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CPA BEC > Chapter 5 - Financial Management & Capital Budgeting > Flashcards

Chapter 5 - Financial Management & Capital Budgeting Flashcards

1
Q

What is the formula for the cash conversion cycle? What is the the cash conversion cycle?

A

CCC = ICP + RCP - PDP

Cash conversion cycle = inventory conversion period + accounts receivable collection period - accounts payable deferral period

The cash conversion cycle measures the number of days from when a business pays for its inputs to when the business collects cash from the sale of finished goods.

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2
Q

What is the inventory conversion period? What is the formula for it?

A

Inventory conversion period is the average number of days required to convert inventory to sales

ICP = average inventory/COGs per day (or sometimes sales per day)

Average inventory = (Beg inventory + ending inventory)/2

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3
Q

What is the accounts receivable collection period? What is the formula for it?

A

The accounts receivable collection period is the average number od days required to collect accounts receivables

RCP = average accounts receivable/ average credit sales per day

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4
Q

What is the accounts payable deferral period? What is its formula?

A

Accounts payable deferral period is the average number of days between buying inventory and paying for it

PDP = average payables / purchases per day (or COGS/365)

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5
Q

How can you minimize the cash conversion cycle?

A
  1. Stretch out the accounts payable deferral period
  2. Shorten the receivable collection period
  3. Manufacture goods faster and shorten the inventory collection period
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6
Q

What is the formula for accounts receivable turnover?

A

Net credit sales / average accounts receivable

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7
Q

What is the equation for the number of days sales in average receivables?

A

365/ accounts receivables turnover

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8
Q

What is the equation to find the re-order point for inventory?

A
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9
Q

What is the equation for economic order quantity?

A
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10
Q

What is the equation for inventory turnover?

A

COGS / average inventory

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11
Q

What is the equation for number of days supply in average inventory?

A

365 / inventory turnover

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12
Q

What is the equation for payback period (# of years)?

A

Initial investment / After tax annual net cash inflows

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13
Q

What is internal rate of return? What is the equation for it?

A

The internal rate of return is the discount rate at which the net present value is zero. It is the rate where PV cash outflows is equal to PV cash inflows.

IRR = Investment / annual cash flows

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14
Q

What is the equation for the accounting rate of return?

A

ARR = accounting income / average (or initial) investnment

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15
Q

What is the calculation of NPV?

A

NPV = Present value of future cash flows - required investment

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16
Q

How are NPV and IRR related?

A
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17
Q

What is the equation for the depreciation tax shield?

A

Depreciation tax shield = tax rate x depreciation

18
Q

What is the equation for annual financing costs?

A

Annual financing costs = (discount % / (100% - discount %)) x (365 / (total pay period - discount period))

19
Q

What is the equation for the cost of a loan?

A

Cost of a loan = interest paid / (net funds available (principal - compensating balance))

20
Q

What is the capital asset pricing model (CAPM)? What is its equation?

A

Model that assumes the expected return of a stock depends on its volatility relative to the overall stock market (beta)

CAPM = (beta x excess of normal market return over risk free) + return on risk free

21
Q

What is the equation for degree of operating leverage?

What is DOL?

A

DOL = % change in EBIT (earnings before interest and taxes) / % in sales volume

DOL is how the size of a business’s fixed costs affects its performance when revenue change

22
Q

What is the equation for degree of financial leverage? What is the degree of financial leverage?

A

DFL = % change in earnings per share / % changes in EBIT (earnings before interest and taxes)

DFL is how much the business relies on debt financing.

23
Q

What is the equation for gross margin?

A

Gross margin = gross profit / net sales

24
Q

What is the equation for operating profit margin?

A

Operating profit margin = operating profit / net sales

25
Q

What is the equation for residual income?

A

Residual income = operating profit - interest on investment

Interest on investment = invested capital x required rate of return

26
Q

What is the equation for economic value added (EVA)?

A

EVA = Net operating profit after tax (NOPAT) - cost of financing

Cost of financing = (total assets - current liabilities) x Weighted average cost of capital (WACC)

27
Q

What is the equation for return on investment?

A

Net income / average assets or average invested capital

28
Q

What is the equation for Dupont return on investment (ROI)?

A

ROI = return on sales x asset turnover

Return on sales = net income/sales

Asset turnover = sales/total assets

29
Q

What is the equation for return on assets?

A

Net Income / average total assets

30
Q

What is the equation for return on equity?

A

Net income / average common SE

Common SE = SE - preferred stock liquidation value

31
Q

What is the equation for free cash flow?

A

Net operating profit after taxes (NOPAT) + depreciation + amortization - capital expenditures - net increase in working capital

32
Q

What is the equation for economic rate of return on common stock (total return)?

A

(Dividends + change in price) / beginning price

33
Q

What is the equation for receivable turnover?

A

Net credit sales / average accounts receivable

34
Q

What is the equation for inventory turnover?

A

Cost of goods sold / average inventory

35
Q

What is the equation for fixed asset turnover?

A

Sales / average net fixed assets

36
Q

What is the equation for debt to total assets?

A

Total liabilities / total assets

37
Q

What is the equation for debt to equity ratio?

A

Total debt / total equity

38
Q

What is the equation for the times interest earned ratio?

A

Earnings before interest and taxes (EBIT) / interest expense

39
Q

What is the equation for market capitalization?

A

Common stock price per share x common stock outstanding

40
Q

What is the equation for price earnings ratio?

A

Common stock price per share / earnings per share (EPS)

CPA BEC (3 decks)

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