Becker - Chapter 3

Question 0

Capital Asset Pricing Model (CAPM)

Answer 0

Risk-free rate + (beta x risk prem)

Question 1

Economic value added formula

Answer 1

EVA is computed as after-tax income in excess of required return

Net Income - Required Return = EVA

Question 2

Inventory Turnover ratio formula

Answer 2

Activity

COGS/Avg. Inventory

In days: Inv. turnover / 365

Question 3

Accounts receivable ratio formula

Answer 3

Activity

Net Credit Sales / Avg. AR

In days: AR turnover / 365

Question 4

Accounts Payables ratio formula

Answer 4

Operating cycle

Purchases / Avg. AP

In days: AP turnover / 365

Question 5

Operating cycle calculation

Answer 5

of days of inv. + # of days of rec.

Net Oper. Cycle: Above - # of days of purchases

Question 6

Current ratio formula

Answer 6

Liquidity

Current Assets / Current Liabilities

Question 7

Quick (Acid test) ratio formula

Answer 7

Liquidity

Current Assets - Inv. / Current Liab.

Question 8

Net working capital to sales ratio formula

Answer 8

Liquidity

Current Assets - Current Liab. / Sales

Question 9

Gross Profit margin ratio formula

Answer 9

Profitability

Gross income / Sales

Question 10

Net income margin ratio formula

Answer 10

Profitability

Net Income / Sales

Question 11

Inventory Turnover ratio formula

Answer 11

Activity

COGS / Avg. Inv.

In days: Inv. turnover / 365

Question 12

Formula to calculate Purchases

Answer 12

COGS + End. Inv. + Beg. inv.

Open to update

Question 13

Total debt to asset ratio formula

Answer 13

Financial

Total debt / Total assets

Question 14

Total debt to equity ratio formula

Answer 14

Financial

Total debt / Total shareholders’ equity

Question 15

Earnings per share ratio formula

Answer 15

Net Income / Avg. O/S common shares

Question 16

Dividends per share ratio formula

Answer 16

Dividends paid to shareholders / number of shares O/S

Question 17

Dividend payout ratio formula

Answer 17

Dividends / Earnings

Question 18

Price-earnings ratio formula

Answer 18

Market price per share / Earnings per share

Question 19

Return on Assets ratio formula

Answer 19

Net Income / Total Assets

Question 20

Return on Equity ratio formula

Answer 20

Net Income / Shareholders’ equity

Question 21

Asset Turnover ratio formula

Answer 21

Sales / Total Assets

Question 22

Calculating the cost of lost discounts

Answer 22

Annual days / discount period x discount% / 100% - discount%

Question 23

Economic value-added breakdown

Answer 23

EVA is a residual income technique used for capital budgeting and performance evaluation. It represents the residual (excess) income of project earnings in excess of the cost of capital (includ. cost of equity) associated with invested capital.

Question 24

Operating Leverage breakdown

Answer 24

OL is defined as the degree to which a firm uses fixed operating costs, as opposed to variable operating costs. A firm that has high OL has high fixed operating costs (salaries) and relatively low variable operating costs (commission) and uses this cost structure to magnify the financial results of each additional dollar in sales.

Question 25

Financial leverage breakdown

Answer 25

FL is defined as the degree to which a firm uses debt to finance the firm, not purely operating fixed costs. When making financing decisions, a firm can choose to issue debt or equity. When debt is issued, the firm generally must pay fixed interest costs.

Question 26

Cost of equity formula

Answer 26

Expected dividend / current share price + growth rate

Question 27

A graph that plots beta would show the relationship between ...

Answer 27

Asset return and benchmark return. Beta shows the relationship between the return of an individual asset and the return of an entire class of that asset, as reflected in a benchmark return for that class.

Question 28

Cash conversion cycle

Answer 28

The cash conversion cycle is equal to the inventory conversion period plus the receivables collection period less the payables deferral period. Think of it as how long it takes for a company to buy inventory on credit from a vendor, sell that inventory on credit, collect cash for the sale, and use the proceeds to pay the vendor for the purchase.

Question 29

Payment discount calculation | APR of quick payment discount

Answer 29

Number of days in a year/pay period - discount period x discount %/100 - discount %

Question 30

Relevant costs

Answer 30

- Incremental costs - Opportunity costs - Controllable costs - Marginal costs (variable costs and avoidable fixed costs)

Question 31

Country risk includes

Answer 31

- political risk - economic risk - transfer risk - sovereign risk - exchange rate risk