corporate finance

fixed-rate perpetual preferred stock price

$1.75/.065=$26.92

degree of financial leverage dfl

% change in net income/% change in operating income = Q(P-V)-F/Q(P-V)-F-C

g=

b x roe

liquidity measures- curr ratio

ca / cl

=taxable earnings [Q(P-V)-F-C]-taxes

same volatility as NI

cost of capital

should be forward looking...target capital structure

With regard to net present value (NPV) profiles, the point at which a profile crosses the vertical axis is best described as:

the sum of the undiscounted cash flows from a project

degree of total leverage dtl

% change in net income/% change in sales= Q(P-V)/Q(P-V)-F-C

degree of operating leverage dol

% change in operating income/% change in sales = Q-(P-V)/Q(P-V)-F

cash conversion cycle =

(# of days inv) + (# of days rec.) - (#of days payables)

operating cycle =

(# of days inventory) + (# of days receivables)

Q b e

Q b e = F+C/P-V

at breakeven Q b e(P-V)-F=0

Q b e=F/P-V

With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as:

The horizontal axis represents an NPV of zero. By definition, the project's IRR equals an NPV of zero.

cost of equity

cap M is a risk return model

A/R turnover

credit sales / average receivables

cost of capital

use forecasted market value for both debt and equity

-variable costs [QXV] V= Variable

...

bond equiv yield (BEY)

[face value-purchase price / purchase price] x [365/no. of days to maturity

- interest expense[C]

presence creates financial risk

-fixed costs[F]

presence creates operating risk

div discount model (DDM)

r=(div/payout%)+g

asset beta and equity beta

Asset risk does not change with a higher debt-to-equity ratio. Equity risk rises with higher debt

With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include:

Costs to finance the project are taken into account when the cash flows are discounted at the appropriate cost of capital; including interest costs in the cash flows would result in double-counting the cost of debt.

Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com's marginal tax rate is 38 percent, its after-tax cost of debt is closest to:

FV $1,000; PMT $40; N 10; PV $900 Solve for i. The six-month yield, i, is 5.3149% YTM 5.3149% 2 10.62985% rd (1 t) 10.62985%(1 0.38) 6.5905%

after-tax cost of debt

For a given company, the after-tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity

The weighted average cost of capital, using weights derived from the current capital structure, is the best estimate of the cost of capital for the average-risk project of a company

In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:

crossover rate

The return at which two alternative projects have the same net present value. The crossover rate is the discount rate at which the NPV profiles for two projects cross; it is the only point where the NPVs of the projects are the same.

discount-basis yield=

[face value-purchase price / purchase price] x [360/no. of days to maturity

yields- money market

[face value-purchase price / purchase price] x [360/no. of days to maturity

# of days of receivables

a r / ave. days sales on credt

# days payables

acct pay / ave days purchases

cost of capital bond yield appproach

bond yield plus risk premium

= net income

bottom line earnings volatility

inv turn

cogs / ave inventory

cost of equity dividend discount model

d/p+g (growth)

cost of capital preferred stock

div/curr price of pfd stock

capital asset pricing model

risk free rate+ (beta)*(equity risk premium)

=net sales [Q(P-V))]

same as variability as sales

P/E=

K / r - g

quick

cash+st marketable+rec / cl

k= div payout ratio

...

b=

1 minus payout ratio

financial leverage and net income

financial leverage, all else equal, lowers the level of net income and raises the variability of net income

financial leverage and roe

financial leverage, all else equal, raises the level and variability of roe

cost of capital

for equity, there is zero, for debt it is (1-t)

g=growth

g=(1-div payout %)(roe)

share repurchase made at market value

if mv>bv- repurchase will decrease bv per share if mv<bv- repurchase will increase bv per share

# days of inventory

inventory / ave day's cogs

cost of capital

is market value based, not book value based

cost of equity Capm pricing model

is risk free rateXmarket risk premiumXbeta cost

leverage =

magnifies the impact of sales volatility on earnings volatility

breakeven sales quantity Q b e

net income=(1-t)[Q(P-V)-F-C]

operating breakeven sales Quantity Q b e

operating profit= Q(P-V)-F

Gordon Model

p = div / r - g

pro forma

percent of sales approach - forecast top line sales and do percents except interest payments, link from inc stmt to bal sheet but not LT lia, and share equity grows by retained earns

The cost of equity is equal to the

rate of return required by stockholders

leverage=

use of fixed cost (financing or operating)

=pre tax operating profit [Q(P-V)-F]

variability = business risk

revenue [QXP] Q=Quantity P=Price

variability = sales risk