Corporate Finance Flashcards Preview

CFA Level I (Joeker) > Corporate Finance > Flashcards

Flashcards in Corporate Finance Deck (24):
1

WACC

wd[kdbt(1-t)] + wpskps + wcekce

or

wdkd+ wpskps + wcekce

= weight * after tax cost of debt

+ weight * cost of preferred stock

weight * cost of common equity

2

After Tax Cost of Debt

kd

kdbt(1 - t)

Market interest rate (YTM) at which firms can issue new debt (kd) net of the tax savings.

3

Cost of Preferred Stock

kps

D

———

P

4

Cost of Common Equity

kce

CAPM Model

ß[E(rmkt) - rrf] + rrf

5

Cost of Common Equity

kce

Dividend Discount Model

kce = (D1 / P) + g

or

P = D1 / (kce - g)

6

Cost of Common Equity

kce

Bond-Yield-Plus-Risk-Premium Approach

kdbt + Risk Premium

or

[kd/(1 - t)] + Risk Premium

Before tax cost of debt plus risk premium of equity over debt.

7

Growth Rate

g

RR * ROE

8

Dividend Payout Rate

Dp

1 - RR

9

Retention Rate

RR

1 - Dp

10

Profitability Index

PI

NPV / CF0 + 1

11

Break Point for

Marginal Cost of Capital

MCC

Dollar Amount

————————

Weight

12

Bank Discount Yield

BDY

[(F - P) / F] * (360/n)

13

Cost of Trade Credit

(Payables with discounts)

(1 + %Disc/(1 - %Disc)(365/n) - 1

The cost of not paying based on discount terms

eg:2/10 net 40

A image thumb
14

Operating Cycle

DOP + DOH

15

Operating Break-Even Point

Fixed Costs

———————————

Contribution Margin

16

Optimal Capital Budget

The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.

MCC = IOS

The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)

17

Cash Flow Forecasting Techniques

Short Term

  • Simple Projections

Medium Term

  • Project Models & Averages

Long Term

  • Statistical Models

18

Business Risk

Sales Risk + Operating Risk

19

Equity Beta

ßEquity

ßAsset[1 + (1 - t)(D/E Ratio)]

20

Degree of Financial Leverage

DFL

Operating Income

——————————

EBT

21

Degree of Total Leverage

DTL

(Revenue - Variable Costs)

——————————————

Net Income

22

Degree of Operating Leverage

DOL

Q * Contribution

—————————————

Q * Contribution - Fixed

23

Book Value

Owners Equity

———————————

Shares Outstanding

24

The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.

MCC = IOS

The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)

Optimal Capital Budget