Financial Management & Capital Budgeting

Question 1

How to use current ratio and cal?

Answer 1

Current ratio

Current Asset / Current Liability

Ex - 2,500,000 / 1,000,000 = 2.50

Question 2

Formula for Working Capital?

Answer 2

Current Asset - Current Liability

Question 3

What’s the formula for Quick ratio? Acid test ratio

Answer 3

Cash + AR + Marketable securities
Current Liabilties

Ex 5,000 + 10,000
15,000 + 5,000

= 15,000
20,000

= 0.75

Question 4

How to calc working capital?

Answer 4

Current Asset - Current liability

Cash 15% + A/R 10% + Inventory 20% - 30% A/P

=

Question 5

How to calc Cash Conversion cycle? What is the formula?

Answer 5

CCC Formula

ICP + RCP - PDP

ICP 60 + RCP 15 - PDP 30 = 75

Inventory conversion period (ICP)

Account receivable collection period (RCP)

Accounts payable deferred period (PDP)

Question 6

How to calc the Receivable turnover ratio?

Answer 6

Step 1 - Calc the AVG AR, which we need to know the Begin AR and Ending AR

Begin AR - 14,600
Ending AR - 12,900 = 27,500
Divide by 2 = 13,750 AVG AR

Step 2 - Calc the A/R Turnover

So first need to know the sales from the problem and use the AVG AR from Step 1

Sales is 103,200 / 13,750 = 7.5
Receivable turnover ratio

Question 7

How to calc inventory turnover ratio?

Answer 7

COG
Begin Inventory + Ending Inventory / 2

Question 8

What are the inventory management technique?

Answer 8

Just In Time (JIT) ensuring inventory levels are low as possible rather than having excessive

Economic order quantity (EOQ) formula to determine optimal number of inventory units to order at one time so the cost of restocking and carrying storage would be minimized

Material requirements planning (MRP) set procedures that uses finished goods demand forecasts to manage raw materials needs

Question 9

If you want to select a supplier before implementing a Just In Time purchasing system a company must take extreme care and why would that be?

Answer 9

Since JUST want to have inventory in a min level they like to receive their inventory whenever it’s needed

Question 10

For re-order of inventory what calc is used?

Answer 10

lead time and usage per day (avg daily demand)

Question 11

How to calc the inventory turnover ratio? When the COGS is not given in the problem

Answer 11

step 1 is to calc the COGS, in the problem we are given the sales which is 80,000 x 1.25 since the sale increase by 25% the current year. Step 2 we calc the Current COGS which we use the 100,000 for the current sales and we multiply that by 55% 55,000. Next we use the 15,000 which is the begin inventory and ending 25,000 = 40,000 total then we divide it by 2 which would equal 20,000. Finally, we use the COGS we got which was 55,000 and divide that by 20,000 the AVG invenotry which gives as the inventory turnover ratio of 2.75

Question 12

Primary benefits of Just-in-time inventory sytems for raw materials?

Answer 12

Eliminates nonvalue-added operations

Question 12

What was the company inventory turnover at the end of the current period?

Answer 12

Step 1 - First we need to cal the COGS, in this problem we are given the Current year and Prior year Annual Sales. The question is asking for Current period so that is 2,525,000 x 60% = 1,515,000 COGS

Step 2 - we need to calc AVG Inventory. So first we need to find or calc Begin and Ending. The “Prior year” would be begining inventory 2,125,000 x 15% begin finshed goods rate = 318,750. Next we need the ending inventory which we use the Current year 2,525,000 x 40% = 555,500. We add 318,750 + 555,500 = 874,250 / 2 = 437,125 AVG Inventory

Step 3 we need to divide the COGS 1,515,000 / AVG Inventory 437,125 = 3.47

Question 13

How to calc the after tax cash flow for the project?

Answer 13

Step 1 we use the projected increased sales by 100,000

next we add 50,000 annually
subtract depreciation expense 30,000

Taxable income 120,000

Step 2 we use the marginal tax rate of 40%

120,000 x 40% = 48,000
subtract taxable income less income taxes = 72,000

Step 3 we add the depreciation expense back and we get the after tax cash flow of 102,000

Question 14

What is the Projected index? What is it used for & limits?

Answer 14

It’s a capital budgeting tool used to evaluate and prioritize investments projects. Limits are that it forecast of the future information, which may not reflect what really actually happen

Question 15

What is IRR and how does management use it?

