Final Flashcards
(13 cards)
What does CAPM uniquely require?
The company’s beta
CAPM stands for Capital Asset Pricing Model.
What does CAPM estimate to determine the cost of common equity?
Expected market returns, the risk-free rate, and the stock’s beta
CAPM integrates these elements to assess investment risk and potential return.
What is company beta a measure of?
Systematic risk
Systematic risk refers to the inherent risk that affects the entire market.
What does the Gordon Growth Model focus on?
Estimating the cost of equity based on expected future dividends and their growth
This model is particularly useful for dividend-paying companies.
What two factors does the Gordon Growth Model use?
Dividend growth rate and current share prices
These factors help in calculating the expected return on equity.
How is projected accounts receivable calculated?
(Future price cost) x accounts receivable sales ratio
This formula helps estimate future cash inflows from sales made on credit.
How is the projected amount of cash calculated?
(Projected sales price for that year) x historical cash to sales ratio
This calculation estimates the expected cash flow based on sales projections.
What is the formula for sustainable growth rate?
ROE * (1 - Dividend payout ratio)
ROE stands for Return on Equity.
What does ROE stand for?
Return on Equity
ROE is calculated as net income divided by equity.
Fill in the blank: Sustainable growth rate is calculated as ROE * (1 - _______).
Dividend payout ratio
This ratio indicates the proportion of earnings paid out as dividends.
What does receivables turnover measure?
How effectively a company extends credit and collects debts
Receivables turnover is a financial ratio that indicates how many times a company collects its average accounts receivable during a specific period.
What is a key consideration when setting credit terms?
The impact on the firm’s cash cycle and cash needs
Credit terms can influence how quickly a company receives payment and thus affect its liquidity.
