CMA Part 2

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1. Term Structure of Inter- relationship between long and short term rates,
est Rates depicted by an upward sloping yield curve

2. The terms of a bond are indenture

stated in the

3. Advantages of bonds to -interest paid on debt is tax deductible

the issuer ... -basic control of the firm not shared with debt
holders

4. Disadvantages of bonds -pmt of interest and principal is a legal obligation

to the issuer ... -raises a firms risk level
-amount of debt financing avaliable is limited
-managerial perogatives given up in the indenture

5. Serial Bond matures in stated amounts at regular intervals

6. Term Bonds have a single maturity date

7. Dividend Discount Mod- Dividend Per Share / (Cost of Capital - Dividend

el (aka dividend growth Growth Rate)
model) =

8. Earning Power ability to generate income from normal operations

9. Hedging The process of using offsetting commitments to

minimize or avoid the impact of adverse price
movements

10. Call Option gives the buyer (holder) the right to purchase the
underlying asset at a fixed price

11. Put Option gives the buyer (holder) the right to sell the under-
lying asset at a fixed price

12. Put-Call Parity definition investment strategy that proves a risk free return

13. Put-Call Parity Formula PV of Exercise Price = Value of Put + Value of

Underlying - Value of Call

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14. Component Cost of Debt effective rate x (1.0 - marginal tax rate)
=

15. Component Cost of Dividend Yield Ratio = Cash Dividend on Stock /

Stock = Market Price of Stock

16. Cost of NEW Debt = Annual Interest / Net Issue Proceeds

17. The Over the Counter dealer market... it conducts transactions in securi-
Market is a ... ties not traded on the stock exchanges

18. Three forms of markets strong, semi-strong, and weak

...

19. High Dividend Rate = Slow Growth Rate

20. Low Dividend Rate = High Growth Rate

21. Factors influencing a -legal restrictions

companies Dividend -stability of earnings
Policy ... -rate of growth
-cash position
-restrictions on debt agreements
-tax position of shareholders
-residual theory of dividends

22. Residual Theory of Divi- the amount (residual) of earnings paid asdivi-
dends dends depends on the avaliable investment oppor-
tunities and the debt-equity ratio at which cost of
capital is minimized

23. Motivations of share -mergers

repurchases (treasury -share options
stock) ... -stock dividends
-tax advantage to shareholders
-increase EPS, other ratios
-prevent hostile takeover
-eliminate a particular ownership interest

24. Merger ...

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one firm absorbs a second firm - acquiring firm
remains in business as combo of the two firms
--> approval of the shareholders of each firm is
required

25. Types of Mergers -horizontal

-vertical
-congeneric
-conglomerate

26. Horizontal Merger two firms in the same line of business combine

27. Vertical Merger combines a firm with one of its suppliers or cus-
tomers

28. Congeneric Merger combination of firms with related products or ser-

vices - do not produce the same product and have
no prior supplier relationship

29. Conglomerate Merger two unrelated firms in different industries

30. Consolidation new entity is formed and neither of the previous

entities survives

31. Acquisition purchase of all of another firms assets or a con-

trolling interest in its stock

32. Cost Volume Profit aka breakeven analysis -- tool for understanding
Analysis (CVP) the interaction of revenues with fixed and variable
costs

33. Normal Profit - level of profit necessary to induce entrepreneurs

to enter and remain in the market

34. Pure Competition - marginal revenue = average revenue = market

price (must accept the market price) --> charac-
terized by a large number of sellers acting inde-
pendently and a standardized product

35. Monopoly -
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industry consists of one firm and the product has
no close substitutes --> must lower price to en-
courage sales

36. Monopolistic Competi- large number of firms - cannot collude

tion -

37. Collude act together to restrict output and fix the price

38. Oligopoly - few large firms - mutually interdependent - deci-

sions depends largely on the actions of the other
firms

39. To be relevant the rev- -made in the future

enues and cost must be -differ among the possible alternative courses of
... actions

40. Price Elasticity of De- % Change in Quantity Demanded / % Change in

mand = Price

41. Internal Price-Setting -marketing objectives

Factors ... -marketing-mix strategy
-all relevant costs (variable, fixed, and total)
-organizational locus of pricing decisions
-capacity

42. External Price-Setting -type of market (pure competition, monopolistic

Factors ... competition, monopoly, or oligopolistic competi-
tion)
-customer perceptions of price and value
-the price-demand relationship
-competitiors products, costs, prices, and amounts
supplied

43. Stages in Capital Bud- -Identification and Definition

geting ... -Search
-Information-Acquisition
-Selection
-Financing
-Implementation and Monitoring
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44. What is the most difficult Identification and Definition

stage in capital budget-
ing?

