B2 - Financial Management Flashcards
(103 cards)
1
Q
cWhat is the CAPM formula?
A
Cost of RE = Risk-free rate + Risk Premium
Cost of RE = Risk-free rate + (Beta * Mkt Risk Premium)
Cost of RE = Risk-free rate + [Beta * (Market Return - Risk-free rate)
2
Q
What is Beta?
A
Beta represents volatility of stock relative to the market.
Beta = 1; stock is as volatile as the market.
Beta = >1; stock is more or less volatile as the market.
3
Q
How do you calculate Beta?
A
% Change in Stock Price / % Change in Market Price
4
Q
What is WACC?
A
Weighted Average Cost of Capital.
Serves to max sh equity.
It is used to compare ROR and determine weather to make an investment.
5
Q
How is the optimal capitalization of an organization determined?
A
By the lowest WACC.
6
Q
What is the biggest advantage of having debt?
A
It is the cheapest!
7
Q
What to remember about bonds?
A
Coupon Rate > Market rate = Bonds sell @ Premium
Coupon Rate < Market rate = Bonds sell @ Discount
8
Q
What is overall cost of capital?
A
ROR required to cover resources employed.
9
Q
When do managers meet the responsibility of increase shareholder value?
A
When the return on the cap investments > ROR associated to beta.
10
Q
What are the benefits of debt financing vs equity financing?
A
High tax rates and few noninterest benefits.
11
Q
What are the 3 elements to estimate cost of equity?
A
- Current dividends per share.
- Expected growth rate in dividends.
- Current market price per share of common stock.
12
Q
What is the type of bond that maintains a constant market value.
A
Floating rate bond.
13
Q
How do you calculate After-tax cost of debt?
A
After-tax cost of debt = Pretax cost of debt * (1 - Tax Rate).
14
Q
What is the interest on a one year US T-Bill?
A
Risk free rate + Inflation rate
15
Q
What is the cost of equity?
A
Dividend payout / Stock Issue Price
16
Q
What is the cost of debt?
A
Interest Exp / Total Debt * (1 - Tax Rate)
17
Q
What is the dividend growth model?
A
(Dividend * Constant Growth % / FMV of CS) + Constant Growth%
18
Q
What is cost of preferred stock?
A
Dividend Paid / Net Proceeds
19
Q
What is WACC for equity?
A
Cost of Equity * % Equity
20
Q
What is WACC for debt?
A
Post Tax Debt WACC = Pretax WACC * (1 - Tax Rate)
Pretax WACC = Cost of Debt * % Debt
21
Q
What is the Discounted Cash Flow Model?
A
Dividend / Price + Growth Rate
22
Q
What is the Bond Yield Risk Premium Model?
A
Pre-tax Cost of Debt + Risk Premium
23
Q
What is cost of preferred stock?
A
Preferred stock dividend / Net proceeds from issuance
24
Q
What is Financial Leverage?
A
The degree to which a company uses debt rather than equity to finance the company.
25
What is Operating Leverage?
The degree to which a company uses fixed costs rather than variable costs.
26
What is Times-Interest-Earned ratio?
EBIT / Int Exp
27
What are the core activities pertaining to the SCOR model?
1. Plan = Properly balance/plan demand and supply.
2. Source = Procure resources to meet demand and supply.
3. Make = Production; turning RM into FG.
4. Deliver = Getting goods to customers/consumers.
28
What are carrying costs?
The cost of carrying inventory.
29
What are ordering costs?
The cost of ordering additional inventory.
30
What is the Economic Order Quantity model?
A model that wants to minimize the total ordering and carrying costs. It assumes periodic demand is known.
31
How are safety stock levels affected?
1. Uncertain sales forecast.
2. Dissatisfaction of customers.
3. Uncertain lead times.
32
What is MRP?
Material Requirements Planning = Focus is RM and WIP. It makes sure we have enough RM and WIP to produce.
33
How is the optimal level of inventory affected?
1. Time required to receive inventory.
2. Cost per unit.
3. Cost of placing orders.
34
What are ordering costs for manufacturers?
Production set-up costs.
