BEC-Financial Mgmt

Question 1

how is weighted avg cost of capital calculated?

Answer 1

the required rate of return on each source of capital weighted by the proportion of total capital provided by each source and then those amounts are summed.debt:30%x(10% 1-30% tax rate)=2.1%CS: 60%x12%= 7.2%PS: 10%x10%= 1%WACC= 10.3%

Question 2

what is a compensating balance and how is the effective interest rate calculated?

Answer 2

an amount the borrower has to maintain in an account with a lender.the effective int rate is the cost of borrowing divided by the funds available for use.If the interest each year is 40,000 and the only amount you can actually use is 400,000, then the effective rate is 10%.

Question 3

how is the required rate of return calculated?

Answer 3

risk free rate + Beta(expected rate - risk free rate)

Question 4

basic approach to capitalize earnings to determine value of business?

Answer 4

annual earnings / required rate of return.

Question 5

what is a time series model?

Answer 5

models based on extrapolation of past data to predict a future value

Question 6

delphi method?

Answer 6

form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast.

Question 7

diff in quantitative & qualitative forecasting?

Answer 7

quantitative is objective and rely on math and calculations. qualitative are subjective and rely on judgement and opinion

Question 8

what is the profitability index approach?

Answer 8

the relative economic ranking of projects by taking into account the cost & net present value of projects

Question 9

average accounting rate of return?

Answer 9

avg annual after tax net income / avg cost of investment.the avg cost of investment is the beg book value + ending bv then divided by 2.

Question 10

formula for calculating the profitability index of a project?

Answer 10

present value of annual after tax cash flows / original cash invested in the project

Question 11

NASDAQ requires all companies have audit committees composed entirely of:

Answer 11

Independent directors who are also financially literate

Question 12

can board of directors change the articles of incorporation?

Answer 12

no, only stockholders can do that

Question 13

the purchase and sale of commodities for current delivery is what:

Answer 13

the spot market. the futures market is for delivery in the future

Question 14

what is a specialist on the NYSE?

Answer 14

a NYSE member acting as a dealer in a small number of securities

Question 15

what is a call option?

Answer 15

the right to purchase a security at a specified price for a defined period of time.

Question 16

what factors make up the nominal risk free rate?

Answer 16

the real rate of interest and an inflation premium

Question 17

if the Fed reserve purchases a large number of US gov securities, what is the effect?

Answer 17

it increases the monetary supply and puts downward pressure on interest rates

Question 18

what is a put option?

Answer 18

it lets you sell a stock at a certain price for a period of time.

Question 19

what is transfer pricing?

Answer 19

the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.

Question 20

capital structure refers to:

Answer 20

all long-term debt and equity

Question 21

the market price of a bond is the present value of the principal amount plus:

Answer 21

the present value of future interest payments at the market rate of interest

Question 22

cost of capital for newly issued preferred stock?

Answer 22

net proceeds per share / annual costs40 sales price less 5 issuance costs = 35.if par value is 20, @9% int. payments are 1.80calculation is 1.8/35=5.1%

Question 23

what is the CAPM formula?

Answer 23

Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market

Question 24

between 2 investments with the same expected return, choose the one with:

Answer 24

lower projected standard deviation

Question 25

between 2 investments with different expected returns and standard deviations, choose the one with:

Answer 25

lower coefficient of variation

Question 26

What is NPV?

Answer 26

net present value is the present values of future cash flows less the cost of the investment. If the NPV is above zero then it's a good investment.

Question 27

How do you calculate NPV?

Answer 27

it's the present value of future cash flows discounted to present value using the COST OF CAPITAL

Question 28

what is the basic FV calculation?

Answer 28

FV= current amount x(1+i)^nor1,000 times(1+0.1)^5

Question 29

what is the rule of 72?

Answer 29

a very close estimate for seeing how long it takes for an investment to double. You just divide 72 by the interest rate. If the interest rate is 8% you divide 72/8=9

Question 30

what does the security market line(SML) graph?

Answer 30

the relationship between expected return and risk as measured by the beta coefficient

Question 31

How to calculate the benefit cost (profitability) index?

Answer 31

present value of cash flows / net investment. an index greater than 1 means the project is acceptable

Question 32

what does the equivalent annual annuity(EAA) technique evaluate?

