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Flashcards in B3: Financial Management Deck (30):
1

The discount rate is determine in advance for which of the following capital budgeting techniques?

Net present value

The discount or hurdle rate is determined in advance for computations of net present value. Project cash flows are discounted based upon a predetermined rate and compared to the investment in the project to arrive at a positive or negative net present value. Advance determination of management's required return is integral to the development and evaluation of net present value.

2

In equipment-replacement decisions, which one of the following does not affect the decision-making process?

Original fair market value of the old equipment

The original FMV of the old equipment is a sunk cost that does not affect equipment-replacement decisions.

3

Which of the following is an advantage of NPV modeling?

It accounts for compounding of returns

The NPV method assumes that positive cash flows are reinvested at the hurdle rate thereby considering compounding.

4

For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before adjusting for $5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for 2 years is $1.74. What is the lease's after-tax present value using a 10% discount factor?

PV of cash inflows: $7,500 x 1.74 = $13,050
PV of cash outflows: ($7,500 - $5,000) x 40% x 1.74 =
$2,500 x 40% x 1.74 = - 1,740

$13,050 - 1,740 = $11,310 After-tax PV

5

A project's net present value, ignoring income tax considerations, is normally affected by the:

Proceeds from the sale of the asset to be replaced

6

Para Co. is reviewing the following data relating to an energy saving investment proposal:

Cost: $50,000
Residual value at the end of 5 years: $10,000
PV of annuity of 1 at 12% for 5 years: 3.60
PV of 1 due in 5 years at 12%: 0.57

What would be the annual savings needed to make the investment realize a 12% yield?

PV cash savings/inflows = PV net cash outflows

Annual savings x 3.60 = $50,000 - (10,000 x 0.57)

Annual savings x 3.60 = $50,000 - 5,700

Annual savings x 3.60 = $44,300

Annual savings = $44,300 / 3.60

Annual savings = $12,306

7

PV of $1

PV = FV / (1+r)^n

Example: 2 years, rate of 6%

PV = 1 / (1 + .06)^2

PV = 0.890

8

PV of Annuity

Step 1: Calculate PV factor for $1
PV = FV / (1 + r)^n

Step 2:
(1 - PV of $1) / r

Example: 2 years, rate of 6%

Step 1:
PV = 1 / (1.06)^2
PV = 0.890

Step 2:
PV of annuity = (1 - 0.890) / .06
.16 / .06 = 2.673

9

A company recently issued 9% preferred stock. The preferred stock sold for $40 a share with a par of $20. The cost of issuing the stock was $5 a share. What is the company's cost of preferred stock?

Dividend paid ($20 par x 9%) = $1.80
Net proceeds ($40 SP - $5 flotation) = $35

$1.80 / 35 = 5.1%

10

Cost of Retained Earnings (CAPM)

Risk-free rate + [Beta x (Market return - Risk-free rate)]

11

Discounted Cash Flows (DCF)

Future Dividend (D1) / Current Market Price (P0) + growth rate (g)

12

"Pretax" Bond Yield Plus Risk Premium (BYRP)

Pretax cost of long-term debt (YTM or coupon) + Market risk premium

13

Return on Equity (ROE)

NI / E

14

Return on Investment (ROI)

Income / Investment Capital (D + E)

~OR~

Profit Margin x Investment turnover

15

Profit Margin

NI / Sales

16

Investment turnover

Sales / Invested Capital (D + E)

17

Return on Assets (ROA)

NI / Avg. total Assets

~OR~

NI / Avg. PP&E + Avg. WC

~OR~

Profit Margin x Asset Turnover

18

Asset Turnover

Sales / Avg. total Assets

19

Financial Leverage

Avg. total assets / Equity

20

DuPont Analysis (3 stage)

Net profit margin (NI / Sales)
x
Asset turnover (Sales / Avg. Assets)
x
Financial leverage (Avg. Assets / Equity)

21

Extended DuPont Model (5 stage)

Tax burden (NI / Pretax Income)
x
Interest burden (Pretax Income / EBIT)
x
Operating Income Margin (EBIT / Sales)
x
Asset TO (Sales / Avg. total assets)
x
Financial Leverage (Avg. total assets / Equity)

22

Residual Income

Net Income(I/S) - Required return (NBV Equity x Hurdle)

23

Economic Value Added

Step 1: Required return in dollars
Investment (D + E) x cost of capital (WACC)

Step 2:
Net operating profit after taxes (NOPAT) - Required return in dollars

24

Net operating profit after taxes (NOPAT)

EBIT x (1 - t)

25

Current Ratio

Current Assets (CA) / Current Liabilities (CL)

26

Quick Ratio

Cash + Marketable Securities (MS) + Receivables / Current Liabilities (CL)

27

Payment Discounts

360 / (Pay period - Discount period) x Discount / (100 - Discount %)

28

Cash conversion cycle

Inventory conversion period (365 / inventory turnover)
+
Receivables collection period (365 / A/R turnover)
-
Payables deferral period (365 / A/P turnover)

29

Economic Order Quantity (EOQ)

SQRT ( 2 x Annual Sales x Order costs / Carrying cost per unit)

30

The following information regarding inventory policy was assembled by the JRJ Corporation. The company uses a 50-week year in all calculations.

Sales 10,000 units per year
Order quantity 2,000
Safety stock 1,300
Lead-time 4 weeks

What is the reorder point?

10,000 units per year / 50 weeks = 200 units per week

4 weeks x 200 units per week = 800 sold during lead-time

1,300 safety stock + 800 units during lead-time = 2,100 units required for reorder point