Section 3: Financial Management & Capital Budgeting

Question 1

Working Capital

Answer 1

Current Assets - Current Liabilities

Question 2

Current Ratio

Answer 2

Current Assets / Current Liabilities

Question 3

Quick Ratio

Answer 3

Quick Assets (Cash+Marketable Securities+A/R) / Current Liabilities

Question 4

Net Operating Cycle

Answer 4

1. Receive Inputs from Suppliers
2. Pay Suppliers
3. Sell finished products on credit
4. Collect Receivables

Question 5

Cash Conversion Cycle (2-4)

Answer 5

CCC = ICP + RCP - PDP

Question 6

Inventory Conversion Period (1-3)

Answer 6

ICP = Avg. Inventory / COGS per day

Question 7

Accounts Receivable Collection Period (3-4)

Answer 7

RCP = Avg. A/R / Avg. credit sales per day

Question 8

Accounts Payable Deferral Period (1-2)

Answer 8

PDP = Avg. Payable / Purchases per day(Or COGS/365)

Question 9

Accounts Receivable Turnover

Answer 9

Net Credit Sales / Avg. A/R

Question 10

Number of Days of Sales in A/R

Answer 10

360 / A/R Turnover

Question 11

Reorder Point

Answer 11

Avg. Daily Demand * Avg. Lead Time = Reorder Point w/o Safety Stock
+ Safety Stock
= Reorder Point w/ Safety Stock

Question 12

Economic Order Quantity

Answer 12

Sq. Root of [2 * A(Annual Usage of Inventory) * P(Cost of Placing Order)] / S(Cost of Storing)

Question 13

Inventory Turnover Ratio

Answer 13

COGS / Avg. Inventory

Question 14

Number of Days of Supply in Avg. Inventory

Answer 14

360 / Inventory Turnover

Question 15

4 Capital Budget Techniques

Answer 15

1. Payback Period
2. Internal Rate of Return (IRR)
3. Accounting Rate of Return
4. Net Present Value (NPV)

Question 16

Payback Period

Answer 16

Initial Investment / After tax Annual Net Cash Inflows = # of Years

Question 17

Internal Rate of Return (IRR)

Answer 17

Investment / Annual Cash Flows = PV Factor

Question 18

Accounting Rate of Return

Answer 18

Accounting Income / Avg. Investment = ROI

Question 19

Net Present Value (NPV)

Answer 19

PV Cash Inflows - PV Cash Outflows = Net PV (+=good, -=bad)

Question 20

Annual Financing Costs (AFC)

Answer 20

Costs of NOT taking a discount

Discount % / (100% - Discount %)) * (365 / (Total Pay Period - Discount Period)

Question 21

Costs of the Loan

Answer 21

Interest Paid / Net Funds Available (Principal - Compensating Balances)

Question 22

Effective Annual Interest Rate (EAR)

Answer 22

(1+r/m)^m -1
r = Stated interest rate
m = compounding frequency

Question 23

Degree of Operating Leverage (DOL)

Answer 23

% Change in EBIT / % Change in Sales Volume

Question 24

Degree of Financial Leverage (DFL)

Answer 24

% Change in Earnings per Share / % Change in EBIT

Question 25

Cost of Debt

Answer 25

1. YTM * (1 - effective tax rate | 2. (Interest Exp. - Tax Deduct for Interest) / CV of Debt

Question 26

Cost of Preferred Stock

Answer 26

Dividend / Net Issue Price

Question 27

Cost of Existing Common Stock

Answer 27

1. CAPM = Risk Free Rate + [(Expected Market Rate - Risk Free Rate) * Beta] 2. Dividend Yield Plus Growth = (Next Expected Dividend / Current Stock Price) + Expected Growth in Earnings

Question 28

Cost of New Common Stock

Answer 28

[Next Expected Dividend / (Current Stock Price - Flotation Costs)] + Expected Growth in Earnings