box out Flashcards
(18 cards)
residual income formula
income - (investment * hurdle rate)
why is increasing debt when tax rates increase a good idea?
interest expense is tax deductible while dividends are not
what is prime rate?
the lowest rate of interest at which money can be borrowed at commercially
what is the operating profit margin?
sales $200,000
NI $100,000
depreciation $20,000
taxes $5,000
interest $10,000
115/200
a favorable flexible budget variance could be due to
changes in selling price
why would IRR not be helpful in evaluating the adequacy of a budgeted operating income?
IRR is for capital budgeting
market rate of interest includes what rates?
risk free
inflation rate
what are risk premium adjustments used to compute the required rate of return?
inflation risk
default risk
maturity risk
what does NPV compare?
cash inflow and cash outflow from a project
Fernwell wants to buy shares of Gurst company in 2 years. Fernwell uses the constant growth dividend discount model with a growth rate of 5%. Fernwell’s discount rate is 10% and Gurst’s current dividend is $20. How much will Fernwell pay?
- calculate next year’s dividend (since F uses a constant growth model) $20 * (1.05) * (1.05) = $22.05
- use year 3’s dividend and factor in the growth rate
$22.05 * (1.05) / (.1 - .05)
why does a budgeted income statement need to be prepare before a budgeted balance sheet?
net income flows into retained earnings
why would a company who exports to Asia not be subject to translation exposure?
they don’t have a foreign subsidiary
what is free cash flow?
$120,000 net income
$30,000 capital expenditures
$5,000 depreciation expense
$3,000 increase in working capital
$92,000 free cash flow after op. expenses & asset maintenance
120,000
(30,000)
+ 5,000
(3,000)
under process costing, how do you find the cost per equivalent unit under FIFO?
current material costs / [beg inv (incomplete) - all beg inv + completed units + ending inventory]
what is Kaizen analysis?
continuous improvement through the search for cost reductions to stay within target costs
what do program change controls strive to achieve?
prevent unauthorized access
track changes made in the system
when is overhead control account recorded?
what type of account is overhead control account?
what is the journal entry for an over applied overhead control account?
when indirect materials are purchased
it’s an expense account
credit OH control to reduce the expense
what risks come with outsourcing? (3)
poor quality
less secure - potential information compromise
staff turnover
