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Flashcards in Chapter 2 Deck (58)
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1
Q

Weighted Average Cost of Capital

A
  • ***(Cost of equity /sum of total debt+equity x %equity capital) + (Weighted average cost of debt / sum of total debt + equity x (1- tax rate) x % debt in capital structure)
    • ** tax rate only applied to the cost of debt
2
Q

net cost of debt

A

basis points x 1/100 x risk free rate x income tax rate

3
Q

Cost of retained earnings

A

common stock selling price/earnings per share-amt underpriced-floatation costs

Or

**Cost of retained earnings = (Common stock dividends x (1 + growth rate) / market price) + growth rate

4
Q

expected rate of return

A

yearly dividend/ current market price

5
Q

Weighted Average Cost of Debt

A

*****. Weighted average interest rate = Effective annual interest payments / Debt outstanding

6
Q

After tax Cost of Debt

A

*****. Pretax cost of debt x (1 - Tax rate)

Pre tax cost of debt = interest expense/debt

7
Q

Cost of Preferred Stock

A

*****. Preferred stock dividends / Net proceeds of preferred stock

Preferred stock dividends. = par value x % stock issued

Net proceeds of preferred stock = net proceeds- net of floatation costs-stock underpricing

Net proceeds is the selling price
Floatation costs is the cost of issuing the stock
If dividend paid not given, then par value x % issued

8
Q

Expected rate or return on preferred stock

A

annual dividends/current market price

9
Q

Cost of funds from retained earnings

A

common stock dividend/current market price

10
Q

CAPM (cost of retained earnings)

A

risk free rate + [beta x (market return - risk free rate)]

11
Q

DCF (cost of retained earnings)

A

**D1/P0 + g **

G = net income/equity x (1-rate)

D1 = dividend per share expecting at the end of one year
P0 = current market value or price of the outstanding common stock
G = the constant rate of growth in dividends

To go from D0 to D1

* D0 x (1+g) ***

12
Q

Bond Yield Risk Premium

A

Pretax cost of long term debt + market risk premium

13
Q

Growth rate

A

= retention ratio x return on equity***

Retention ratio = 1 - dividend payout %

14
Q

ROI

A

Net income/invested capital

Invested capital = assets - operating liabilities

15
Q

ROA

A

Net Income/Assets

16
Q

ROE

A

Net income/Shareholder’s equity

Shareholder’s equity = Assets - liabilities

17
Q

Operating Leverage

A

* % chg EBIT/% chg sales*

% chg sales x DOL = % chg EBIT

Another op leverage formula
* FC/VC*

18
Q

Financial Leverage

A

***% chg EBT (EPS)/% chg EBIT **

%chg Earnings = % chg EBIT x DFL

Or
Total Assets/Equity

19
Q

debt to total capital

A

= total debt/total capital ***

Total capital = Debt + equity = total assets

Indicates long term paying ability. The lower the better

20
Q

Debt to Equity Ratio

A

***total Debt / total shareholder equity

If debt to equity ratio given, for example 1.75, then there is 1.75 of debt for every $1

Indicates the DOL used
The lower, the lower risk involved

21
Q

Times Interest Earned Ratio

A

** EBIT/ interest expense **

Measures the ability of a company to pay its interest charges

22
Q

Current Ratio

A

*Current assets/current liabilities

23
Q

Quick (Acid-Test) Ratio

A

**(cash+marketable securities+receivables)/current liabilities ***

24
Q

Cash Ratio

A

**(Cash+cash equivalents+marketable securities)/Current Liabilities

25
Q

Cash Conversion Cycle

A

***Inventory conversion period + Receivables collection period - Payables deferral period **

26
Q

Inventory Conversion Period

A

= 365 x avg inventory cogs

27
Q

AR turnover

A

credit sales/avg AR***

28
Q

Receivables collection period

A

Days sales outstanding = 365 x avg ar/credit sales

29
Q

Inv turnover savings

A

= (budgeted cost of sales/inventory turnover) - (budgeted sales/inventory turnover) =inventory increase or decrease * interest rate = cost savings

