Corporate Issuers

Question 1

Formula for cash conversion cycle

Answer 1

DOH + DSO - DPO

Question 2

What is a drag on liquidity

Answer 2

Factors that reduce the amount of liquid assets over time. Slows down cash flow

Question 4

What is a pull on liquidity

Answer 4

Pull liquidity out of the system

Question 5

How to work out ROIC

Answer 5

Question 6

Disadvantages of ROIC

Answer 6

Not comparable as different accounting treatments
Backward looking

Question 7

What is MM proposition

Answer 7

Under certain assumptions the value of the firm is unaffected by its capital structure

Question 8

What is MM 2?

Answer 8

Cost of equity increases linearly as company increases its proportion of debt financing.

Therefore WACC is unchanged by changes in the proportion of debt financing in its capital structure

Question 10

What is static trade off theory

Answer 10

Seeks to balance the costs of financial distress with the tax skilled benefits from using debt

Question 11

What is the optimal capital structure

Answer 11

Where WACC is minimised. Amount of debt financing at which the increase in the value of the tax shield from additional borrowing is exceeded by the value reduction of higher expected costs of financial distress