BEC-Financial Mgmt Flashcards
how is weighted avg cost of capital calculated?
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%
what is a compensating balance and how is the effective interest rate calculated?
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%.
how is the required rate of return calculated?
risk free rate + Beta(expected rate - risk free rate)
basic approach to capitalize earnings to determine value of business?
annual earnings / required rate of return.
what is a time series model?
models based on extrapolation of past data to predict a future value
delphi method?
form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast.
diff in quantitative & qualitative forecasting?
quantitative is objective and rely on math and calculations. qualitative are subjective and rely on judgement and opinion
what is the profitability index approach?
the relative economic ranking of projects by taking into account the cost & net present value of projects
average accounting rate of return?
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.
formula for calculating the profitability index of a project?
present value of annual after tax cash flows / original cash invested in the project
NASDAQ requires all companies have audit committees composed entirely of:
Independent directors who are also financially literate
can board of directors change the articles of incorporation?
no, only stockholders can do that
the purchase and sale of commodities for current delivery is what:
the spot market. the futures market is for delivery in the future
what is a specialist on the NYSE?
a NYSE member acting as a dealer in a small number of securities
what is a call option?
the right to purchase a security at a specified price for a defined period of time.
what factors make up the nominal risk free rate?
the real rate of interest and an inflation premium
if the Fed reserve purchases a large number of US gov securities, what is the effect?
it increases the monetary supply and puts downward pressure on interest rates
what is a put option?
it lets you sell a stock at a certain price for a period of time.
what is transfer pricing?
the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.
capital structure refers to:
all long-term debt and equity
the market price of a bond is the present value of the principal amount plus:
the present value of future interest payments at the market rate of interest
cost of capital for newly issued preferred stock?
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%
what is the CAPM formula?
Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market
between 2 investments with the same expected return, choose the one with:
lower projected standard deviation
between 2 investments with different expected returns and standard deviations, choose the one with:
lower coefficient of variation
What is NPV?
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.
How do you calculate NPV?
it’s the present value of future cash flows discounted to present value using the COST OF CAPITAL
what is the basic FV calculation?
FV= current amount x(1+i)^nor1,000 times(1+0.1)^5
what is the rule of 72?
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
what does the security market line(SML) graph?
the relationship between expected return and risk as measured by the beta coefficient
How to calculate the benefit cost (profitability) index?
present value of cash flows / net investment. an index greater than 1 means the project is acceptable
what does the equivalent annual annuity(EAA) technique evaluate?
projects that have different durations(lives)
times interest earned calculation?
Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period
cash conversion cycle?
period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory
what is underwriting?
investment bank buys an entire offering then tries to sell it to the public at a profit
least expensive long-term source of capital?
long term debt because interest is tax deductible and debt is repaid first so it has less risk
formula to determine the cost of common stock:
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%
what are the chronological events in the dividend payment process?
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
how is financial leverage calculated?
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.
what are the 4 reasons to hold cash?
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
cash conversion cycle?
age of inventory + age of receivables - age of payables
4 parts of a company’s credit policy?
(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.
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?
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%
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?
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.
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?
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.
average days sales in inventory?
360 / inventory turnoverinventory turnover= COGS/ Avg inventory
What does a TPS do?
it supports the day to day activities of a business such as purchasing goods, sales to customers, and payroll
ROI calculation?
net income / avg investment
alternate ROI calculation?
asset turnover x profit margin on sales
what is the dupont ROA?
(net income/net sales) x (net sales/avg total assets)
asset turnover?
sales / assets
which risk cant be mitigated through diversification of investments?
systematic risk because it deals with the macro environment
what does the systems analyst do in an IT environment?
designs systems, prepares specifications for programmers, and serves as intermediary between users and programmers
what detects errors in data transmission?
a parity check
margin of safety?
difference between your actual or expected profitability and the break even point
what is the floor and ceiling in a transfer pricing decision?
the floor is opportunity cost plus costs of outlay. the ceiling is the market price
target pricing?
set prices based on what you think customers are willing to pay based on perceived value
economic value added?
net operating profit after taxes less cost of capital
does deflation encourage or discourage borrowing?
deflation discourages borrowing because people want to borrow money in times of inflation because you can repay it with money with less purchasing power
when interest rates increase, bond prices:
decrease. and vice versa
how is the overhead rate calculated?
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
conversion cost?
direct labor + overhead
how is a spoilage question done?
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
how to use high-low method:
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)
what does the CPU contain?
primary storage, a control unit, and an arithmetic/logic unit
what is primary storage?
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
elements of assembly language:
must be translated into machine language by an assemblereasier to write programs in than machine languageit’s an efficient form of second gen language
elements of a procedural language:
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
what does a JCL do?
Job control language initiates programs, specifies priorities and running sequences, and which databases are used and which files are used
What is the order of creating master budget?
sales budget is first, then production budget, budgeted income statement then budgeted balance sheet
absorption costing?
assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory
direct costing?
assigns only variable manufacturing costs to inventory- which means variable manufacturing overhead
what does r squared actually mean?
percentage of variation in the dependent variable explained by the variation in the independent variables
what are x and y in a line equation?
x is the independent variable, and y is the dependent variable.
overhead efficiency variance?
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.
overhead volume variance?
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.
labor efficiency variance
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.
material usage variance?
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.
Diff between spending variance for fixed overhead and variable overhead?
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.
what is incremental or differential cost?
the total difference in cost of two alternatives.
Residual income formula?
Residual income = operating income - required rate of return (invested capital)
using PERT or CPM, activity slack is?
max amount of time an activity can be delayed without delaying the entire project
