1. Inventory turnover=Cost of sales/Average inventory
Account payable payment period= (Average trade payables/ Purchase or cost of sales)×365 days
2. Buffer safety inventory levels
Reorder level=Maximum usage×Maximum lead time
Buffer safety inventory= Reorder level－(Average usage×Average lead time)
Average inventory= Buffer safety inventory ＋Reorder amount/2
3. Sensitivity analysis
=NPV/ Present value of project variable %
The lower the percentage, the more sensitive is NPV to that project variable as the variable would need to change by a smaller amount to make the project non-viable.
4. Debt finance
•Deep discount bonds-are loan notes issued at a price which is at a large discount to the nominal value of the notes, and which will be redeemable at par or above par when they eventually mature.
•Zero coupon bonds-are bonds that are issued at a discount to their redemption value, but no interest is paid on them.
•Convertible bonds-are bonds that give the holder the right to convert to other securities, normally ordinary shares at a pre-determined price/rate and time.
5. Scrip dividends/ Share dividends
It is a dividend paid by the issue of additional company shares, rather than by cash.
Recently enhanced scrip dividends have been offered by many companies. With enhanced scrip dividends, the value of the shares offered is much greater than the cash alternative, giving investors an incentive to choose the shares.
6. Debt ratio= Total debts/Total assets
7. Liquidity preference theory
The yield curve will normally be upward sloping, so that long-term financial assets offer a higher yield curve than short-term assets.
The investors prefer cash now to later and want compensation in the form of a higher return for being unable to use their cash now. Long-term interest rate not only reflects investors’ assumptions about future interest rates but also include a premium for holding long-term bonds. The premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty. Because of this premium, long-term bond yields tend to be higher than short term yields and the yields and the yield curve slopes upward.
Expectation theory
Forward interest rate is due only to expectations of interest rate movements. When interest rates are expected to fall, short-term rates might be higher than long-term rates, and the yield curve would be downward sloping. Thus, the shape of the yield curve gives an indication to the financial manager about how interest rates are expected to move in the future.
Market segmentation theory
The slope of the yield curve will reflect conditions in different segments of the market. This theory holds that the major investors are confined to a particular segment of the market and will not switch segment even if the forecast of likely future interest rates changes.
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