FIN 6100 REVIEW TIPS ANSWERS AND QUESTIONS
SET A+
✔✔Fundamental cost of equity - ✔✔dividend yield + expected rate of growth in
dividends
✔✔fundamental dividend growth rate is - ✔✔plow back rate * ROE
✔✔According to trade-off theory, which is true - ✔✔Firms take on debt to take
advantage of tax shields created by interest payments on debt
✔✔Debt: - ✔✔as firms increase debt in capital structure, beta must increase which will
make the required return on equity increase
✔✔Which is false when comparing share repurchses to dividends - ✔✔once you start
repurchases it is expected to happen regularly
✔✔Which refers to date on which a shareholder must be listed as the owner of a share
in order to receive a declared dividend - ✔✔date of record
✔✔Which theory suggests a firm borrow money in order to limit cash available for
managers to waste obtaining private benefits - ✔✔agency theory
✔✔Which type of repurchase allows management to declare an intention to buy back a
set dollar amount of stock over a set period, but not legally obligate them to actually buy
back the shares - ✔✔open market repurchase
✔✔WACC - ✔✔WdKd(1-T) + WeKe
✔✔Current Ratio - ✔✔= Current Assets / Current Liabilities
✔✔Quick Ratio - ✔✔(Current Assets - Inventory) / Current Liabilities
, ✔✔Inventory Turnover Ratio - ✔✔cost of goods sold/average inventory
✔✔Days Sales Outstanding - ✔✔365/receivables turnover
✔✔Total Debt Per Share - ✔✔Total Debt/(shares outstanding*price)
✔✔Interest coverage ratio - ✔✔EBIT/ interest expense
✔✔Profit Margin - ✔✔net income/net sales
✔✔Return on Assets - ✔✔net income/average total assets
✔✔ROE - ✔✔Net Income/Total Equity
✔✔Price Earnings Ratio - ✔✔market price per share/earnings per share
✔✔Market to Book Ratio - ✔✔market value per share/book value per share
✔✔Effective Tax Rate - ✔✔Income Tax Expense / Pretax Income
✔✔Cost of Equity - ✔✔Ke = (1-payout ratio) * ROE + (EPS * Payout Ratio)/Share Price
✔✔Sustainable growth rate - ✔✔g = (1 - payout ratio) * ROE
✔✔CAPM ROE - ✔✔Ke = RF + βi [ E(RM) - RF ]
✔✔Beta - ✔✔βA = ρA,MσA / σM
✔✔Beta Unlevered formula - ✔✔βU = βL / [1 + (1 - T)(D/E)]
✔✔Beta levered formula - ✔✔BU * (1+(1-effective tax rate)*(D/E Ratio)
✔✔Times Interest Earned - ✔✔EBIT/ interest expense
✔✔CCC - ✔✔Days in inventory + Days Sales Out - Days Payable Out
✔✔Total Asset Turnover - ✔✔Sales/Total Assets
✔✔Inventory Turnover - ✔✔COGS/Average Inventory
✔✔Days in inventory - ✔✔365/inventory turnover
✔✔Payables Turnover - ✔✔COGS/Accounts Payable
SET A+
✔✔Fundamental cost of equity - ✔✔dividend yield + expected rate of growth in
dividends
✔✔fundamental dividend growth rate is - ✔✔plow back rate * ROE
✔✔According to trade-off theory, which is true - ✔✔Firms take on debt to take
advantage of tax shields created by interest payments on debt
✔✔Debt: - ✔✔as firms increase debt in capital structure, beta must increase which will
make the required return on equity increase
✔✔Which is false when comparing share repurchses to dividends - ✔✔once you start
repurchases it is expected to happen regularly
✔✔Which refers to date on which a shareholder must be listed as the owner of a share
in order to receive a declared dividend - ✔✔date of record
✔✔Which theory suggests a firm borrow money in order to limit cash available for
managers to waste obtaining private benefits - ✔✔agency theory
✔✔Which type of repurchase allows management to declare an intention to buy back a
set dollar amount of stock over a set period, but not legally obligate them to actually buy
back the shares - ✔✔open market repurchase
✔✔WACC - ✔✔WdKd(1-T) + WeKe
✔✔Current Ratio - ✔✔= Current Assets / Current Liabilities
✔✔Quick Ratio - ✔✔(Current Assets - Inventory) / Current Liabilities
, ✔✔Inventory Turnover Ratio - ✔✔cost of goods sold/average inventory
✔✔Days Sales Outstanding - ✔✔365/receivables turnover
✔✔Total Debt Per Share - ✔✔Total Debt/(shares outstanding*price)
✔✔Interest coverage ratio - ✔✔EBIT/ interest expense
✔✔Profit Margin - ✔✔net income/net sales
✔✔Return on Assets - ✔✔net income/average total assets
✔✔ROE - ✔✔Net Income/Total Equity
✔✔Price Earnings Ratio - ✔✔market price per share/earnings per share
✔✔Market to Book Ratio - ✔✔market value per share/book value per share
✔✔Effective Tax Rate - ✔✔Income Tax Expense / Pretax Income
✔✔Cost of Equity - ✔✔Ke = (1-payout ratio) * ROE + (EPS * Payout Ratio)/Share Price
✔✔Sustainable growth rate - ✔✔g = (1 - payout ratio) * ROE
✔✔CAPM ROE - ✔✔Ke = RF + βi [ E(RM) - RF ]
✔✔Beta - ✔✔βA = ρA,MσA / σM
✔✔Beta Unlevered formula - ✔✔βU = βL / [1 + (1 - T)(D/E)]
✔✔Beta levered formula - ✔✔BU * (1+(1-effective tax rate)*(D/E Ratio)
✔✔Times Interest Earned - ✔✔EBIT/ interest expense
✔✔CCC - ✔✔Days in inventory + Days Sales Out - Days Payable Out
✔✔Total Asset Turnover - ✔✔Sales/Total Assets
✔✔Inventory Turnover - ✔✔COGS/Average Inventory
✔✔Days in inventory - ✔✔365/inventory turnover
✔✔Payables Turnover - ✔✔COGS/Accounts Payable