Answer 32

projects that have different durations(lives)

Question 33

times interest earned calculation?

Answer 33

Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period

Question 34

cash conversion cycle?

Answer 34

period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory

Question 35

what is underwriting?

Answer 35

investment bank buys an entire offering then tries to sell it to the public at a profit

Question 36

least expensive long-term source of capital?

Answer 36

long term debt because interest is tax deductible and debt is repaid first so it has less risk

Question 37

formula to determine the cost of common stock:

Answer 37

next period's dividend / proceeds such as 2/50 which equals 4%. then you add this to the firms growth rate in dividends. If growth rate the cost of common stock would be 7+4 for 11%

Question 38

what are the chronological events in the dividend payment process?

Answer 38

1-declaration date when board approves dividend2-ex dividend date is first date you buy stock without being entitled to the dividend3-date of record is date you must own shares by to receive dividend4-payment date is when checks are mailed

Question 39

how is financial leverage calculated?

Answer 39

It is calculated by taking the percentage increase in earnings per share which is then divided by the percentage increase in earnings before interest and taxes. Here, earnings per share starts as $4.00 and increases by $2.00, a 50 percent increase. Earnings before interest and taxes starts as $300,000 and increases by $60,000, only a 20 percent increase. Therefore, the degree of financial leverage is 50 percent divided by 20 percent or 2.5.

Question 40

what are the 4 reasons to hold cash?

Answer 40

transactions to meet day to day cash outflows, compensating balances required by banks, precautionary balances to meet unexpected events, and speculative balances to take advantage of opportunities

Question 41

cash conversion cycle?

Answer 41

age of inventory + age of receivables - age of payables

Question 42

4 parts of a company's credit policy?

Answer 42

(1) Credit period--when the payment is due; (2) Credit standards--criteria as to which customers are granted credit; (3) Collection policy--enforcement of the collection process; and, (4) Discount--reductions offered to speed up payments.

Question 43

Your supplier gives you credit terms of 2/10 net 30. This means that if you pay within 10 days you take a 2% discount. If not, the balance is due in full within 30 days. What is the annual percentage cost to you of not taking the discount and paying on the 30th day?

Answer 43

Your choice is to pay $.98 on the dollar on day 10 or $1 on day 30. The extra cost is .02/.98 or .0204081. You save 20 days (30-10) by paying later. To annualize the cost take 365 days and divide by the days saved. 365/20=18.25 and multiply this by the .0204081 percent cost: (.0204081) (18.25) = 37.24%

Question 44

A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?

Answer 44

Economic Order Quantity points (EOQ) tells you how many engines to order at one time. It is determined by taking the square root of the following result: 2 times annual demand (1,600 units) times the cost of placing an order ($50) divided by the cost of carrying a unit for a year ($1). So, (2 x 1,600 x 50) or 160,000. That is then divided by $1 so that it stays 160,000. The square root of 160,000 is 400. That is the number of units that should always be ordered. Because 1,600 are needed, the orders of 400 are placed four times per year.

Question 45

A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?

Answer 45

In the absence of a safety stock, reorder point is equal to daily usage times the time it takes for a supplier to deliver. Daily usage is 3,650/365 or 10 x 5 days to deliver (lead time) is equal to 50 engines as a reorder point.

Question 46

average days sales in inventory?

Answer 46

360 / inventory turnoverinventory turnover= COGS/ Avg inventory

Question 47

What does a TPS do?

Answer 47

it supports the day to day activities of a business such as purchasing goods, sales to customers, and payroll

Question 48

ROI calculation?

Answer 48

net income / avg investment

Question 49

alternate ROI calculation?

Answer 49

asset turnover x profit margin on sales

Question 50

what is the dupont ROA?

Answer 50

(net income/net sales) x (net sales/avg total assets)

Question 51

asset turnover?

Answer 51

sales / assets

Question 52

which risk cant be mitigated through diversification of investments?

Answer 52

systematic risk because it deals with the macro environment

Question 53

what does the systems analyst do in an IT environment?

Answer 53

designs systems, prepares specifications for programmers, and serves as intermediary between users and programmers

Question 54

what detects errors in data transmission?

Answer 54

a parity check

Question 55

margin of safety?

