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