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