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
