final exam

Question 1

What does MARR/Discount Rate consider?

Answer 1

1. Cost of Loan
2. Cost of capital
3. Opportunity Cost
4. Risk
5. Time

Question 2

Annual Percentage Rate

Answer 2

Loan Amount (in the time period indicated)

Question 3

NPV

Answer 3

Bring all values to the PV and subtract any initial investment. Higher NPV is better!

Question 4

NFV

Answer 4

Bring all values to the FV… subtle

Question 5

What is IRR

Answer 5

what interest rate will cause the NPV to be 0. Or, what would make hte PV of costs = PV of benefits

Question 6

Capitalized Cost

Answer 6

take a PV, divide by MARR. Represents the lump sum you need to handle the cost forever

Question 7

Loan Payment/ Total Cost/ Total Paid

Answer 7

Annual Payment -> amt of loan(ap, interest, length)
Total Paid -> annual payment * term length
Total Interest Paid -> Total Paid - principal

Question 8

Straight-line Depreciation

Answer 8

life span

Question 9

Accounting Equation

Answer 9

Assets = Liabilities + OE

Question 10

Balance Sheet

Answer 10

• Assets (at book value)
• Liabilities
• OE
• shows financial progress

Question 11

Net Worth

Answer 11

• Assets(fair market value)
• Liabilities
• OE
• shows solvency

Question 12

Cash Flow

Answer 12

• Beginning Balance
• operating activities
• investing activities
• financing activities
• net flow
• ending balance
• shows liquidity

Question 13

Net Income Statement (and Accrued)

Answer 13

-total revenue
-variable expenses
contribution margin
-fixed expenses

ACCRUAL
cash sales
sales revenue
AR adjustment value
inventory adjustment value
= total revenue

variable expenses
ap adjustment value
fixed expenses
prepaid expenses
= total expenses

difference is NET INCOME

-shows profitability

Question 14

Contribution Margin

Answer 14

Total Revenue - Total VC

Question 15

Effective Rate

Answer 15

altered by compound interest
= (1 + nominal annual rate/time periods)^time periods - 1
1.5% monthly is 19.56

Question 16

Nominal Rate

Answer 16

unaltered (like a bank charging you 1.5% monthly is 18% nominally

Question 17

Liquidity Ratios

Answer 17

Current Ratio = CA/CL >1 green, =1, yellow, <1 red
Quick Ratio = (CA-INV)/CL same as above
Working Capital = CA-CL (varies)
Working Capital to Expenses = CA- CL/Total Expenses >50 green, 20-50 yellow, <20 red

Question 18

Solvency Ratios

Answer 18

Debt2Asset = total debt/total assets   <30 green, 30-55 yellow, >55 red
Debt2Equity = total liabilities/total owner's equity   <42 green, 42-122, yellow, >122 red
Equity2Asset = total equity/total assets   >55 green, 30-55 yellow,

Question 19

Solvency Ratios

Answer 19

Debt2Asset = total debt/total assets   <30 green, 30-55 yellow, >55 red
Debt2Equity = total liabilities/total owner's equity   <42 green, 42-122, yellow, >122 red
Equity2Asset = total equity/total assets   >55 green, 30-55 yellow, <30 red

Question 20

Profitability Ratios

Answer 20

Operating Profit Margin = EBIT/total revenue >25 green, 10-25 yellow, <10 red
ROA = NI + Annual Interest Expense/Average Assets >12 green, 6-12 yellow, <5 red
ROE = NI/Average OE… look at the opportunity cost

Question 21

Efficiency Ratios

Answer 21

Asset Turnover = total revenue/avg. asset value
AP Turnover = currrent AP/avg AP
Inventory Turnover = VC/avg. inventory

all are benchmarked by looking at other ocmpanies or previous years

Question 22

Financial Risk

Answer 22

all to do with liabilities

can use any ratio that involves debt to analyze

Question 23

Business Risk

Answer 23

unavoidable, has to do with business you’re in

can use contribution margin, or look at financial leverage ability

Question 24

Factors when considering optimal capitalization

Answer 24

• 3R’s
• 5C’s
• Leverage
• Busines Risk
• Financial Risk

Question 25

Value of TVM

Answer 25

• dollar today is worth less in future due to inflation
• useful for loans
• mortgages
• investments
• asset acquisition
• personal finance

Question 26

Tax Implications of Selling an Asset

Answer 26

• consider capital gains/taxes

Question 27

Leverage

Answer 27

If your ROA is >12% then good use of liability

Question 28

Debt vs. Equity

Answer 28

Debt Equity
Decision fixed flexible
making

Security yes no

Leverage yes no

Question 29

5 C’s

Answer 29

Character
Collateral
Capacity
Conditions
Capital

Question 30

3R’s

Answer 30

1) returns from investment
2) repayment capacity
3) risk-bearing ability

Question 31

Payback Period

Answer 31

time it takes for an initial investment to pay itself back

Question 32

Breakeven Price

Answer 32

P = (FC + (VC * Q))/Q

Question 33

Breakeven Quantity

Answer 33

units = FC/(p-vc)

Question 34

Contribution Margin Ratio

Answer 34

selling price per unit

Question 35

Break even in sales dollars

Answer 35

contribution margin ratio

Question 36

margin of safety in units, dollars and safety percentage

Answer 36

actual/estimated units of activity - BEP in units

actual/estimate sales $ - BEP in sales $

Question 37

Use of Break even analysis

Answer 37

profit planning
risk assessment (business and financial)

Question 38

Estimating Models

Answer 38

• per unit model
• segmenting model
• cost index
• power-sizing model
• triangulation

Question 39

financial activities

Answer 39

1. taking loans
2. issuing shares/stocks
3. paying loans principal
4. owner contributions
5. owner withdrawals
6. reinvestment of net income (called retained earnings)

Question 40

investing activities

Answer 40

transactions that +/- long term assets

Question 41

operating activities

Answer 41

-buying and selling goods
buying supplies
paying wages
paying income tax
paying interest

Question 42

revenue

Answer 42

money created through operating activites

Question 43

double declining depreciation

Answer 43

(100/useful life) *2