Capital Management

Question 1

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

Answer 1

Operating leverage

Question 2

Formula for Degree of Operating Leverage

Answer 2

% change in EBIT / % change in Sales

Question 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?

Answer 3

Financial Leverage

Question 4

Formula for Degree of Financial Leverage

Answer 4

% change in EPS / % change in EBIT

Question 5

Formula for Combined Leverage

Answer 5

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

Question 6

Compute Weighted-average interest rate

Answer 6

Effective annual interest payments / debt cash available

Question 7

kdx=

Answer 7

Cost of long-term debt

Question 8

kdt=

Answer 8

Pre-tax cost of debt

Question 9

kps=

Answer 9

Cost of preferred stock

Question 10

Nps=

Answer 10

Net proceeds of preferred stocks

Question 11

Dps=

Answer 11

Preferred stock cash dividends

Question 12

Formula for Cost of preferred stock

Answer 12

Preferred stock cash dividends / Net proceeds of preferred stocks

Question 13

krf=

Answer 13

Risk-free rate

Question 14

PMR=

Answer 14

Market risk premium

Question 15

Compute risk premium

Answer 15

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

Question 16

Compute PMR

Answer 16

market rate - risk-free rate(krf)

Question 17

Formula for Cost of retained earning(kre) CAPM method

Answer 17

krf + (bi x (km - krf))

Question 18

Formula for cost of retained earning(Discounted cash flow)

Answer 18

(D1/P0) + g

Question 19

D1=

Answer 19

Dividend per share

Question 20

G=

Answer 20

Growth rate in dividends

Question 21

P0=

Answer 21

Current market value or price

Question 22

Compute Dividend per share

Answer 22

D0 + (1+g)

Question 23

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

Answer 23

kdt + PMR

Question 24

Compute Return on Investment

Answer 24

Income / Investment capital; Profit margin x investment turnover

Question 25

Compute Return on assets

Answer 25

Net income / average total assets

Question 26

Compute residual income

Answer 26

Net income - required return

Question 27

Compute required return

Answer 27

NBV x Hurdle rate

Question 28

Compute economic value added

Answer 28

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

Question 29

Compute working capital

Answer 29

Current assets - Current liabilities

Question 30

Compute current ratio

Answer 30

Current assets / Current liabilities

Question 31

Compute quick ratio

Answer 31

(Current assets - Inventory - Prepaids) / Current liabilities

Question 32

Compute APR of quick payment discount

Answer 32

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

Question 33

Formula for cash conversion cycle

Answer 33

Inventory conversion + Receivables collection - Payables deferral

Question 34

What are the 3 components of the Economic Order Quantity?

Answer 34

Annual sales, Order cost, and carrying cost per unit

Question 35

What type of leverage is the result of industry characteristics?

Answer 35

Operating leverage

Question 36

What type of leverage deals with capital structure?

Answer 36

Financial leverage

Question 37

Calculation for Weighted-Average Cost of Capital

Answer 37

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

Question 38

Calculation for after-tax cost of long-term debt

Answer 38

Kdt x (1 - tax rate)

Question 39

Aggressive working capital means to increase current liabilities or assets?

Answer 39

Current liabilities

Question 40

Conservative Working Capital means to increase current liabilities or assets?

Answer 40

Current assets

Question 41

Calculation for cost of factoring

Answer 41

Net cost / average amount invested

Question 42

Calculation for cost savings

Answer 42

(Cost of sales / inventory turnover) x interest rate

Question 43

Calculation for required costs to achieve target

Answer 43

Asset base x interest rate + income target - revenue forecast

Question 44

Calculation for net cost of debt

Answer 44

Effective interest rate x (1-tax rate)

Question 45

Calculation for economic value added

Answer 45

After tax income - required return

Question 46

Calculation for times interest earned

Answer 46

EBIT / Total interest