Financial Mgmt. & Capital Budgeting Flashcards by Joe Nash

Formula: Working Capital

Current Assets - Current Liabilities

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Formula: Current Ratio

CA / CL

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Formula: Quick / Acid Test Ratio

(Cash + marketable securities + Net A/R) / Current Liabilities

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What is the Cash Conversion Cycle?

What is the Formula?

time from when a company pays for Materials and Labor to the time they receive their Cash from Sales

CCC = ICP + RCP - PDP

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Formula: Inventory Conversion Period (ICP)

Avg. Inventory / COGS per day

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Formula: Receivables Collection Period (RCP)

Avg. Rec / Credit Sales Per Day

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Formula: Accts. Payable Deferral Period (PDP)

Avg. Payables / Purchases per day

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Formula: A/R Turnover Ratio

Net Credit Sales / Avg. A/R

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Formula: # of Days of Sales in Avg. Receivables

360 / AR Turnover

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What is Materials Requirement Planning

MRP - computer system that uses forecasts to manage finished goods and raw material inventory

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Formula: Economic Order Qty.

What does the EOQ tell you?

square root of : 2AP / S

A: annual usage of inventory
P: cost to place an order
S: cost to store individual Unit of inventory for one period

How much you should order or purchase

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Formula: Reorder Point

Avg. Daily Demand
x Avg. lead time
= REORDER POINT w/o safety stock

+ safety stock
= reorder point WITH safety stock

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Formula: Inventory Turnover Ratio

COGS / Avg. Inventory

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Formula: # of Days supply in Avg. Inventory

360 / Inventory Turnover

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What is the BACKFLUSH approach?

costs are not tracked in as much detail

- costs are charged directly to COGS since little or no inventory should exist

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What is JUST IN TIME inventory and when is it good to use it?

- order only when you need something
Use when:
1. Non-value storing costs are high
2. Lead times are Low
3. need for Safety stock is Low 
4. costs per purchase order are also low

What are the Four methods used for CAPITAL BUDGETING?

Payback Period
Internal Rate of Return
Accounting Rate of Return
Net Present Value

Formula: Payback Period ?

Investment / Annual Cash Flows

Payback Period: Advantages / Disadvantages

Advantages
- easy to calculate

Disadvantages

no present value
no profitability
Stops once # of years to payback is identified

Formula: Internal Rate of Return

use the # of years that come from payback calculation

- go to PV table and locate the % based off of # of years

Internal Rate of Return (Advantages/ Disadvantages)

Adv.

Cash Flows
uses Pres. Value

Disadvantages

Some patterns yield multiple IRR
Could yield “0”

Formula: Accounting Rate of Return

Acct. Income / Avg. Investment

Accounting Rate of Return (Advantages/ Disadvantages)

Adv.

easy to calculate
No Present Value

Disadvantages

results affected by depreciation
No Present Value
No adjustment to project risk

Formula: Net Present Value

PV of Inflows / PV of Outflows

Net Present Value (Advantages/ Disadvantages)

Adv - results in $ that is easily understood - Adjusts for the time value of money - Total profit of project Disadvantages - not simple - not consider mgmt. flexibility

Annual Financing Cost FORMULA: "Cost for NOT taking Discount'' Ex: 2/10 net 30

1. 2% / (100%-2%) X 2. 360 / (30-10) = 36%

Compensating Balance (cost of Financing) Define and Formula

- amount that bank makes you keep in the account while you are paying on the loan Interest Paid / Net Funds net funds = principle - compensating balance

Debt Financing (Pros/Cons)

``` Pros: Interest Tax Deductible Fixed Terms No loss of control Less costly than equity ``` Cons: Fixed payments whether company is performing good/bad Can't control change of Interest rates Debt covenants

Equity Financing (Pros/Cons)

Pros: Pay dividends or not More equity less risk to investors Cons: Cost of issuing stock higher than issuing debt current owner shares get diluted

Formula: Degree of Operating Leverage

% of change in EBIT / % Change in Sales Volume

Formula: Degree of Financial Leverage

% Change in EPS / % Change in EBIT How much does q business rely on DEBT FINANCING

Formula: Cost of Capital | 2 ways

(interest exp. - tax deduction for int.exp) / Carry Value of Debt yield to maturity X (1 - eff. tax rate)

Formula: Cost of New Common Stock

(Next expected div.) / (cur. Stock price - float costs) + Expected Earnings Growth

Formula: Cost of Existing Stock

Risk Free Rate CAPM = risk free rate + (expected mkt. rate - risk free rate)

Formula: Gordon Growth Model Div. Yield + Growth Rate

(Next expected div. / Curr. Stock Price) + Expected Growth in Earnings

WACC (remember)

• take out tax (1 - Tax Rate) when calculating the average for BONDs % of in relation to total debt × interest rate

Asset Valuation

1. Comparing actual to actual 2. comparing similar within the same market 3. Estimated future Cash Flows

Types of Mergers

Horizontal: merge w/ Competitor Vertical: acquire Supply Chain Conglomerate: business acquires another business that is in an UNRELATED Market

Bonds: how do you know when selling at a PREMIUM / DISCOUNT

Stated Rate > Market Rate = Premium Stated Rate < Market Rate = Discount