CH09-FP&A Flashcards

1
Q

only way to compare the economic value of cash flows from different investment alternatives that have different timing of cash flow streams such as stocks versus bonds?

A

Present Value

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2
Q

Formula for:
A construction firm has a contract in which it is paid $10,000 today, January 1, and then requires a payment of $5,000 at the end of the year and $15,000 at the end of the second year. Assuming that all funds can be invested to earn a return of 6%, how much will the contract be worth at the end of the second year?

A

Finding the FV of the inflows b/c getting paid for contract over 2 years.

=10k (1.06)^2 + 5k(1.06)^1 + 15k

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3
Q

T/F: Return on Assests (ROA) needs to be higher than WACC to satisfy investor expectations

A

True

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4
Q

In capital budgeting, a company might use ___ as its discount rate?

A

WACC

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5
Q

Best way to estimate a firm’s cost of debt for use in WACC

A

after-tax yield to maturity on the firm’s most recent bond issuance

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6
Q

Formula for EVA =

A

EBIT (1 - Tax Rate) - (WACC)(Long-Term Debt + Equity)

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7
Q

Explain IRR three ways

A

IRR is the discount rate where NPV=0
so
PV cash inflows - Cost = 0

Where PV of cash inflows = PV of cash outflows

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8
Q

What does if mean when IRR > WACC?

A

When IRR>WACC increases firm’s value

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9
Q

WACC calc on page 255

A

[Debt%YTM on new debt before tax(1-t)] + (Equity%*Required rate of return on equity)

Where:

wD = Weighting of debt financing: D / (D+E)

rD = Yield to maturity on newly issued debt on a before-tax basis

T = Firm’s marginal income tax rate

wE = Weighting of equity financing: E / (D+E)

rE = Required rate of return on equity

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10
Q

Degree of TOTAL Leverage (DTL) =

A

%Change in Net Income / %Change in Sales

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11
Q

Degree of OPERATING Leverage (DOL) =

A

%Change in EBIT / %Change in Sales

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12
Q

Degree of FINANCIAL Leverage (DFL) =

A

%Change in Net Income / %Change in EBIT

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13
Q

Cash Conversion Efficiency =

A

Cash Flow from Operations / Revenues

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14
Q

Return on Assets =

A

Net Income / Total Assets

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15
Q

What is the formula used to determine a firm’s ability to meet its interest payments?

A

Times Interest Earned (TIE) = EBIT/Interest Exp

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16
Q

Debt to Tangible Net Worth =

A

Total Debt / (Total Equity - Intangible Assets)

17
Q

What is the best way to estimate a firm’s cost of debt for use in WACC calc?

A

use the YTM (yield to maturity) on the firm’s most recent bond issuance

18
Q

T/F: The capital asset pricing model can estimate the required rate of return on retained earnings

A

True

19
Q

Typical project acceptance criteria might include:

NPV > ?
Profitability index > ?
IRR > ?

A

NPV > 0
Profitability index > 1
IRR > WACC

20
Q

The capital asset pricing model (CAPM) may be used to estimate the market’s required rate of return on a firm’s equity. This is the cost that applies to equity funds that are obtained through retained earnings. The cost of issuing new, additional common stock will be a bit higher because the company will receive less per share than shares sold due to issuance expenses.

A

TRUE