Corporate Finance

Question 1

Accounts Receivable

Answer 1

Day sales outstanding * Sales/365

Question 1

Accounts Payable

Answer 1

Target payment terms * Purchases/365

Question 2

Additional funds needed

Answer 2

ADD DEFINITION/CALCULATION!

Question 2

Additional funds needed

Answer 2

Required increase in assets (A/S₀)*S_change

Less spontaneous change in liabilities (L/S₀)*S_change

Less increase in retained earnings (Net margin * S₁ * RetRatio)

____

(A/S₀)*S_change - (L/S₀)*S_change - (Net margin * S₁ * RetRatio)

Question 2

Arithmetic vs geometric mean

Answer 2

INSERT DEFINITION

Question 2

Effective cost of trade credit

Question 3

Asset turnover

Answer 3

ADD DEFINITION

Question 4

Asset β

Answer 4

β_a=β_e * (E/V)

E/V is market value capital structure. User surrogates to estimate unlevered β, calculate weighted averages of unlevered βs, re-lever at target’s market value capital structure

Question 5

Cash conversion cycle

Answer 5

Inventory conversion + AR conversion - AP conversion

Inventory/Sales per day + AR/Sales per day - AP/COGS per day

Question 5

CAPM

Answer 5

R = R_rf + β(R_m-R_rf)

• R_rf = risk free rate (long-term treasury bond*
• R_m = return on a broad market interest*

Question 5

Beta (β)

Answer 5

Measures the variability of a security’s return relative to a portfolio/the market.

β>1 indicates risk greater than the market

β

Question 5

Bond par value

Answer 5

contracted face value of a bond, amount to be repaid

Question 6

After tax cost of debt

Answer 6

K_d=(T-bond₃₀+debt spread)*(1-R_t)

Because interest payments on debt are always tax deductible, K_d is always considered after tax

Question 7

Cost of trade credit

Answer 7

Discount/(100-disc) * 365/(DSO-disc period)

Question 7

Day sales outstanding

Answer 7

(AR/Total credit sales) * Number of days

Question 7

Cost of equity

Answer 7

T-bond yield + β * Market Risk premium

Question 8

Discounted Cash Flows method (DCF)

Answer 8

1. Establish free cashflows
2. Estimate terminal value
3. Discount CF and terminal value by WACC to derive PV of operations
4. Add market value of non-operating assets
5. Reduce by market value of debt

Question 9

Effective annual rate

Answer 9

(1+i/m)^mn-1

Question 11

Equity mutiplier

Answer 11

ADD DEFINITION

Question 13

Free cash flows

Answer 13

Sales - operating expenses - taxes - investment in operations

NOPAT + depreciation - change in capital investments

Question 14

Future value (FV)

Answer 14

FV = PV*(1+i)ⁿ

Question 15

Internal rate of return (IRR)

Answer 15

Discount rate at which the investment’s NPV = 0

Question 17

Inventory

Answer 17

Sales/Target inventory turnover

Question 18

Inventory turnover

Answer 18

COGS/Final inventory

Question 19

Market risk premium/equity premium

Answer 19

Required return on the market minus the risk-free rate (spread)

Question 21

Net margin

Answer 21

ADD DEFINITION

Question 23

Net operating working capital

Answer 23

Operating current assets - operating current liabities Includes cash but excludes short-term notes payable

Question 25

Non-operating activities

Answer 25

Financing activities, non-operating investments (ie securities)

Question 27

NOPAT

Answer 27

EBIT \* (1-tax rate)

Question 29

Operating activities

Answer 29

Activities related to the firm's normal course of business operations; process of income generation and investments required to support it. Accounts: net income, depreciation, various asset and liability accounts but excluding cash, securities and third-party debt.

Question 30

Payback period

Answer 30

Period of time to recovery of investment. Does not take into account time value of money or value of cashflows after payback.

Question 31

Periodic rate

Answer 31

i/m i=interest rate m=# periods per year FV=PV\*(1+(i/m))^mn

Question 32

Present value (PV)

Answer 32

PV = FV\*(1/(1+i)ⁿ)

Question 33

Retention Ratio

Answer 33

ADD DEFINITION

Question 34

ROA

Answer 34

ADD DEFINITION

Question 35

ROE

Answer 35

ADD DEFINITION

Question 36

ROIC

Answer 36

NOPAT/Total operating capital

Question 37

Sustainable growth rate

Answer 37

Profit margin \* asset turnover \* equity multiplier \* retention ratio NI/sales \* sales/TA \* TA/Eq \* (NI-Div)/NI

Question 38

TIE

Answer 38

EBIT/Interest

Question 40

Total net operating capital

Answer 40

Net operating working capital (NOWC) + long-term operating assets (PPE)

Question 41

Unlevering Beta

Answer 41

Asset β = β \* (E₀/V₀) Relevered β = β_A / (E₁/V₁)

Question 42

Valuation ratios

Answer 42

P/E P/Sales P/Book P/EBITDA P/FCF

Question 43

Valuing stock: Zero growth model

Answer 43

P = Div/r ## Footnote *r = expected return on stock*

Question 44

Weighted average cost of capital (WACC)

Answer 44

WACC = w_dk_d(1-t) + w_pfk_pf + w_csk_cs k is new cost of debt d = debt pf = preferred stock cs = common stock ?????