Answer 55

difference between your actual or expected profitability and the break even point

Question 56

what is the floor and ceiling in a transfer pricing decision?

Answer 56

the floor is opportunity cost plus costs of outlay. the ceiling is the market price

Question 57

target pricing?

Answer 57

set prices based on what you think customers are willing to pay based on perceived value

Question 58

economic value added?

Answer 58

net operating profit after taxes less cost of capital

Question 59

does deflation encourage or discourage borrowing?

Answer 59

deflation discourages borrowing because people want to borrow money in times of inflation because you can repay it with money with less purchasing power

Question 60

when interest rates increase, bond prices:

Answer 60

decrease. and vice versa

Question 61

how is the overhead rate calculated?

Answer 61

dividing estimated overhead costs(both variable and fixed) by a budgeted or estimated quantity of a cost driver. Example: total overhead costs of 75,000 divided by 20,000 budgeted direct labor hours for a overhead application rate of 3.75 per direct labor hour

Question 62

conversion cost?

Answer 62

direct labor + overhead

Question 63

how is a spoilage question done?

Answer 63

normal spoilage is a manufacturing cost because it's an inherent part of production, so it is included in finished goods.Abnormal spoilage is treated as a period cost.If total units completed are 5500 with 5000 being saleable, 200 being normal spoilage, and 300 being abnormal spoilage, then 5200 is included in finished goods. so 5200/5500 times the total cost:(5200/5500)*99,000=93,600 which is what will be debited to finished goods

Question 64

how to use high-low method:

Answer 64

total costs y=a+b(x)y=total costsa=fixed costsb=variable cost per unitx=number of kilos,etcb is change in costs divided by change in kilos, or (y2-y1)/(x2-x1)

Question 65

what does the CPU contain?

Answer 65

primary storage, a control unit, and an arithmetic/logic unit

Question 66

what is primary storage?

Answer 66

temporary main memory portion of the CPU which is part RAM part ROM. Secondary storage consists of devices external to the CPU such as disks, flash drives, & hard drives

Question 67

elements of assembly language:

Answer 67

must be translated into machine language by an assemblereasier to write programs in than machine languageit's an efficient form of second gen language

Question 68

elements of a procedural language:

Answer 68

3rd gen language that concentrates on the procedures and functions of the programs. written in source code then translated into object code. source code is more similar to english but object code is the machine language for the type of computer. FORTRAN, COBOL, and BASIC are all forms of procedural languages

Question 69

what does a JCL do?

Answer 69

Job control language initiates programs, specifies priorities and running sequences, and which databases are used and which files are used

Question 70

What is the order of creating master budget?

Answer 70

sales budget is first, then production budget, budgeted income statement then budgeted balance sheet

Question 71

absorption costing?

Answer 71

assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory

Question 72

direct costing?

Answer 72

assigns only variable manufacturing costs to inventory- which means variable manufacturing overhead

Question 73

what does r squared actually mean?

Answer 73

percentage of variation in the dependent variable explained by the variation in the independent variables

Question 74

what are x and y in a line equation?

Answer 74

x is the independent variable, and y is the dependent variable.

Question 75

overhead efficiency variance?

Answer 75

The overhead efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the variable overhead rate per hour.

Question 76

overhead volume variance?

Answer 76

The overhead volume variance equals the difference between the master budget for fixed overhead and applied fixed overhead. The variance has one cause only: producing a number of units different from that specified in the master budget.

Question 77

labor efficiency variance

Answer 77

The labor efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the direct labor wage rate per hour.

Question 78

material usage variance?

Answer 78

This variance is the difference between the actual quantity of material used, and the standard quantity allowed for the output achieved, times the standard price of material.

Question 79

Diff between spending variance for fixed overhead and variable overhead?

Answer 79

The spending variance for variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for fixed overhead is the difference between the actual overhead and the master budget for fixed overhead. Neither variance is affected by the denominator used for allocating fixed overhead.

Question 80

what is incremental or differential cost?

Answer 80

the total difference in cost of two alternatives.

Question 81

Residual income formula?

Answer 81

Residual income = operating income - required rate of return (invested capital)

Question 82

using PERT or CPM, activity slack is?

Answer 82

max amount of time an activity can be delayed without delaying the entire project