have different durations(lives)
times interest earned calculation?
Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period
cash conversion cycle?
period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory
what is underwriting?
investment bank buys an entire offering then tries to sell it to the public at a profit
least expensive long-term source of capital?
long term debt because interest is tax deductible and debt is repaid first so it has less risk
formula to determine the cost of common stock:
next period’s dividend / proceeds such as 2/50 which equals 4%. then you add this to the firms growth rate in dividends. If growth rate the cost of common stock would be 7+4 for 11%
what are the chronological events in the dividend payment process?
1-declaration date when board approves dividend2-ex dividend date is first date you buy stock without being entitled to the dividend3-date of record is date you must own shares by to receive dividend4-payment date is when checks are mailed
how is financial leverage calculated?
It is calculated by taking the percentage increase in earnings per share which is then divided by the percentage increase in earnings before interest and taxes. Here, earnings per share starts as $4.00 and increases by $2.00, a 50 percent increase. Earnings before interest and taxes starts as $300,000 and increases by $60,000, only a 20 percent increase. Therefore, the degree of financial leverage is 50 percent divided by 20 percent or 2.5.
what are the 4 reasons to hold cash?
transactions to meet day to day cash outflows, compensating balances required by banks, precautionary balances to meet unexpected events, and speculative balances to take advantage of opportunities
cash conversion cycle?
age of inventory + age of receivables - age of payables
4 parts of a company’s credit policy?
(1) Credit period–when the payment is due; (2) Credit standards–criteria as to which customers are granted credit; (3) Collection policy–enforcement of the collection process; and, (4) Discount–reductions offered to speed up payments.
Your supplier gives you credit terms of 2/10 net 30. This means that if you pay within 10 days you take a 2% discount. If not, the balance is due in full within 30 days. What is the annual percentage cost to you of not taking the discount and paying on the 30th day?
Your choice is to pay $.98 on the dollar on day 10 or $1 on day 30. The extra cost is .02/.98 or .0204081. You save 20 days (30-10) by paying later. To annualize the cost take 365 days and divide by the days saved. 365/20=18.25 and multiply this by the .0204081 percent cost: (.0204081) (18.25) = 37.24%
A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?
Economic Order Quantity points (EOQ) tells you how many engines to order at one time. It is determined by taking the square root of the following result: 2 times annual demand (1,600 units) times the cost of placing an order ($50) divided by the cost of carrying a unit for a year ($1). So, (2 x 1,600 x 50) or 160,000. That is then divided by $1 so that it stays 160,000. The square root of 160,000 is 400. That is the number of units that should always be ordered. Because 1,600 are needed, the orders of 400 are placed four times per year.
A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?
In the absence of a safety stock, reorder point is equal to daily usage times the time it takes for a supplier to deliver. Daily usage is 3,650/365 or 10 x 5 days to deliver (lead time) is equal to 50 engines as a reorder point.
average days sales in inventory?
360 / inventory turnoverinventory turnover= COGS/ Avg inventory
What does a TPS do?
it supports the day to day activities of a business such as purchasing goods, sales to customers, and payroll
ROI calculation?
net income / avg investment
alternate ROI calculation?
asset turnover x profit margin on sales
what is the dupont ROA?
(net income/net sales) x (net sales/avg total assets)
asset turnover?
sales / assets
which risk cant be mitigated through diversification of investments?
systematic risk because it deals with the macro environment
margin of safety?
difference between your actual or expected profitability and the break even point
economic value added?
net operating profit after taxes less cost of capital
when interest rates increase, bond prices:
decrease. and vice versa
Residual income formula?
Residual income = operating income - required rate of return (invested capital)
definition of net present value?
present value of cash inflows minus the net investment
definition of internal rate of return?
the specific discount rate that makes the present value of the inflows equal to the net investment and forces the NPV to be equal to zero
market value added?
market value of the firm minus the book value of the capital investment in the firm
economic value added?
net operating profit after taxes minus the firm’s cost of capital in dollar terms
ROA (return on assets):
net income divided by total assets
ROE(return on equity):
net income divided by total equity
ROIC (return on invested capital)
net income plus interest divided by average total invested capital. invested capital is just interest bearing debt plus owners equity
free cash flow?
net operating profit after taxes (NOPAT), add in depreciation expense, then subtract money set aside for capital expenditures and any need for increasing working capital
receivables turnover?
net credit sales / avg acc receivable
number of days sales in inventory?
COGS divided by 365. Then divide avg inventory by the first number.
financial planning process:
1) analyzing the investment and financing alternatives available to a firm, 2) forecasting the future consequences for each of the alternatives, 3) deciding which alternatives to undertake, 4) measuring subsequent performance against established goals. Measuring the subsequent performance is the final step in that process.
relevant range?
level of activity where fixed costs remain fixed
when doing weighted avg cost of capital calculations, what needs to have taxes removed?
the cost of capital for DEBT must be computed net of the tax benefit provided by the deductibility of the interest expense
how to find effective rate of interest on a compensating balance question?
cost of borrowing / funds available for useIf you have 500,000 at 8% interest that equals 40,000 in interest expense. but if you can only use 400,000, then the calculation is 40k/400k for an effective rate of 10%, not 8%
required rate of return for an investment:
riskfree rate + beta(expected rate - riskfree rate)
diff in financial structure and capital structure:
financial structure includes all items of liabilities and owners equity, and capital structure includes LONG-TERM liabilities and owners equity.
what time series model reduces random fluctuations in data?
exponential smoothing
what source of new capital usually has the lowest after tax costs?
bonds. less risk to investors so they’re cheaper than equity, and the interest payments are tax deductible
what is the bond contract call?
an indenture
what is the profitability index used for?
to rank potential investments by taking into account both the time value of money and the initial cost of the project
what is commercial paper?
short term, unsecured promissory notes
calculate profitability index of a project?
divide present value of annual after tax cash flows by the original cash invested in the project
what is residual income that remains after the cost of all capital, including equity capital, has been deducted?
economic value added. it measures economic profit, not accounting profit. NOPAT minus cost of capital
accounting rate of return?
dividing accrual based net income by the initial cost of the project
what is systematic risk?
market risk. large scale economic events that typically affect all companies
most likely strategy to reduce breakeven point?
decrease fixed costs and increase contribution margin
What method should be used when capital rationing need be considered in ranking capital project?
Profitability index ( also call cost/benefit ratio) method should be considered when capital rationing is consider in ranking capital project
Which capital budgeting technique for evaluating investment would be used to rank projects competing for limited capital investment funds?
Profitability index. It is designed to rank projects. It takes into account time value of money and the initial cost of the project.
