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Flashcards in Capital Management Deck (46):
1

What is the degree to which a firm uses fixed operating costs, as opposed to variable operating costs?

Operating leverage

2

Formula for Degree of Operating Leverage

% change in EBIT / % change in Sales

3

What is the degree to which a firm's use of debt to finance the firm magnifies the effects of a given percentage change in EBIT?

Financial Leverage

4

Formula for Degree of Financial Leverage

% change in EPS / % change in EBIT

5

Formula for Combined Leverage

DOL x DFL; % change in EPS / % change in Sales

6

Compute Weighted-average interest rate

Effective annual interest payments / debt cash available

7

kdx=

Cost of long-term debt

8

kdt=

Pre-tax cost of debt

9

kps=

Cost of preferred stock

10

Nps=

Net proceeds of preferred stocks

11

Dps=

Preferred stock cash dividends

12

Formula for Cost of preferred stock

Preferred stock cash dividends / Net proceeds of preferred stocks

13

krf=

Risk-free rate

14

PMR=

Market risk premium

15

Compute risk premium

Beta coefficient(bi) x market risk premium(PMR)

16

Compute PMR

market rate - risk-free rate(krf)

17

Formula for Cost of retained earning(kre) CAPM method

krf + (bi x (km - krf))

18

Formula for cost of retained earning(Discounted cash flow)

(D1/P0) + g

19

D1=

Dividend per share

20

G=

Growth rate in dividends

21

P0=

Current market value or price

22

Compute Dividend per share

D0 + (1+g)

23

Compute cost of retained earnings(Bond yield plus risk premium)

kdt + PMR

24

Compute Return on Investment

Income / Investment capital; Profit margin x investment turnover

25

Compute Return on assets

Net income / average total assets

26

Compute residual income

Net income - required return

27

Compute required return

NBV x Hurdle rate

28

Compute economic value added

Investment x cost of capital = required return; Income after taxes - required return = economic value added

29

Compute working capital

Current assets - Current liabilities

30

Compute current ratio

Current assets / Current liabilities

31

Compute quick ratio

(Current assets - Inventory - Prepaids) / Current liabilities

32

Compute APR of quick payment discount

(Disc% x 365) / (100 - Disc%) x (Disc period - Pay period)

33

Formula for cash conversion cycle

Inventory conversion + Receivables collection - Payables deferral

34

What are the 3 components of the Economic Order Quantity?

Annual sales, Order cost, and carrying cost per unit

35

What type of leverage is the result of industry characteristics?

Operating leverage

36

What type of leverage deals with capital structure?

Financial leverage

37

Calculation for Weighted-Average Cost of Capital

(Cost of equity x %equity in capital structure) x ((after tax)cost of debt x %debt in capital structure)

38

Calculation for after-tax cost of long-term debt

Kdt x (1 - tax rate)

39

Aggressive working capital means to increase current liabilities or assets?

Current liabilities

40

Conservative Working Capital means to increase current liabilities or assets?

Current assets

41

Calculation for cost of factoring

Net cost / average amount invested

42

Calculation for cost savings

(Cost of sales / inventory turnover) x interest rate

43

Calculation for required costs to achieve target

Asset base x interest rate + income target - revenue forecast

44

Calculation for net cost of debt

Effective interest rate x (1-tax rate)

45

Calculation for economic value added

After tax income - required return

46

Calculation for times interest earned

EBIT / Total interest