CH09-FP&A Flashcards
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?
Present Value
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?
=10k (1.06)^2 + 5k(1.06)^1 + 15k
T/F: Return on Assests (ROA) needs to be higher than WACC to satisfy investor expectations
True
In capital budgeting, a company might use ___ as its discount rate?
WACC
Best way to estimate a firm’s cost of debt for use in WACC
Use the YTM of the firm’s most recent bond issuance
Formula for EVA =
EBIT (1 - Tax Rate) - (WACC)(Long-Term Debt + Equity)
Explain IRR three ways
IRR is the discount rate where NPV=0
so
PV cash inflows - Cost = 0
Where PV of cash inflows = PV of cash outflows
What does if mean when IRR > WACC?
When IRR>WACC increases firm’s value
WACC calc on page 255
[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
Degree of TOTAL Leverage (DTL) =
%Change in Net Income / %Change in Sales
Degree of OPERATING Leverage (DOL) =
%Change in EBIT / %Change in Sales
Degree of FINANCIAL Leverage (DFL) =
%Change in Net Income / %Change in EBIT
Cash Conversion Efficiency =
Cash Flow from Operations / Revenues
Return on Assets =
Net Income / Total Assets
What is the formula used to determine a firm’s ability to meet its interest payments?
Times Interest Earned (TIE) = EBIT/Interest Exp
