Corporate Finance I Flashcards Preview

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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

Discount-basis yield

% discount * (360/days)