Flashcards in Corporate Finance I Deck (23):

1

## Payback period

### Length of time it takes for a projects cost to be paid back to the firm.

2

## Profitability Index

###
Present value of cash flows / initial cash outflow

> 1 = profitable project

3

## WACC

###
Use target capital structure

Wi * Cost + Wd * debt cost * (1-tax), etc

Based on average risk level, should be adjusted when used to discount risk project

4

## Marginal cost of capital

### Only projects that have a return > marginal cost of capital should be undertaken

5

## Cost of debt

### Calculated as the YTM of current debt (not coupon rate). Use after-tax value.

6

## Cost of equity

### Can estimate with (1) CAPM, (2) dividend discount model or (3) bond + risk premium

7

## Pure play method

### Using beta of a proxy company engaged in the same (pure) business to estimate CAPM return.

8

## Beta - formula to unlever

###
βunlevered = βlevered / [1+(1−t) * (D/E)]

9

## Beta - formula to lever

### βlevered = βunlevered * [1+(1−t) * (D/E)]

10

## Country risk premium (CRP)

### Sovereign yield spread * (annualized vol of equity in foreign country / annualized volatility of foreign govern bonds in USD)

11

## CAPM with CRP

### RFR + Beta * (E(rmkt) - RFR + CRP)

12

## Flotation costs

### Add to initial outflow for project - one time.

13

## Operating leverage

### Magnifies changes in sales on operating earnings

14

## Financial leverage

### Magnifies changes in operating earnings on net income

15

## Degree of operation leverage (DOL) simple

### DOL = (% change in EBIT / % change in sales)

16

## Degree of operating leverage (DOL) longer

### (sales - total variable costs) / (sales - total variable costs - fixed costs)

17

## Degree of financial leverage (DFL) simple

### % change in EPS / % change in EBIT

18

## Degree of financial leverage (DFL) longer

### EBIT / (EBIT - interest)

19

## Degree of total leverage (DTL) simple

### DTL = DOL & DFL

20

## Degree of total leverage (DTL) longer

### change in EPS / change in sales = (change in EBIT / change in sales) * (change in EPS / change in EBIT)

21

## Operating cycle

###
Days of inventory + days receivable

How long it takes to turn raw materials into cash

22

## Cash cycle

### Days receivable + days of inventory - average days payable

23