BEC MCQ 3.3 Flashcards Preview

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Flashcards in BEC MCQ 3.3 Deck (45)
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1
Q
Capital budgeting decisions
A
doesn't include short term financing needs they are more of operational
2
Q
The annual depreciation expense on an asset reduces income taxes
A
The firms marginal tax rate times the depreciation amount
3
Q
Manufacturing equipment replacement decision
A
Disposal price of the old equipment
4
Q
Items included in discounted cash flow analysis
A
Future operating cash saving
current asset disposal price
tax effects of future asset depreciation
future asset disposal price
5
Q
not included in discounted cash flow analysis
A
future asset depreciation expense
6
Q
A project should be accepted
A
if the NPV is greater or equal to zero
7
Q
Rates used in Net present value analysis
A
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
Q
Sensitive analysis
A
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
Q
IRR
A
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
Q
Pay back method
A
is the length of time required to recover the initial cash outlay of a project. It emphasis liquidity
11
Q
A firm with a higher degree of operating leverage
A
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
Q
when the cost of funds from the sale of Common stock is asked
A
annual dividend/sale price of common shares -floatation cost-underpricing
13
Q
Strategies for creating an optimal capital structure is
A
Maximizing earning per share
Minimizing cost of debt
minimizing cot of equity
maximizing cash flow
14
Q
If a company becomes more conservative in its working policy
A
it would tend to have an increase of ratio of current assets to current units of output
15
Q
Turnaround document
A
Is a computer output that can be later used as a source document
16
Q
Converting accounts receivable to cash
A
Collection agencies: Used to collect overdue A/R
Selling AR or factoring AR
Cash discount
Electronic fund transfers
17
Q
Commercial paper
A
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
Q
Negotiable certificate of deposit
A
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
Q
The primary motivation for holding cash
A
Transactions demand
Speculative demand
Precautionary demand
20
Q
If we are asked to Determine additional investment in Accounts receivable
A
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
Q
IF a seller extends credit to a purchaser more than his operating cycle
A
it means in effect financing more than inventory needs
22
Q
Comparing a change in credit policy
A
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
Q
what does not affect safety stock
A
re-order level
The facts that affect safety stock are
uncertain sales forecasts
dissatisfaction of customers
uncertain lead times
24
Q
Re-order point is
A
safety stock+ stock units used during lead time
25
Q
inventory carrying costs
A
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
Q
expected stock out cost + carrying costs
A
safety stock costs
27
Q
Ordering costs primarily consist of
A
production set up
28
Q
Average inventory
A
Re-order quantity/2 Average inventory excluding safety stock + Avg safety stock= avg. Inventory including safety stock.
29
Q
Operating leverage
A
Fixed costs/Variable costs
30
Q
Historical weighted average cost of capital
A
It is often used as target or hurdle rate not the optimal rate
31
Q
residual income
A
first step=Average invested capital=sales/capital turnover
second step=operating income-(imputed rate x average invested capital)
32
Q
Return on assets
A
Income/Ave.Assets or income /sales or sales /avg.assets
33
Q
ROI
A
Net Income/ Invested Capital
34
Q
Cost of fund from retained earnings
A
Dividend /stock price
35
Q
Free cash flow`
A
Net operating profits after taxes+ Depreciation + Amortization -Capital expenditures-net increase in WC
36
Q
Interest on investment
A
Invested capital x required rate of return
37
Q
Economic value added
A
Net operating profit after taxes-cost of financing
38
Q
Cost of financing
A
Total assets-current liabilities x WACC
39
Q
Economic rate of return on C.S
A
Dividends+change in price/ Beginning price
40
Q
ROI based on assets
A
Net Income/ Total assets or Average invested capital
41
Q
Du point ROI analysis=Return on salesx asset turnover
A
Return on sales= Net Income/sales
Asset turnover= Sales/total assets
42
Q
Market capitalization
A
Common Stock price per share x common stock O/S
43
Q
Market Ratio
A
Common stock price per share/Book value per share
Market capitalization/ Common Stockholders Equity
44
Q
Cost of funds from sale of C.S
A
Annual dividend/ Sale price of common share -flotation costs-underpricing
45
Q
Coefficient of variation
A
Standard Deviation/Rate of return