45. Steps in Ranking Poten- -Determine the asset cost or net investment
tial Investments ... -Calculate estimated cash flows
-Relate the cash-flow benefits to their costs
-rank the investments

46. Relevant Cash Flows ... -net initial investment

-annual net cash flows
-project termination cash flows

47. What makes up the net -purchase of new equipment

initial investment? -initial working capital requirements
-after-tax proceeds from disposal of old equipment

48. What makes up annual -after-tax cash collections from operations

net cash flows? -tax savings from depreciation deductions

49. Depreciation Tax Shield - tax savings from depreciation deductions

= annual depreciation x firms tax rate

50. What is the IRR of an in- the discount rate at which the investments NPV =
vestment? ZERO

51. Breakeven Time - period required for the discounted cumulative cash
inflows to equal the discounted cumulative cash
outflows (usually the initial cost)

52. Profitability Index - aka excess present value index --> method for
ranking projects to ensure that limited resources
are placed with the investments that will return the
highest NPV

53. Payback Period = net investment / annual after tax cash flow

54. Real Option -

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the flexibility to affect the amounts and risk of an
investments project's cash flows, to determine its
duration, or to postpone its implementation

55. If a products elastici- elastic

ty coefficient is 2.0, de-
mand is ...

56. On a common size state- SALES

ment, line items on the
income statement and
the statement of cash
flows are presented as a
percentage of ...

57. On a common size state- TOTAL ASSETS

ment, line items on the
balance sheet are pre-
sented as a percentage
of ...

58. Common Base Year (New Line Item Amount / Base Year Line Item
Statements = Amount) x 100

59. Annual Growth Rate of (New Line Item Amount / Old Line Item Amount) -
Line Items = 1

60. Cash Flow Ratio = Operating Cash Flow / Current Liabilities

61. Net Working Capital Ra- Net Working Capital / Total Assets
tio =

62. Liquidity Ratios ... net working capital

current, quick, cash and cash flow ratios
net working capital ratio

63. Leverage Ratios ... degree of financial leverage

degree of operating leverage
financial leverage
total debt to total capital ratio
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debt to equity
long term debt to equity
debt to total assets
fixed charge coverage
times interest earned
cash flow to fixed charges

64. Degree of Financial % Change in Net Income / % Change in EBIT

Leverage = or
EBIT / EBT

65. Degree of Operating % Change in EBIT / % Change in Sales

Leverage = or
Contribution Margin / EBIT

66. Financial Leverage Ratio Assets / Equity

=

67. Fixed Charge Coverage earnings before fixed charges and taxes / fixed
= charges

68. Fixed Charges include ... interest, required principal payments, and leases

69. Times Interest Earned EBIT / Interest Expense

(Interest Coverage Ra-
tio) =

70. Cash Flow to Fixed (cash from operations + fixed charges + tax pay-
Charges Ratio = ments)/ Fixed Charges

note: Cash from operations is after tax

71. Activity Ratios ... accounts receivable turnover

inventory turnover
accounts payable turnover
days sales in receivables and inventory
days purchases in payables
operating cycle
cash cycle

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total asset turnover
fixed asset turnover

72. Accounts Payable Credit Purchases / Average Accounts Payable

Turnover =

73. operating cycle = days sales in receivables + days sales in inventory

74. cash cycle = operating cycle - days purchases in payables

75. total asset turnover = sales / average total assets

76. fixed asset turnover = sales / average net plant, property, and equipment

77. Profitability Ratios ... gross profit margin percentage

operating profit margin percentage
net profit margin percentage
EBITDA Margin
ROA
ROE

78. EBITDA Margin = EBITDA / Sales

79. ROA = net income / average total assets

or
(net income / sales) x (sales / average total as-
sets)
or
net profit margin x total asset turnover ratio

80. ROE = net income / average equity

or
(net income / average total assets) x (average total
assets / average equity)
or
ROA x Financial Leverage

81. Market Ratios ... market to book

price earnings
price to EBITDA
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book value per share
basic EPS
diluted EPS
earnings yield
dividend yield
dividend payout ratio
shareholder return

82. Diluted EPS adjusts adding shares that may be issued for convertible
common shares by.... securities and options

83. Earnings Yield = EPS / current market price per common share

84. Dividend Yield = annual dividends per share / market price per
share

85. Dividend Payout Ratio = common dividend / earnings available to common

shareholders

86. Shareholder Return = (ending stock price - beginning stock price + annu-
al dividends per share) / beginning stock price

87. Return on Common Eq- (net income / sales) x (sales / average total assets)
uity - DuPont Model = x (average total assets / average total equity)
or
net profit margin x total asset turnover x equity
multiplier

88. Sustainable Growth ( 1 - Dividend Payout Ratio) x ROE

Rate =

89. Breakeven Point in Units Fixed Costs / Unit Contribution Margin

=

90. Breakeven Point in Dol- Fixed Costs / Contribution Margin Ratio

lars =

91. Contribution Margin Ra- Unit Contribution Margin / Unit Price

tio =

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92. Margin of Saftey = Planned Sales - Breakeven Sales

93. Margin of Saftey Ratio = Margin of Saftey / Planned Sales

94. Elasticity is calculated ( ( Change in Quantity / (Average of Quantities)) /

using the midpoint for- (change in price / (average of prices))
mula. Price Elasticity of
Demand =

95. EBIT is also known as... operating income

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