Financial Management & Capital Budgeting Flashcards
How to use current ratio and cal?
Current ratio
Current Asset / Current Liability
Ex - 2,500,000 / 1,000,000 = 2.50
Formula for Working Capital?
Current Asset - Current Liability
What’s the formula for Quick ratio? Acid test ratio
Cash + AR + Marketable securities
Current Liabilties
Ex 5,000 + 10,000
15,000 + 5,000
= 15,000
20,000
= 0.75
How to calc working capital?
Current Asset - Current liability
Cash 15% + A/R 10% + Inventory 20% - 30% A/P
=
How to calc Cash Conversion cycle? What is the formula?
CCC Formula
ICP + RCP - PDP
ICP 60 + RCP 15 - PDP 30 = 75
Inventory conversion period (ICP)
Account receivable collection period (RCP)
Accounts payable deferred period (PDP)
How to calc the Receivable turnover ratio?
Step 1 - Calc the AVG AR, which we need to know the Begin AR and Ending AR
Begin AR - 14,600
Ending AR - 12,900 = 27,500
Divide by 2 = 13,750 AVG AR
Step 2 - Calc the A/R Turnover
So first need to know the sales from the problem and use the AVG AR from Step 1
Sales is 103,200 / 13,750 = 7.5
Receivable turnover ratio
How to calc inventory turnover ratio?
COG
Begin Inventory + Ending Inventory / 2
What are the inventory management technique?
Just In Time (JIT) ensuring inventory levels are low as possible rather than having excessive
Economic order quantity (EOQ) formula to determine optimal number of inventory units to order at one time so the cost of restocking and carrying storage would be minimized
Material requirements planning (MRP) set procedures that uses finished goods demand forecasts to manage raw materials needs
If you want to select a supplier before implementing a Just In Time purchasing system a company must take extreme care and why would that be?
Since JUST want to have inventory in a min level they like to receive their inventory whenever it’s needed
For re-order of inventory what calc is used?
lead time and usage per day (avg daily demand)
How to calc the inventory turnover ratio? When the COGS is not given in the problem
step 1 is to calc the COGS, in the problem we are given the sales which is 80,000 x 1.25 since the sale increase by 25% the current year. Step 2 we calc the Current COGS which we use the 100,000 for the current sales and we multiply that by 55% 55,000. Next we use the 15,000 which is the begin inventory and ending 25,000 = 40,000 total then we divide it by 2 which would equal 20,000. Finally, we use the COGS we got which was 55,000 and divide that by 20,000 the AVG invenotry which gives as the inventory turnover ratio of 2.75
Primary benefits of Just-in-time inventory sytems for raw materials?
Eliminates nonvalue-added operations
What was the company inventory turnover at the end of the current period?
Step 1 - First we need to cal the COGS, in this problem we are given the Current year and Prior year Annual Sales. The question is asking for Current period so that is 2,525,000 x 60% = 1,515,000 COGS
Step 2 - we need to calc AVG Inventory. So first we need to find or calc Begin and Ending. The “Prior year” would be begining inventory 2,125,000 x 15% begin finshed goods rate = 318,750. Next we need the ending inventory which we use the Current year 2,525,000 x 40% = 555,500. We add 318,750 + 555,500 = 874,250 / 2 = 437,125 AVG Inventory
Step 3 we need to divide the COGS 1,515,000 / AVG Inventory 437,125 = 3.47
How to calc the after tax cash flow for the project?
Step 1 we use the projected increased sales by 100,000
next we add 50,000 annually
subtract depreciation expense 30,000
Taxable income 120,000
Step 2 we use the marginal tax rate of 40%
120,000 x 40% = 48,000
subtract taxable income less income taxes = 72,000
Step 3 we add the depreciation expense back and we get the after tax cash flow of 102,000
What is the Projected index? What is it used for & limits?
It’s a capital budgeting tool used to evaluate and prioritize investments projects. Limits are that it forecast of the future information, which may not reflect what really actually happen
What is IRR and how does management use it?
