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B2 Flashcards

1
Q

Capital Asset Pricing Model Formula

A

Risk Free Rate + (Beta * (Market Return - Risk Free Rate))

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2
Q

Stated Interest Rate

A

rate of interest charged before adjustments for compounding or market factors

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3
Q

Simple Interest Rate

A

amount of interest paid on the original principal without including compounding

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4
Q

Compound Interest

A

amount of interest earnings or expense that is based on the original principal plus unpaid interest earnings or expense

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5
Q

Net Proceeds Formula

A

Total Loan Amount - Fees and Charges - Compensating Balance

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6
Q

Effective Interest Rate Formula

A

Net Proceeds

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7
Q

Calculate Effective Interest Rate

A

Actual Interest = ( P x Rate x Time)

Net Interest Cost = Actual Interest - Interest Earned

Effective Interest Rate= Net Interest Cost/ Loan Proceeds - Additional Balance

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8
Q

Calculate Effective Interest Rate in form of a discounted note

A

Cash Proceeds = Loan Principal - Interest discounted in advance

Effective Interest Rate = Interest Charged/ Cash Proceeds Of discounted note

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9
Q

Calculate Effective annualized percentage cost of financing

A

(Face Value - Original Issue Discount ) = x

X + Transaction costs = Y

(Y/ Original Issue Discount) x number of years = Answer

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10
Q

Interest Paid Formula

A

loan amount * ( annum interest amount ) - interest earned

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11
Q

Weighted Average Cost of Capital (WACC)

A

The average cost of debt and equity financing associated with the firms existing assets and operations.

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12
Q

After Tax Cost of Debt Formula

A

Pre tax Cost of Debt x ( 1- Tax Rate)

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13
Q

Cost of Preferred Stock Formula

A

Preferred Stock Cash Dividends / Net Proceeds of Preferred Stock

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14
Q

Cost of Retained Earnings using CAPM formula

A

Risk Premium
Risk Free Rate +———————————————————
[Beta Coefficient x (Market Rate - Risk Free Rate)]
—————————————-
Market Risk Premium

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15
Q

Retained Earnings using Discounted Cash Flow

A

(Dividend per share at year end/ Current Market Value) + Constant growth rate of dividends

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16
Q

Retained Earnings under bond yield plus risk premium

A

Pretax cost of debt + Market Risk Premium

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17
Q

1) Operating Lease

A

1) Operating lessee will record (ROU) asset and a lease liability on balance sheet. ROU will be amortized and lease liability paid down over life of lease.

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18
Q

Finance Lease

A

Will record a ROU and Lease liability on balance sheet. Each lease will consist of interest (IS) and principal pay (BS) down.

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19
Q

1) Debenture
2) Subordinated Debenture

A

1) Debenture: unsecured obligation of the issuing company
2) Subordinated Debenture: bond issue that is unsecured and ranks behind senior creditors in a bankruptcy scenario

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20
Q

Examples of Delay Disbursement

A

1) Defer Payments
2) Drafts
3) Letter of Credit
4) Zero Balance Accounts

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21
Q

Annual Percentage rate for quick payment discounts

A

360 Discount %
——————————————-x —————————-
Pay Period - Discount Period 100% - Discount %

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22
Q

Formula for Reorder Point Inventory

A

Reorder Point = Safety Stock + (Lead Time x Sales During Lead Time)

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23
Q

Economic Order Quantity (EOQ) Formula

A

2 x Sales in Units x Cost per Purchase Order
\ ——————————————————————-
Carrying Cost per Unit

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24
Q

Motivation to hold Cash

A

1) Transaction Motive
2) Speculative Motive
3) Precautionary Motive

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25
Q

Advantages and Disadvantages of Short Term Financing

A

1) Advantages: Increased liquidity, Increased profitability, Decreased financing costs
2) Disadvantages: Increased interest rate risk, Decreased capital availability

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26
Q

Advantages and Disadvantages of Long Term Financing

A

1) Advantages: Decreased interest rate risk, increased capital availability
2) Disadvantages: decreased liquidity, decreased profitability, increased financing costs

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27
Q

Present Value Formula

A

(1 + Interest Rate) ^ Number of Years

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28
Q

Present Value of annuity

A
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29
Q

Dividend Discount Model

A

(Required Return - Growth Rate)

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30
Q

Valuing Intangible Assets (Patents, Trademarks, Intellectual Property)

A

1) Market Approach: similar market
2) Income Approach: expected cash flow over useful life
3) Cost Approach: based on replacement cost

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31
Q

Net Present Value (NPV)

A

Difference between the present value of the cash inflows and outflows from a project (If positive then invest)

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32
Q

Internal Rate of Return (IRR)

A

The discount rate which the present value of the cash inflows equals the present value of the cash outflows from project. (IRR should exceed the hurdle rate)

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33
Q

Payback Method Formula

A

Increase in annual net after tax cash flow

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34
Q

The bond will sell at a premium when the

A

stated coupon rate on the bond is greater than the market interest rate on the bond at a given date

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35
Q

Commercial paper generally does not have an

A

active secondary market, it usually sold to the money markets by high creditworthy companies

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36
Q

Commercial paper avoids the expense of

A

maintaining compensating balance with commercial bank, Provide a broad distribution for borrowing, borrowers name becomes more widely known

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37
Q

Cost of Capital aka hurdle rate is the minimum return

A

a company must achieve in order to make an investment financially feasible, which can be calculated using WAAC.

