8-7 - Testlet 2 - 66% Flashcards
Hedging Principle
the maturity structure of an entity’s financing should be consistent with the cash flow produced by the asset being financed.
What term identifies the guidance in the International Standards for the Professional Practice of Internal Auditing that distinguishes between requirements for “assurance” services and “consulting” services?
Implementation Standards.
Implementation Standards differentiate the requirements applicable to “assurance” activities from those applicable to “consulting” activities within the Attribute and Performance Standards.
What is the nominal risk-free rate of return in the US?
US Treasury Bond Rate
Operating Cycle
The average length of time between the acquisition of the inventory and the collection of cash from the sale of that inventory
Inventory Conversion Cycle + Accounts Receivable Conversion Cycle
In a computer-based system, the equivalent of a subsidiary ledger is a
Master file
A master file holds account and account balance information and is roughly equivalent to a ledger (or subsidiary ledger) in a manual system.
Which of the following is the shape of the demand curve a firm faces in a perfectly competitive market?
Horizontal
In a perfectly competitive market, a firm is a “price taker” that can sell any amount of commodity supplied at the established market price.
Thus, the demand curve is completely horizontal at the established market price. Because the demand curve is horizontal at the market price, marginal revenue (MR)–from one additional unit sold–is equal to the price (P) of the unit, which is also any point on the demand curve. These relationships are easily illustrated as:
In the long run, when a monopolistic firm produces at the quantity that maximizes revenue, will the firm use resources efficiently or inefficiently and will its price be higher or lower than in a competitive environment?
Use of Resources?
Monopoly Price?
Use of Resources: Inefficient
Monopoly Price: Higher than Perfect Competition
A monopolistic firm that produces at the quantity that maximizes revenue will use resources inefficiently and will have a higher price than a firm in perfect competition. The inefficient use of resources and the price that is higher than it would be in perfect competition result because the monopolistic firm faces a downward-sloping demand curve.
Which one of the following is the annual rate of interest applicable when not taking trade credit terms of “2/10, net 30?”
A. 2.00% B. 24.00% C. 36.00% D. 36.73%
Ans. D. 36.73%
Credit terms of "2/10, net 30" mean that the debtor may take a 2% discount from the amount owed if payment is made within 10 days of the bill, otherwise the full amount is due within 30 days. The 2% discount is the interest rate for the period between the 10th day and the 30th day; it is not the effective annual rate of interest. The computation of the annual rate of interest using $1.00 would be: Interest 1 APR = \_\_\_\_\_\_\_ x \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Principal Time fraction of year .02 1 APR = \_\_\_ x \_\_\_\_\_\_ = .0204 x (360/20) = .98 20/360 APR = .0204 x 18 = 36.73% Thus, the effective annual interest rate for not taking the 2% (.02) discount is 36.73%. The 20 days in the 360/20 fraction is (30 - 10), the period of time over which the discount was lost as a result of not paying early.
A company recently issued 9% preferred stock. The preferred stock sold for $40 a share, with a par of $20. The cost of issuing the stock was $5 a share. What is the company’s cost of preferred stock?
5.1%
In this question, the net proceeds per share is given as $40 sales price less $5 per share issue cost, or $35 per share net proceeds. The annual cost of the newly issued shares is the par value, $20, multiplied by the preferred dividend rate, 9%, or $20 x .09 = $1.80 annual dividend per share. Therefore, the cost of capital for the newly issued preferred stock is $1.80/$35.00 = 5.1%.
How is the current cost of capital for newly issued preferred stock computed?
annual costs of the newly issued shares / net proceeds per share
How are the annual costs of newly issued preferred stock calculated?
par value x preferred dividend rate
How are the net proceeds of newly issued shares of preferred stock calculated?
sales price per share less share issue cost per share
Price Elasticity of Demand
Price elasticity of demand measures the percentage change in the quantity of a commodity demanded as a result of a given percentage change in the price of the commodity.
A high price elasticity of demand means that the percentage change in demand would be greater than the percentage change in price. For example, an increase in price would result in a greater than proportionate decrease in demand.
Such a result would likely indicate that there are many similar substitutes for the commodity for which the price was increased; buyers would have many other options when the price of the commodity of concern is increased.