35
What is the annual cost of a quick payment discount?
APR = 360 / (Pay Period - Discount Period) * Discount % / (100% - Discount %)
36
How is reorder point calculated?
Reorder Point = Safety Stock + (Lead Time * Sales During Lead Time)
37
How can you calculate how much are you willing to invest on a cash delaying system?
Excess Funds * Earning Rate
Excess Funds = Avg daily cash outflows * days delayed
38
How do you calculate Annual Cost of Safety Stock?
Stockout Cost * Carrying Cost
Stockout Cost = Stockout Units * Stockout Costs per Units * Probability @ stock level * Orders per year
Carrying cost = Inventory Investment per Unit * Carrying Cost % * Safety Stock Units
39
What is NRV?
The price that you can resell your inventory less selling costs.
40
How is Average Inventory calculated?
(Reorder quantity / 2) + Safety Stock
41
What is Working Capital?
Current Assets - Current Liabilities
42
What would the quick ratio tell you?
High quick ratio = I have more $$$
Low quick ratio = I have less $$$
43
When is working capital policy considered conservative?
When Assets are funded by LT financing.
44
What does Bad Debt Expense have to do with Working Capital?
Bad Debt Exp
Allowance for Doubtful Accts
1. Allowance reduces AR.
2. Less AR, less Current Assets
3. Less Current Assets, less Working Cap.
45
What is the working capital policy that produces the highest risk?
Financing permanent assets with ST debt.
46
How do you calculate average collection period in days?
Discount period * % customers paying during discount period + Pay period * % customers paying during pay period
47
What is the cash conversion cycle?
Days in inventory + Days in AR - Days in AP
48
How do you calculate the expected cost savings when inventory turnover is increased?
49
What are the 3 primary motives to hold cash?
1. Transactions Demand.
2. Precautionary Demand.
3. Speculative Demand.
50
What is concentration banking?
The method by which a single bank is designated as a central bank as a means of controlling receipts.
51
What is the primary reason for you to agree to a debt covenant limiting the percentage of its LT debt?
To reduce the coupon rate of the bonds being sold.
52
What is minimized collection float?
Expedition of cash inflows.
53
What are the methods to convert AR into cash?
1. Collection Agencies.
2. Factoring AR.
3. Cash Discounts.
4. Electronic Fund Transfers.
54
What happens when sales increase, AR decreases, and the decrease it’s not due to bad debt write off?
Average collection period has decreased.
55
What is the potential investment income used to compare to the cost of lockbox?
(Reduced collection days/360) * sales * loan interest rate
56
How do you calculate the cost of factoring?
Factoring Cost = AR submitted + AR subj to interest - expense saved
Net Cost / Avg amt subj to interest = APR
AR Submitted = AR * Fee * 360/collection days
AR Subject to Interest = (AR - Amt WH or not advanced) * annual rate/12 * 360/collection days
57
What is the cost of carrying additional investments on receivables?
Sales * VC * ROR * (collection period / 360)
Then, compare the two
58
How do you calculate average gross receivable balance?
Average daily sales * average collection period
59
What is the benefit on planned change in credit terms?
Sales - VC - Opp Cost
60
What does the P/E ratio tell you?
That earnings have growth potential.
61
What is the price sales ratio?
The price sales ratio uses sales per share as a basis for valuation and can be used in start-up situations or when earnings data is not meaningful.
62
What is the formula of the zero growth model?
Stock value = Dividend Amt / Required Return.
63
What is the formula for the P/E ratio?
P/E Ratio = FMV Stock / EPS Expected in 1 yr
64
What is the formula for the PEG ratio?
PEG = P/E Ratio / Expected Growth Rate
65
What is the formula for Free Cash Flow?
Net Income
(+) Noncash Exp
(-) Increase in Working Cap
(-) Cap Expenditures
= FCF
66
What is the Gordon Growth Model?
Stock Price = (Dividend w/ Growth Rate) / (Required Return - Growth Rate)
67
What is the DCF Method?
Intrinsic Value = Valuation Based on DCF / Shares Outstanding
68
What is the Price-to-Sales Ratio?
