Flashcards in BEC MCQ 3.3 Deck (45):

1

## Capital budgeting decisions

### doesn't include short term financing needs they are more of operational

2

## The annual depreciation expense on an asset reduces income taxes

### The firms marginal tax rate times the depreciation amount

3

## Manufacturing equipment replacement decision

### Disposal price of the old equipment

4

## Items included in discounted cash flow analysis

###
Future operating cash saving

current asset disposal price

tax effects of future asset depreciation

future asset disposal price

5

## not included in discounted cash flow analysis

### future asset depreciation expense

6

## A project should be accepted

### if the NPV is greater or equal to zero

7

## Rates used in Net present value analysis

###
The discount rate, hurdle rate and cost of capital. These are the synonymous terms for an arbitrary rate set by management

Rates which will Decrease NPV

Increase in discount rate will reduce NPV.

Increase in NPV

Increase the estimated salvage value

Extend the project life and associated cash inflow

Decrease the estimated effective income tax rate

If the NPV of a proposed investment is negative the discount rate used must be greater than the project IRR.

The IRR is the discount rate that results in a NPV of zero

The disadvantage of NPV is that it does not provide the true rate on investment. The NPV indicates whether the investment will earn the hurdle rate used in the NPV calculation.

8

## Sensitive analysis

### is a what if technique that's asks how a given organization will change if the original estimates used in capital budgeting are changed

9

## IRR

### is the rate of return that produces a npv of zero. IRR valuation do not require cash flows that are constant. IRR an be determined even the profitability index is less than one. IRR is defined as the technique that determines the present value factor after the tax flows equals the initial investment of the project. Alternatively IRR is the discount rate that produces a npv of zero . NPV will greater than zero when IRR is higher than the hurdle rate

10

## Pay back method

### is the length of time required to recover the initial cash outlay of a project. It emphasis liquidity

11

## A firm with a higher degree of operating leverage

###
implies that firms profit are more sensitive to changes in sales volume

higher variable costs implies a lower degree of operating leverage

A firm using significant amount of debt has higher degree of financial leverage

12

## when the cost of funds from the sale of Common stock is asked

### annual dividend/sale price of common shares -floatation cost-underpricing

13

## Strategies for creating an optimal capital structure is

###
Maximizing earning per share

Minimizing cost of debt

minimizing cot of equity

maximizing cash flow

14

## If a company becomes more conservative in its working policy

### it would tend to have an increase of ratio of current assets to current units of output

15

## Turnaround document

### Is a computer output that can be later used as a source document

16

## Converting accounts receivable to cash

###
Collection agencies: Used to collect overdue A/R

Selling AR or factoring AR

Cash discount

Electronic fund transfers

17

## Commercial paper

###
does not have an active secondary market. Commercial papers are sold by money markets by highly credit worthy companies. The maturity is less than 270 days. The interest on commercial paper is below prime rate but above Treasury bill rate.

There are restrictions as to the type of corporation that can enter into a commercial market for short term financing since to use of the open market is restricted to a small number of most credit worthy large corporations

ADvantage

it avoids the expense of maintaining a compensating balance

provides a broad distribution for borrowing

accrues a benefit to the borrower because its name is more widely known

18

## Negotiable certificate of deposit

###
Negotiable CD have former secondary market

are regulated by Federal Reserve System

Are sold in denominations of 100000.

It carry lower interest than banker acceptance and commercial paper

19

## The primary motivation for holding cash

###
Transactions demand

Speculative demand

Precautionary demand

20

## If we are asked to Determine additional investment in Accounts receivable

###
Step 1: Determine average accounts receivable and the additional accounts receivable as follows:

it is new credit policy minus old credit policy it will give additional A/R

Determine the additional investment in additional accounts receivable

It is the receivable balance minus variable cost

then calculate the returned on investment

that is the amount

21

## IF a seller extends credit to a purchaser more than his operating cycle

### it means in effect financing more than inventory needs

22

## Comparing a change in credit policy

###
Cost of funds

Bank may require that a day sales O/S cannot exceed certain number of days.

Customers may feel they should be given extended terms. If this is true additional working capital may be even greater

23

## what does not affect safety stock

###
re-order level

The facts that affect safety stock are

uncertain sales forecasts

dissatisfaction of customers

uncertain lead times

24

## Re-order point is

### safety stock+ stock units used during lead time

25

## inventory carrying costs

###
uinspections are part of ordering costs not carrying cots. Disruption of productions schdules,quantity discount lost, handling cost

Inventory cost or carrying cost include

insurance

opportunity cost on inventory investment

obsolescence and spoilage

Cost of capital invested in industry

26

## expected stock out cost + carrying costs

### safety stock costs

27

## Ordering costs primarily consist of

### production set up

28

## Average inventory

### Re-order quantity/2 Average inventory excluding safety stock + Avg safety stock= avg. Inventory including safety stock.

29

## Operating leverage

### Fixed costs/Variable costs

30

## Historical weighted average cost of capital

### It is often used as target or hurdle rate not the optimal rate

31

## residual income

###
first step=Average invested capital=sales/capital turnover

second step=operating income-(imputed rate x average invested capital)

32

## Return on assets

### Income/Ave.Assets or income /sales or sales /avg.assets

33

## ROI

### Net Income/ Invested Capital

34

## Cost of fund from retained earnings

### Dividend /stock price

35

## Free cash flow`

### Net operating profits after taxes+ Depreciation + Amortization -Capital expenditures-net increase in WC

36

## Interest on investment

### Invested capital x required rate of return

37

## Economic value added

### Net operating profit after taxes-cost of financing

38

## Cost of financing

### Total assets-current liabilities x WACC

39

## Economic rate of return on C.S

### Dividends+change in price/ Beginning price

40

## ROI based on assets

### Net Income/ Total assets or Average invested capital

41

## Du point ROI analysis=Return on salesx asset turnover

###
Return on sales= Net Income/sales

Asset turnover= Sales/total assets

42

## Market capitalization

### Common Stock price per share x common stock O/S

43

## Market Ratio

###
Common stock price per share/Book value per share

Market capitalization/ Common Stockholders Equity

44

## Cost of funds from sale of C.S

### Annual dividend/ Sale price of common share -flotation costs-underpricing

45