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Flashcards in Capital Management Deck (46)
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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