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Flashcards in BEC MCQ 3.2 Deck (38):

Weighted Average Cost of Capital

Investment structure(percentage of that investments in the total investments) X cost of Investment= Weighted Average Cost of Capital


Expected rate of Capital with CAPM

c= R+B(M-R) c=cost of capital R=risk free rate B= Beta coefficient of comparable publicly traded stock M= Market rate of return where B is referred to a s particular change in stock compared to the overall market change.
change in stock price/change in market price


Discounted cash flow method

D/P + G= K
Dividend next period /Stock price +Growth


Factors might cause a firm to increase debt in financial structure

Corporate income tax rate


Cost of capital

Cost of capital considers the cost of all funds whether they are short term long term new or old


Financial leverage

Financial leverage increases when debt to equity ratio increases. When the company issues bonds


residual income

Residual income is defined as income in excess of a minimum rate of return. Residual income is defined as segment margin of an investment center after deducted imputed interest rate (hurdle rate) on the assets used by the investment center. Residual income measures actual dollars that an investment earns over its required return rate. Performance evolution on this basis will mean the desirable investment decision will not be rejected by high return divisions . Residual income is accrual method


ROI formula



The amount of inventory that a company tend to hold in stock would decrease as the

variability of sale decreases
cost of running out of stock decreases
length of time a goods are in transit decreases


Which of the following increase EOQ

Decrease in Carrying costs


Which decrease EOQ

Decreased cost per order
Decreased safety stock level
Decreased quantity demanded


Annual cost of credit or annual cost of not taking the discount

Number of days in a year usually 360/total pay period- discount period x Discount percentage/ 100-discount percentage


Delays outflow of cash

Draft which increases payable float


The optimal level of inventory

is not affected by current level of inventory
but it is affected by
lead time to receive merchandise
the cost of unit per inventory
the costs of placing an order impacts order frequency which affects order size and optimal inventory levels


In inventory management

safety stock will increase variability time increases.
A high carrying cost would decrease safety stock
A lower stock out cost would decrease safety stock
If the order cost decrease then inventory will be ordered more frequently and less safety stock will be needed


Changes because of Just in time inventory system

Inventory turnover increase inventory percentage decrease



Ratio of operating income /Average operating assets
or operating profit/investment
or income/investment
ROI does not balance short and long term issues


E= Squre root of 2so/c

E= Order size (EOQ)
S= Annual sales in units
O= Cost per purchase order
C= Carrying cost per unit
EOQ assumes that periodic demand is known


Assets turnover

Sales /Assets


Profit Margin/ Sales

NI/Sales or Return of Investment/asset turn over


concentration banking

concentration banking is the method by which a single bank is designated as a central bank as a means of controlling receipts.



A lockbox system generally relates to expediting deposits over a specific group of transactions. The technique arranges for direct mailing of customers remittances to a bank post office box and subsequent deposit. ( Minimize collection float)


zero balance accounts

represents a account that maintains zero balance. Zero balance accounts are accompanied by a master or parental account that serves fund any negative balances and is designed to minimize cash not control receipts.


when the question ask for net cost of debt

effective interest rate X (1- tax rate)


Residual income

is the difference between net income and desired return. The required return is net book value times the hurdle rate (required rate of return) .


Optimal capitalization for an organization

Lowest weighted average total of capital or minimum weighted average of capital


Economic value added

EVA is a residual income technique used for capital budgeting and performance evolution. It represents residual excess income of project earnings in excess of cost of capital (including equity) associated with invested capital.


weighted average cost of capital

the weighted average cost of capital is frequently used as the hurdle within capital budgeting techniques. Investments that provide a return more than wacc is the best...hurdle rates


which ratio is used to evaluate company profitability

gross margin =Gross margin/sales


Invest turnover

sales/ average investment


Company's cost of preferred stock

Amount paid /net proceeds
where as amount paid is par value of the capital x % of preferred stock. net proceeds (Selling price-Flotation)


Cash conversion cycle

Does not include cash discount period
Inventory Conversion period+ receivables collection period - payables deferral period


Operating leverage

is defined as the degree to which a firm uses its fixed operating cots as to variable operating costs. A firm that has high operating leverage has high fixed costs and relatively low variable cost and uses this cost structure to magnify the financial result of each additional dollar in sales


Market rate of interest in one year of treasury bill

Risk rate plus inflation premium


Cost of common equity-Discounted cash flow method

expected dividend/ current share price+ growth rate


Material requirement planning(MRP)

Is specifically designed for WIP and Raw materials


Cycle counting

Is an inventory auditing procedure


Times interest earned ratio

Earnings before Interest and taxes/Total interest expense