Deck 8 Flashcards Preview

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Flashcards in Deck 8 Deck (20):
1

After-tax cost of debt

Interest rate x (1 - tax rate)

2

Cost of preferred stock =

Preferred stock dividends / (Selling price - flotation costs)

3

Three methods to compute cost of common equity

1. CAPM; 2. Discounted cash flow; and Bond yield plus risk premium

4

CAPM (cost of equity)=

Risk free rate + Beta (Market rate - risk free rate)

5

Cost of equity using discounted cash flows method =

(Future Dividend / current market price) + growth rate

6

Cost of equity (Bond yield plus risk premium) =

Pretax cost of long-term debt + market risk premium

7

Definition of Residual Income

Income in excess of a minimum amount

8

How does the addition of assets at year end affect ROI and residual income?

Decreases both

9

Limitation of ROI

It has a short term focus

10

Return on Investment (ROI) =

Net income / Investment

11

Residual Income (RI) =

Net income - (Investment x hurdle rate)

12

Investment turnover =

Sales / average investment

13

Times interest earned =

Earnings before interest and taxes / interest expense

14

Economic Value Added (EVA) =

Net operating profit after taxes (NOPAT) - required return

15

Market rate of interest on a 1 year US treasury bill is

Risk free rate plus inflation premium

16

Cash Conversion Cycle =

Inventory conversion period + Receivables collection period - Payables deferral period

17

The higher the carrying costs of inventory, the lower the

Safety stock and Economic order quantity

18

Goal of working capital management is

Maximize shareholder wealth

19

How does aggressive working capital management affect current ratio and working capital?

WC and current ratio both decrease but risk increases

20

How does less working capital affect risk?

Increase in risk