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29 Cards in this Set
- Front
- Back
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5 FUNCTIONS OF FINANCIAL MGT |
1Financing function 2capital budgeting function 3financial mgt function 4corporate governance function 5risk management function |
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CASH CONVERSION CYCLE (CCC) 2-4 |
# of days when business pays for inputs & bus collects cash CCC=ICP + RCP - PDP |
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INVENTORY CONVERSION CYCLE ( ICP) 1-3 |
Avg # of days req to convert inventory to sales ICP = Avg Inv / COGS per day(salesperday) 365 Avg Inv = (Beg+End) / 2 |
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RECEIVABLE COLLECTION PERIOD (RCP) 3-4 Average collection period |
Avg # of days required to collect A/R RCP = AVG A/R / AVG CRED SALES PER DAY (365) |
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ACCT PAYABLE DEFERRAL PERIOD (PDP) 1-2 |
AVG # of days b/w buying inventory and paying PDP=AVG PAYABLE / PURCHASES PER DAY COGS / 365 |
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REORDER POINT |
AVG DAILY DEMAND (USAGE) X AVG LEAD TIME = REORDER POINT W/O SAFETY STOCK + SAFETY STOCK = REORDER POINT WITH SAFETY |
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ECONOMIC ORDER QUANTITY (EOQ) |
EOQ = {SQUARE ROOT OF (2xAxP) / S } A = annual usage P = Cost of placing order S = cost of storing (carrying) |
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PRESENT VALUE |
PV$ = FV$ / 1 + INT RATE FV = 1 / PV FACTOR FV = PV$ x ( 1/ PV FACTOR) |
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CAPITAL BUDGETING |
L/T INVESTMENT DECISIONS MATURITY MATCHING/ SELF LIQUIDATING APPROACH |
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PAY BACK PERIOD Time it takes for initial investment to be recovered |
INITIAL INVESTMENT / AFTER TAX ANNUAL NET CASH INFLOWS = # OF YEARS |
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INTERNAL RATE OF RETURN (IRR) "TIME ADJUSTED RATE OF RETURN" Int rate at which NPV of cashflows is zero |
INVESTMENT/ ANNUAL CASH FLOWS = PV FACTOR Find pv of ordain ann, go up to find irr% |
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ACCT RATE OF RETURN |
ACCT INCOME / AVG (INITIAL INVESTMENT) Acct income = cash flow (-) dep (-) income tax |
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NET PRESENT VALUE ( NPV ) |
PV of future cash flows (-) Required investment (hurdle rate) |
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PAYBACK PERIOD ADVANTAGES EASY USES CASH FLOWS |
DISADVANTAGES NOT TOTAL PROFITABILITY NO TIME VALUE OF MONEY |
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IRR ADVANTAGES USES TIME VALUE OF MONEY HURDLE RATE USES INV. WITH SIMILAR RISK MORE EASY TO UNDERSTAND THAN NRV |
DISADVANTAGES CASH FLOW PATTERNS MAY YIELD DIFF RESULTS CASH FLOW PATTERNS MAY NOT HAVE INVESTMENT, WHERE NPV = 0 |
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ACCT RATE OF RETURN ADVANTAGES EASY TO COMPUTE AND UNDERSTAND SIMPLE AND INTUITIVE |
DISADVANTAGES NO TIME VALUE OF MONEY NO PROJECT RISK - ACROSS DIFF INVESTMENTS DIFF DEP METHODS YIELD DIFF ARR |
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NPV ADVANTAGES TIME VALUE OF MONEY HIGHER DISC RATE FOR RISKIER PROJECTS TOTAL PROFITABILITY NPV IS IN $s. = CHANGE IN OWNERS WELATH |
DISADVANTAGES MORE CALCULATIONS - NOT SIMPLE LESS UNDERSTANDABLE DOESN'T ACCT FOR MGR NOT FOLLOWING ORIG SCHEDULED INVESTMENTS OR EXPENSES |
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SHORT TERM DEBT ANNUAL FINANCING COST COST OF NOT TAKING THE DISCOUNT |
AFC = DISC % / 100 - DISC % X 365 / (Total pay period - Disc period) |
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COMPENSATING BALANCE COST OF LOAN EFFECTIVE INT RATE |
COST OF LOAN = INT PAID / NET FUNDS NET FUNDS = PRINCIPAL - COMP BALANCE |
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LONG TERM DEBT CURRENT YIELD |
CURR YIELD = ANNUAL INT PAID/ SELLING PRICE OF BOND |
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YIELD TO MATURITY (EAR) EFFECTIVE ANNUAL RATE EFFECTIVE RATE MKT RATE |
EAR = (1 +R/M) m - 1 R=STATED RATE M=COMPOUNDING FREQUENCY EAR > CURRENT YIELD ...DISC EAR < CURRENT YIELD ...PREMIUM |
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EQUITY DEGREE OF OP LEVERAGE (DOL) How size of a business's fixed costs affects its performance when revenue changes |
DOL = %CHANGE IN EBIT / %CHANGE IN SALES VOLUME EBIT = Earnings b4 interest & taxes |
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Degree of Financial Leverage ( DFL) how much business relies on debt financing |
DFL = %change in EPS / %change in EBIT EPS = NI-pref div-bond int / wtg avg c/s outstand |
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COST OF DEBT (BONDS) |
YIELD TO MATURITY (EAR) x (1-EFFECTIVE TAX RATE) or (int expense - tax deduct for interest) / carrying value of debt |
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COST OF PREFF STOCK |
DIVIDENT / NET ISSUE PRICE NET ISSUE PRICE = SELLING PRICE - ISSUE PRICE |
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COST OF EXISTING C/S (EQUITY) |
METHODS ARBIRTRAGE PRICING MODEL BOND YIELD PLUS DIVIDENT YIELD PLUS GROWTH RATE |
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CAPM CAPITAL ASSET PRICING MODEL MEASURES VOLATILITY OF STOCK RELATIVE TO AVG STOCK MKT |
Risk free rate + (Exp mkt rate - risk free rate) x beta beta coefficient = price volatility of mkt and price volatility to individual stock |
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DIVIDENT YIELD PLUS GROWTH RATE |
(NEXT EXP DIVIDEND / CURRENT STOCK PRICE) + EXPECTED GROWTH IN EARNINGS |
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COST OF NEW C/S (EQUITY) |
(NEXT EXP DIVIDEND) / (CURRENT STOCK PRICE - FLOATING/SELLING COST) + EXPECTED GROWTH IN EARNINGS |
