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