Answer 15

IRR is the discount rate where the net present value is zero. Rate that make cash inflow and outflow breakeven

IRR is used in capital budgeting to make sure allocate limited resources and most profitable and investments

Notes to remember is also the decison making models

Question 16

What is the formula for profitability index? What is used for?

Answer 16

Formula

Present value of future cash flows / Initial investment

It’s a capital budgeting tool used to evaluate and prioritize investments projects. Limits are that it forecast of the future information, which may not reflect what really actually happen

Question 17

How to calc the initial investment?

Answer 17

This is basically the payback period formula however, we need to use the information given to calc the initial investment

Here is the payback period formula

Initial investment/ annual net cash inflows

Step 1 we are use the generate revenues 100,000

-Next we will use the operating expenses 25,000

-Subtract Depreciation expense 10,000

Which given us 15,000

Net annual cash inflows 85,000 x payback period rate 6.5 = 544,000 Initial investment

Question 18

When to use the PV of an ordinary annuity?

Answer 18

when the machine is generating cashflow for multiple years

Question 19

How to calc Accounting rate of return?

Answer 19

ARR = AVG Annual profit
AVG Investment

Ex - since the equipment has a useful life of 10 years we need to calc

Step 1 calc the depreciation expense and that will use to to cut down the AVG annual profits

100,000 purchase price of equipment / 10 years = 10,000 depreciation expense

Next, we use the 20,000 per year - 10,000 = 10,000

Step 2 - since we got the depreciation expense figured and the the actual AVG annual profit now we can use the 10,000 / AVG Investment which is 10%

Question 19

Calc the Net Present Value of project and determine whether to accept or decline it?

Answer 19

PV Cash Flow 25,000 x PV 3.170 = 79,250

Outflows (80,000)

NPV = 79,250 - 80,000 = (750)

Question 20

Calc company Weighted average cost of capital?

Answer 20

Debt 4.8% x .44 = 2.1 %

Equity 20% x .56 = 11.2%

WACC 13.3%

10/ 8+10 = 56% = .56
8% X 1(1-40%) = .44

Question 21

measurement model used for measuring risj free rate, stock beta coefficient, rate of return on the market portforlio?

Answer 21

Capital asset pricing model is used CAPM to determine the rate of return required for a stock to compensate for market risk

Question 22

How to cal the effective cost of loan?

Answer 22

total funds borrowed 200,000
total interest paid 200,000 x 12% = 24,000
Net funds available = 160,000

Cost of the loan = total interest paid / net funds available

Cost of the loan = 24,000 / 160,000

Cost of the loan = 15%

Question 23

main reason why a firm would strive to reduce the number of days sales outstanding is to increase?

Answer 23

cash

Question 24

characteristics would favor debt fianancing verus equity financing?

Answer 24

high tax rate

Question 25

ratio that would measure the companies profitability?

Answer 25

gross margin ratio
return on asset

Question 26

How to calc the weighted avg after tax cost of capital?

Answer 26

Bonds 40% x 7% = 2.8%

Since bonds are tax detectible we can 10% (1-30%) = 0.07%

Common stock 50% x 10% = 5.0%

Preferred Stock 10% x 20%. = 2.0%

WACC
2.8% + 5.0% + 2.0% = 9.8%

Question 27

Calc, the companies cost of capital?

Answer 27

Cost of debt (8%*40%) = 0.0032

Cost of equity (10%*60%) = 0.0060

0.0032 + 0.0060 = 9.2%

Question 28

How to calc return on equity?

Answer 28

Return on equity (ROE) =

Net Income / AVG Shareholders equity

Step 1 calc Net Income

Sales x profit margin

Sales 2,000,000 x 11% = 220,000

Total debt and equity
Total asset = 2,500,000

Step 2 Calc the Shareholders equity

Percentage of equity = 100% - debt %

100% - 0.40 = 60%

SE = 2,500,000 X 60% 1,500,000

ROE = NI / SE = 220,000 / 1,500,000 14.7%

Question 29

How to calc the residual income?

Answer 29

you need operating income of 200,000 - interest charged 50,000 = 150,000 residual income

Question 30

What is the cost of debt most frequently measured?

Answer 30

actual interest rate minus tax savings

Question 31

Calc the profit margin on sales?

Answer 31

Net Income
Net Sales

Net Income 0.10
Net Sales 4

Question 32

A firm generally choose to finance temporary assets with short term debt?

Answer 32

matching the maturities of assets and liabilities reduces risk