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