Bec #3 Business Environment & Concept

Front 1

The use of SL vs MACRS depreciation would result in?

Back 1

- a slightly lower net cash flow
- lower NPV
- less desirable investment

Front 2

A favorable debt-to-equity ratio means -?

Back 2

- a higher bond rating. -> means lower interest rates for bonds being sold,which lowers the cost of capital for future bond issuanses.

- need to lower % of long-term debt.

Front 3

The marketability of investment-?

Back 3

the ability to sell a security for its face market value quickly

Front 4

What are general charactiristics of debt and equity financing?
Flexibility
Tax deductibility
EPS Dilution
Increased Risk
Cost (high or low?)
Return (fixed or variable?)

Back 4

Debt Equity
Flexibility no yes
Tax deductibility yes no
EPS Dilution no yes
Increased Risk yes no
Cost low high
Return fixed variable

Front 5

Aggressive WC management
more risk

Back 5

↑CL ratio to non-current liabilities
low current ratio
Focus on high profiatbililty potential, despite the cost of high risk and low liquidity

Front 6

Conservative WC Management
less risk

Back 6

↑CA ratio to non-current assets
high current ratio, long operating cycle

Front 7

Net working capital

Back 7

(Current assets) - (Current liabilities)

Liquidity

Front 8

The avg. inv. level when the EOQ model and Safety Stock is used = ?

Back 8

1/2 of the EOQ + SS

Front 9

Absorption costing assigns the fixed costs as

Back 9

a product costs.

Front 10

Variable costing considers the fixed costs as

Back 10

expense in the period incurred

Front 11

A/R are @ the optimal level when

Back 11

Carrying costs = Opportunity costs

Front 12

Annual carrying cost for inventory =

Back 12

AVG inventory x Carrying cost per unit

Front 13

Bond/ stock order in case of default (5 items)

Back 13

1Corporate bonds
2 Convertible bonds
3 Preferred stock
4 Convertable preferred stock
5 Common stock

Front 14

Weighted Average Cost Of Capital - WACC=

Back 14

All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.
The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

= E/V * Re + D/V* Rd * (1- Tax)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tax = corporate tax rate

Front 15

What Does Capital Structure Mean?

Back 15

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.
A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

Front 16

Cost of capital ↓, The return on capital

Back 16

↑

Front 17

Debt carries the_______cost of capital and is tax_______

Back 17

lowest
deductable

Front 18

The higher the tax rate the incentive to use _______ financing

Back 18

Debt

Front 19

Classify risk into two broad categories -

Back 19

D Diversifiable risk
U Unsystimatic ( non-market specific)

N Nondiversifiable Risk
S Systematic (Market)

Front 20

A Poison pur clause is a covenant that obliges the borrower to

Back 20

to repay the bonds if a large quantity of common stock is held by a single investor and the bond rating is downgraded.

Front 21

Opportunity costs are part of _________ cost.
Explicit costs are ___________ costs.

Back 21

IMPLICIT
NOT IMPLICIT

Front 22

Calculate the DISCOUNTED NET-OF-TAX amount that relates to disposal of the asset sold at GAIN.

Back 22

Cash received
less
Gain amount X PFV of 1 yr 1 X tax rate

Front 23

To RANK different investments use __________

Back 23

PROFITABILITY INDEX

Front 24

CONTRIBUTION MARGIN =

Back 24

SALES REV - VARIABLE COSTS

Front 25

CAPITAL STRUCTURE is defined as _________

Back 25

the % of debt, preferred stock, and common stock used for financing a firms assets.

Front 26

The firm's MARGINAL cost of capital is __________

Back 26

a Weighted average of the investors' req. returns of debt and equity

Front 27

When Corp. is earning EXCESS PROFITS. __________ STOCK acts more like ____________

Back 27

PARTICIPATING PREFERRED STOCK
EQUITY THAN CUMULATIVE PREFERRED STOCK

Front 28

Cost of retained earnings =

Back 28

Dividend 1/ Market Price of the stock +G

Front 29

An indenture is a legal document specifying the _______________

Back 29

terms and conditions of a bond issue

Front 30

The firm's FINANCIAL LEVERAGE ___________ when DEBT-TO-EQUITY RATIO______

Back 30

increases
INCREASES,

Repurchase of the Treasury stocks - Decreases EQ.

Front 31

If a company ignores the payment discount (2/10, net 30) what is daily interest rate it is paying ?

Back 31

1. Discount / 100%- discount
2% / 98%

Front 32

To calculate the cost of a NEW common stock issue use ___________Dividend

Back 32

Next period dividend -
Current year dividend X (1+G rate)

Front 33

Bonds are issued at PREMIUM if _______

Back 33

STATED RATE IS > THAN YIELD TO MATURITY ( EFFECTIVE RATE)

Front 34

CAPM Capital Asset Pricing Model =
- is used to estimate the req. return on a firm's cost of Eqity.

Back 34

Rfree + Beta (Rmarket - Rfree)

Front 35

A noncollectable bond is _________ risky and sold at ___________ yield (price)

Back 35

less
lower

Front 36

LETTERS OF CREDIT reduce the risk of loss to Exporters of goods. This is accomplished by having the bank guarantee payment to the ___________. A draft is drawn on the _________ .

Back 36

EXPORTER
IMPORTER

Front 37

Cost per check cleared =

Back 37

DSi
D- days saved
S - size of the check
i - daily Interest rate %/360
OR
Days saved x Check perDay x Annual % rate

Front 38

CURRENT ASSETS ARE :

Back 38

CASH
MRK SEC
A/R
INVENTORY

Front 39

Gross margin =
GM ratio =

Back 39

SALES - COGS
GM / SALES

Front 40

Firm's AVG GROSS RECEIVABLE BALANCE = ?

Back 40

Avg daily sales x Avg collection period

Front 41

Transfer amount ( principal ) =

Back 41

INTEREST EARNED / INTEREST RATE

Front 42

AVG COLLECTION PERIOD
or
Collection ratio
OR
DSO
(2WAYS)=

Back 42

360 / A/R T_OVER, where A/R T_OVER=NET CREDIT SALES / AVG A/R

AVG A/R / AVG DAILY SALES, where AVG DAILY SALES=NET CREDIT SALES /360

Front 43

QUICK or ACID-TEST RATIO =

Back 43

CA - INVENTORY
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CL