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31 Cards in this Set
- Front
- Back
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Define Sunk Costs
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Sunk costs are those that have already been incurred, are unavoidable in the future, and will not vary with the course of action taken
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What is the general definition of opportunity cost?
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Opportunity cost is the potential benefit lost by selecting a particular course of action.
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Define opportunity costs evaluated in considering an opportunity when the firm is operating at capacity.
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Opportunity cost at full capacity is defined as the net benefit given up from the best alternative use of the capacity.
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What is the formula for after-tax cost?
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(1.00-tax rate)*tax deductible cash expense = after tax cost aka net cash outflow.
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What is the formula for after-tax benefit?
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(1.00-tax rate)*tax cash receipt = after tax benefit aka net cash inflow.
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The formula for computing a depreciation tax shield is:
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Tax rate * depreciation deduction = tax savings form the depreciated tax shield.
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What is the formula for the contribution approach?
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Revenue
Less: Variable Cost CONTRIBUTION MARGIN Less: Fixed Costs NET INCOME |
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Contribution margin ratio formula:
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Contribution margin / revenue
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What is the absorption formula?
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Revenue
Less: COGS GROSS MARGIN Less: Oper. Exp. NET INCOME |
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Formula for breakeven point in units:
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Total fixed costs / CM per Unit = Breakeven point in units
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Formula for breakeven point in dollars:
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Total Fixed Costs / CM Ratio = Breakeven point in dollars
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What is the margin of safety formula?
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Total Sales - Breakeven Sales = Margin of safety
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Define the steps and formula for economic value added.
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Step 1: Calc the required amt of return and income after taxes
Investment * Cost of Capital = Required Return Step 2: Compare to the required return Income after taxes - required return = economic value added |
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What is the payback method formula?
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Net initial investment /
Inc. in annual net after tax cash flow = payback period |
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What is risk averse behavior?
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Risk averse behavior exists when the certainty equivalent < expected value.
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What is risk seeking behavior?
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Risk seeking behavior exists when the certainty equivalent > expected value.
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What is risk indifferent behavior?
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Risk seeking behavior exists when the certainty equivalent = expected value.
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Distinguish between diversifiable and non-diversifiable risk.
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D Diversifiable Risk
U Unsystematic Risk (Non-Market / Firm Specific) N Nondiversifiable Risk S Systematic Risk (Mkt) |
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What is the degree of operating leverage formula?
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DOL = % Chg in EBIT / % Chg in Sales
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What is the degree of financial leverage formula?
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DFL = % Chg in EPS / % Chg in EBIT
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What is the degree of combined leverage formula?
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DCL = % Chg in EPS / % Chg in Sales
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Define Weighted Average Cost of Capital
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The Weighted Average Cost of Capital (WACC) is the average cost of debt & equity associated with the firm's existing assets and operations.
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What is the pre-tax cost of debt formula(kdt)?
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kdt = (I+(PV-Nd)/N) / ((Nd+PV)/2)
PV = Par value of the bonds I = Annual Int pymts in $ Nd = Net proceeds from the sale of bonds n = # of yrs to the bond's maturity |
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What is the cost of preferred stock formula (kps)?
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kps = Dps / Nps
Dps = Preferred stock cash dividends Nps = Net proceeds of preferred stock |
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What is the cost of retained earnings (Kre), using the CAPM formula?
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kre=krf+[bi*(km-kf)]
krf= risk free rate bi = beta coefficient of the stock PMR = Mkt risk premium km = Mkt rate |
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Define the Weighted Average Cost of Capital (retained earnings) by formula
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Below is terminology used in the cost of capital and are part of the WACC formula:
wdx=(weight for) longterm debt wps=(weight for) preferred stock wcs=(weight for) common stock equity kwc=weighted average cost of capital "k" stands for the specific COST of each type of capital; "w" stands for the WEIGHT of each. So, WACC would be... kwc=(kdx*wdx)+(kps*wps)+(kcs*wcs) |
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What is the formula for working capital?
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CA-CL=WC
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What are the three (3) motivations for holding cash?
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1. TRANSACTION MOTIVE
A transaction motive for holding cash is concerned with having enough cash to meet payments arising from the ordinary course of business. 2. SPECULATIVE MOTIVE A speculative motive for holding cash is concerned with having enough cash to take advantage of temporary opportunities. 3. PRECAUTIONARY MOTIVE A precautionary motive for holding cash is concerned with having enough cash to maintain a safety cushion so that unexpected needs may be met. |
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What is the formula for computing the annual percentage rate of quick payment discounts?
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(360/(pay period - discount period)) * (Discount % /(100% - Discount%))
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What is the cash conversion cycle formula?
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= inventory conversion period + receivables collection period - payables deferral period
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What is the equation for economic order quantity?
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Mnemonic: e = (2soc)
or e = sq root of (2so/c) |