IRR is the discount rate where the net present value is zero. Rate that make cash inflow and outflow breakeven
IRR is used in capital budgeting to make sure allocate limited resources and most profitable and investments
Notes to remember is also the decison making models
What is the formula for profitability index? What is used for?
Formula
Present value of future cash flows / Initial investment
It’s a capital budgeting tool used to evaluate and prioritize investments projects. Limits are that it forecast of the future information, which may not reflect what really actually happen
How to calc the initial investment?
This is basically the payback period formula however, we need to use the information given to calc the initial investment
Here is the payback period formula
Initial investment/ annual net cash inflows
Step 1 we are use the generate revenues 100,000
-Next we will use the operating expenses 25,000
-Subtract Depreciation expense 10,000
Which given us 15,000
Net annual cash inflows 85,000 x payback period rate 6.5 = 544,000 Initial investment
When to use the PV of an ordinary annuity?
when the machine is generating cashflow for multiple years
How to calc Accounting rate of return?
ARR = AVG Annual profit
AVG Investment
Ex - since the equipment has a useful life of 10 years we need to calc
Step 1 calc the depreciation expense and that will use to to cut down the AVG annual profits
100,000 purchase price of equipment / 10 years = 10,000 depreciation expense
Next, we use the 20,000 per year - 10,000 = 10,000
Step 2 - since we got the depreciation expense figured and the the actual AVG annual profit now we can use the 10,000 / AVG Investment which is 10%
Calc the Net Present Value of project and determine whether to accept or decline it?
PV Cash Flow 25,000 x PV 3.170 = 79,250
Outflows (80,000)
NPV = 79,250 - 80,000 = (750)
Calc company Weighted average cost of capital?
Debt 4.8% x .44 = 2.1 %
Equity 20% x .56 = 11.2%
WACC 13.3%
10/ 8+10 = 56% = .56
8% X 1(1-40%) = .44
measurement model used for measuring risj free rate, stock beta coefficient, rate of return on the market portforlio?
Capital asset pricing model is used CAPM to determine the rate of return required for a stock to compensate for market risk
How to cal the effective cost of loan?
total funds borrowed 200,000
total interest paid 200,000 x 12% = 24,000
Net funds available = 160,000
Cost of the loan = total interest paid / net funds available
Cost of the loan = 24,000 / 160,000
Cost of the loan = 15%
main reason why a firm would strive to reduce the number of days sales outstanding is to increase?
cash
characteristics would favor debt fianancing verus equity financing?
high tax rate
ratio that would measure the companies profitability?
gross margin ratio
return on asset
How to calc the weighted avg after tax cost of capital?
Bonds 40% x 7% = 2.8%
Since bonds are tax detectible we can 10% (1-30%) = 0.07%
Common stock 50% x 10% = 5.0%
Preferred Stock 10% x 20%. = 2.0%
WACC
2.8% + 5.0% + 2.0% = 9.8%
Calc, the companies cost of capital?
Cost of debt (8%*40%) = 0.0032
Cost of equity (10%*60%) = 0.0060
0.0032 + 0.0060 = 9.2%
How to calc return on equity?
Return on equity (ROE) =
Net Income / AVG Shareholders equity
Step 1 calc Net Income
Sales x profit margin
Sales 2,000,000 x 11% = 220,000
Total debt and equity
Total asset = 2,500,000
Step 2 Calc the Shareholders equity
Percentage of equity = 100% - debt %
100% - 0.40 = 60%
SE = 2,500,000 X 60% 1,500,000
ROE = NI / SE = 220,000 / 1,500,000 14.7%
How to calc the residual income?
you need operating income of 200,000 - interest charged 50,000 = 150,000 residual income
What is the cost of debt most frequently measured?
actual interest rate minus tax savings
Calc the profit margin on sales?
Net Income
Net Sales
Net Income 0.10
Net Sales 4
A firm generally choose to finance temporary assets with short term debt?
matching the maturities of assets and liabilities reduces risk
