Flashcards in Nate BEC Deck (182)

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31

## what is a put option?

### it lets you sell a stock at a certain price for a period of time.

32

## what is transfer pricing?

### the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.

33

## capital structure refers to:

### all long-term debt and equity

34

## the market price of a bond is the present value of the principal amount plus:

### the present value of future interest payments at the market rate of interest

35

## cost of capital for newly issued preferred stock?

### net proceeds per share / annual costs40 sales price less 5 issuance costs = 35.if par value is 20, @9% int. payments are 1.80calculation is 1.8/35=5.1%

36

## what is the CAPM formula?

### Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market

37

## between 2 investments with the same expected return, choose the one with:

### lower projected standard deviation

38

## between 2 investments with different expected returns and standard deviations, choose the one with:

### lower coefficient of variation

39

## What is NPV?

### net present value is the present values of future cash flows less the cost of the investment. If the NPV is above zero then it's a good investment.

40

## How do you calculate NPV?

### it's the present value of future cash flows discounted to present value using the COST OF CAPITAL

41

## what is the basic FV calculation?

### FV= current amount x(1+i)^nor1,000 times(1+0.1)^5

42

## what is the rule of 72?

### a very close estimate for seeing how long it takes for an investment to double. You just divide 72 by the interest rate. If the interest rate is 8% you divide 72/8=9

43

## what does the security market line(SML) graph?

### the relationship between expected return and risk as measured by the beta coefficient

44

## How to calculate the benefit cost (profitability) index?

### present value of cash flows / net investment. an index greater than 1 means the project is acceptable

45

## what does the equivalent annual annuity(EAA) technique evaluate?

### projects that have different durations(lives)

46

## times interest earned calculation?

### Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period

47

## cash conversion cycle?

### period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory

48

## what is underwriting?

### investment bank buys an entire offering then tries to sell it to the public at a profit

49

## least expensive long-term source of capital?

### long term debt because interest is tax deductible and debt is repaid first so it has less risk

50

## formula to determine the cost of common stock:

### next period's dividend / proceeds such as 2/50 which equals 4%. then you add this to the firms growth rate in dividends. If growth rate the cost of common stock would be 7+4 for 11%

51

## what are the chronological events in the dividend payment process?

### 1-declaration date when board approves dividend2-ex dividend date is first date you buy stock without being entitled to the dividend3-date of record is date you must own shares by to receive dividend4-payment date is when checks are mailed

52

## how is financial leverage calculated?

### It is calculated by taking the percentage increase in earnings per share which is then divided by the percentage increase in earnings before interest and taxes. Here, earnings per share starts as $4.00 and increases by $2.00, a 50 percent increase. Earnings before interest and taxes starts as $300,000 and increases by $60,000, only a 20 percent increase. Therefore, the degree of financial leverage is 50 percent divided by 20 percent or 2.5.

53

## what are the 4 reasons to hold cash?

### transactions to meet day to day cash outflows, compensating balances required by banks, precautionary balances to meet unexpected events, and speculative balances to take advantage of opportunities

54

## cash conversion cycle?

### age of inventory + age of receivables - age of payables

55

## 4 parts of a company's credit policy?

### (1) Credit period--when the payment is due; (2) Credit standards--criteria as to which customers are granted credit; (3) Collection policy--enforcement of the collection process; and, (4) Discount--reductions offered to speed up payments.

56

## Your supplier gives you credit terms of 2/10 net 30. This means that if you pay within 10 days you take a 2% discount. If not, the balance is due in full within 30 days. What is the annual percentage cost to you of not taking the discount and paying on the 30th day?

### Your choice is to pay $.98 on the dollar on day 10 or $1 on day 30. The extra cost is .02/.98 or .0204081. You save 20 days (30-10) by paying later. To annualize the cost take 365 days and divide by the days saved. 365/20=18.25 and multiply this by the .0204081 percent cost: (.0204081) (18.25) = 37.24%

57

## A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?

### Economic Order Quantity points (EOQ) tells you how many engines to order at one time. It is determined by taking the square root of the following result: 2 times annual demand (1,600 units) times the cost of placing an order ($50) divided by the cost of carrying a unit for a year ($1). So, (2 x 1,600 x 50) or 160,000. That is then divided by $1 so that it stays 160,000. The square root of 160,000 is 400. That is the number of units that should always be ordered. Because 1,600 are needed, the orders of 400 are placed four times per year.

58

### In the absence of a safety stock, reorder point is equal to daily usage times the time it takes for a supplier to deliver. Daily usage is 3,650/365 or 10 x 5 days to deliver (lead time) is equal to 50 engines as a reorder point.

59

## average days sales in inventory?

### 360 / inventory turnoverinventory turnover= COGS/ Avg inventory

60