30
Q

AP turnover

A

COGS/Avg AP

31
Q

AP deferral period

A

365 x avg AP/cogs

32
Q

Working Capital Turnover

A

Sales / Avg Working capital

Working capital = current assets-current liabilities

33
Q

expected cost savings

A

budgeted sales /sales turnover - budgeted cost of sales/ sales turnover * rate

34
Q

Reorder point

A

Safety stock + (Lead time x Sales during lead time)***

To get lead time may have to divide widgets per year by the number of weeks in the year

35
Q

EOQ

A

sqrt (2x annual sales in units x cost per purchase order / annual carrying cost per unit **

36
Q

Apr of quick payment discount

A

= (360/pay period -discount period) x (Discount / 100-Discount %)

37
Q

AR turnover

A

the # of times per year a company is converting its receivables into cash

AR turnover = Credit sales / Avg AR

38
Q

Days Sales Outstanding

A

how many days on avg it takes a company to convert its credit sales into cash

***Days Sales Outstanding = (Avg AR/Credit Sales) x # of days in the period

OR 365/AR Turnover

39
Q

Cost of factoring

A

***AR submitted x fee x 360/30 = y

(AR submitted - Amount withheld) x annual rate= w

Y+w = z

Z-how much saved outsource = net cost

Net cost/(Ar submitted-amount not factored) = cost of financing(borrowing)

The cost of carrying an additional investment in AR
**amt of sales * variable rate% * ar% * 36/360=y

Amt of new sales * new variable rate * new Ar%* 36/360 = w

Y+w= z

40
Q

PV of annuity

A

c x 1-(1/(1+r)^t)/r **

C = amount of annuity 
R = rate of return
T = number of years
41
Q

Perpetuities

A

Per share valuation = P = D/R*

P = stock price
D = dividend
R = required return
42
Q

Gordon Growth DDM

A

***Economic return = (chg in price “growth” + dividend income)/beg price **

43
Q

Per share valuation with assumed growth

A

= Pt = D(t+1)/(R-G)**

Pt = Current price at period t
D(t+1) = Dividend one year after period t
R = Required return
G = (Sustainable) growth rate

TO determine D1 the numerator of formula becomes D0(1+G)

To determine R, use CAPM

**risk free rate + (beta (market rate - risk free rate) **

44
Q

Price Earnings ratio

A

**P/E ratio = P0/E1 ***

P0 = Stock price or value today
E1 =EPS expected in one year (next 4 quarters)

Earnings per share = net income/preferred dividends

E1 = earnings per share * growth rate

45
Q

Forward P/E

A

If P/E ratio is given, then (P0/E1) x E1 it determine the expected value

46
Q

Trailing P/E

A

P0/E0

47
Q

PEG Ratio

A

***PEG = (P0/E1)/G

48
Q

Valuing Equity with the PEG ratio

A

To determine the current price of stock

P0 = PEGxE1xG*

49
Q

Price to sales ratio

A

= P0/S1**
Valuing with equity with price to sales ratio
**
P0 = (P0/S1)
P/CF = P0/CF1

50
Q

Valuing Equity with the PCF Ratio

A

P0 = (P0/CF1)*

Cash flow = cash flow/shares

51
Q

Valuing Equity with the P/B Ratio

A

***P0 = (P0/B1)

Book value of common equity = assets-liabilities -preferred stock

Or

Book value of common equity = common stock + Additional paid in capital+ Retained earnings

Book value of common equity per share = book value of common equity / common shares outstanding

***Formula take the bond face value x annual interest rate to get annual interest payment, then annual interest payment / (1+market rate), for each year: ex: year 2 is Annual interest rate / (1+market rate)^2 and so. For the final year take (annual interest payment +bond face value)/(1+market rate)^final year, then add year 1, year 2, and year 3 together

52
Q

Payback period

A

Net initial investment/Annual net after-tax cash flow**

53
Q

PV of $1

A

The factor of the PV of $1 to be received two years in the future at an interest rate of 6%

PV = FV/(1+r)^n

= 1/1.06^2 =0.890

54
Q

PV of an Annuity

A

The factor of the PV of $1 to be received in each of the next three years at an interest rate of 6%

PV = 1x(1-(1/1.06)^3)/0.06 = 2.673 2.673

55
Q

EBIT Margin

A

EBIT / Sales

56
Q

Interest Burden.

A

EBT/EBIT

57
Q

Tax Burden

A

Net Income/EBT

58
Q

Asset turnover

A

Sales / Total assets