P/S Ratio = FMV / Expected Sales
69
What is the Price-to-Cash-Flow ratio?
P/CF Ratio = FMV / Cash Flows
70
What is the Price-to-Book?
P/B Ratio = FMV / Book Value
71
What is the Black-Scholes model?
FREEE!
A pricing model that determines FMV of securities by considering valuation inputs such as:
1. FMV Stock Price
2. Risk-Free Interest Rate (Constant).
3. Expected Term of Options.
4. Expected Volatilty of Stock Price.
5. Expected Dividend Yield.
72
What is an European-style option?
Means that stock options are exercisable only at maturity.
73
What are the Black-Scholes model features?
1. Stock options are European-style.
2. There are no transactions costs for Call and Put options.
3. Assumes stock pays no dividend, but model can be modified to dividend-paying stock.
74
What is an American-style option?
Means that stock options are exercisable anytime.
75
What is the Binomial model?
A varation of Black Scholes. It considers the security over a period of time, as compared to the value at one point in time. It is used for American-style options.
76
What are the advantages of the Binomial model?
1. It is used for American-style options.
2. Can be used for stocks that pay dividends wo modifying the model.
77
When are bonds sold at a discount/premium?
Discount = Coupon < Market
Premium = Coupon > Market
78
How do you calculate the median value?
It's the average of all numbers, but take the smallest one and the biggest one away.
79
How do you interpret the NPV method?
Positive NPV = Make investment. Disc Rate < IRR
Negative NPV = Don’t make investment. Disc Rate > IRR
Zero NPV = Whatever!
80
What is the formula for Profitability Index?
Profitability Index = PV of Future Cash Inflow / Cost of Initial Investment
81
What are After-Tax Cash Flows?
Cash inflows * (1 - Tax Rate) + (Depr * Tax Rate)
82
What happens when the individual components of a project's cash flow are different?
You can discount each CF using a discount rate that reflects its risk.
83
What is capital budgeting based on?
Predicitons of certain future.
84
What are the assumptions of the NPV model?
1. CFs are reinvested at the discount rate used in the analysis.
85
When is the profitability index used?
For capital rationing.
86
What is the formula for Depreciation Tax Shield?
Depreciation Tax Shield = Depr Exp * Tax Rate
The greater the depr exp, the greater the depr tax shield.
87
How do you calculate NPV?
NPV = CFs * PV Factor (annuity or not) - Today's pmt.
88
How do you calculate the expected price of stock?
Expected Price of Stock = P/CF Ratio * Future CF
P/CF Ratio = FMV / Cash Flows
89
How do you calculate the growth rate?
Growth Rate = Future Cash Flow / Current Cash Flow
90
What is the payback method?
The payback method determines how many years I am getting my money back at for my investment.
91
What are some particularities about the payback method?
1. It does not consider the time value of money.
2. It focuses on liquidity.
3. Profitability is ignored.
4. Ignores CF after investments is recovered.
92
What is the payback method formula?
Payback Period = Net initial investment / Avg incremental CF
93
What is the Internal Rate of Return (IRR)?
Determines the PV that results into a Zero NPV.
94
What is the IRR formula?
IRR = Net incremental investment / Net Annual CF
95
What is the formula for the Discounted Payback Method?
Sum of [CF * Discount Factor]
96
How do you calculate the impact in AR when the credit policy changes?
Sales Projections * Credit/Sales Ratio * Collection Days Ratio
97
What is another way to calculate the growth rate?
Required return - P/E Ratio
98
What is another way to calculate net cash flows?
1. Get cash inflow.
2. Calculate tax effected depreciation expense.
3. Cash Inflow - Tax Effected Depr Expense
99
What is Total WACC?
Total WACC = Equity WACC + Debt WACC
100
When does a project have positive NPV?
IRR > RRR
101
When is the profitability index >1?
When NPV is positive.
102
What is the Key for NVP & Profitability Index
1. Both are calculated with PV of Cash Inflows and Initial invesment.
2. NPV is PV - Initial Investment.
3. Profitability Index is PV / Initial Investment.
103