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38
Q

The overall cost of capital is

A

rate of return required to cover the cost of resources employed

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39
Q

The optimal capitalization for an organization usually can be determined by

A

lowest total weighted average cost of capital (WACC)

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40
Q

When the mean return is greater than the standard deviation that means

A

there is a greater reward/ risk ratio.

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41
Q

Debt is a cheaper source of financing

A

than equity, bonds will be the cheapest form of financing. In addition issuing bonds receives a tax deduction for interest paid which further reduces cost

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42
Q

In the CAPM (Capital Asset Pricing Model) formula the

A

beta coefficient measures the volatility or risk inherent investment by % change in stock price

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43
Q

Manager have met the responsibility if

A

the return on capital investment exceeds the rate of return associated with the firms beta factor

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44
Q

CAPM model is calculated by taking the

A

Risk free rate + {Risk premium aka Beta * (Market Rate return - Risk Free Rate)}

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45
Q

Calculate Market rate of interest on a one year US treasury bill

A

Risk free rate of interest + Inflation Premium

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46
Q

When determining the risk premium

A

length of maturity, relative liquidity, and relative security is relevant

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47
Q

An example of operating leverage is a

A

firm cost structure includes a higher degree of operating fixed costs than variable costs by electing to pay salaries instead of commission.

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48
Q

Net working capital is the difference

A

between current assets and current liabilities

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49
Q

Determine the appropriate level of working capital requires

A

offsetting the benefit of current assets and current liabilities against liabilities rising at a faster rate than assets

50
Q

As a company becomes more conservative in its working capital

A

it increases in the ratio of current assets to units of output

51
Q

Refinancing a short term note payable with a two year note payable would

A

increase the working capital of the firm

52
Q

The working capital financing policy that finances permanent

A

current assets with short term debt subjects the firm to the greatest risk of being unable to meet maturity

53
Q

Loan X require 4 equal payments which includes both interest and principal and Loan Y require one lump sum payment at the end of year four. Interest is an expense while principal is a liability,

A

there for Loan X will be higher in Year 1 due to the principal owed in Year 2 which means a lower working capital, Loan Y does not reflect principal until last payment.

54
Q

The current ratio is measure current assets by current liabilities which will increase if you receive

A

payment on accounts payable but the ratio will stay unchanged if cash is received from a receivable bc that cash already was included in assets just moved to a different category

55
Q

Refinancing of accounts payable with a two year note payable would

A

increase capital of a firm

56
Q

When a long term debt instead of short term debt is used to finance inventory purchases

A

current ratio and total debt ratio both increase

57
Q

Quick ratio includes

A

marketable securities but excludes inventory and prepaids

58
Q

Increase inventory Turnover lowers

A

cash conversion cycle

59
Q

Net realizable value method, recognize the price

A

at which the inventory could be sold less any costs associated with shipping inventory

60
Q

Examples of inventory carrying costs are

A

insurance, opportunity cost on inventory investment, obsolescence and spoilage

61
Q

Safety stock the minimum level on

A

inventory that a firm keeps on hand, which depends on sales forecast, customer dissatisfaction for back orders, lead time for stock shipments

62
Q

The optimal level of inventory would be affected by

A

cost per unit of inventory, cost of placing an order for merchandise, lead time to receive merchandise ordered.

63
Q

When the Economic order quantity (EOQ) model is used for a

A

firm which manufactures inventory ordering costs consist of production set up

64
Q

The economic order quantity formula (EOQ) assumes

A

the periodic demand is known

65
Q

Economic Order Quantity is when

A

Inventory Management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory

66
Q

SCOR model says when

A

key management processes does assess the ability of suppliers to supply resources falls under “Plan”

67
Q

Supply Chain Operations Reference (SCOR) says a company would include

A

determining demand requirements, assessing capacity concerns and capabilities, making make/ buy decisions in its planning

68
Q

Potential Problems for a company with just in time inventory are

A

actual lead time for materials order could be longer than expected, loss of quantity discounts more than the cost of handling and purchasing larger lots of inventory, low quantity inventory. Seasonal fluctuations should not be a problem bc manufactures and suppliers should expect it and coordinate

69
Q

Primary benefit of just in time inventory system for raw materials is

A

eliminates non value added operations

70
Q

Materials requirements planning has a set of procedures to

A

determine inventory levels for demand dependent inventory types such as work in process and raw materials

71
Q

Supply Chain Operations Reference (SCOR) says key management processes does

A

managing accounts receivable and collections from customers falls into Deliver

72
Q

Supply Chain Operations Reference (SCOR) says

A

key management processes does collecting and processing vendor payments falls into Source

73
Q

Accounts Payable provides a

A

spontaneous source of financing for a firm

74
Q

Trade credit is subject

A

to risk of buyer default

75
Q

A firm best delay disbursements through

A

the use of Drafts

76
Q

Trade credit should still be used if

A

cost of alternative short term financing is more

77
Q

If a seller extends credit to a purchaser for a longer period of time than operating cycle it in effect

A

financing more than just the purchaser’s inventory needs

78
Q

If a seller extends the payback period on a customer it affects

A

cost of funds, impact on current customer base of extending terms for certain customers, bank loan covenants on days sales outstanding. No affect on current bad debt.

79
Q

Examples of methods of converting accounts receivable to cash

A

Cash discounts, collection agencies, and electronic funds transfers

80
Q

A change in credit policy has caused an increase in

A

sales, increase in discounts taken, decrease in the amount of bad debt, decrease in accounts receivable means the average collection period decreased

81
Q

If a business sells a product and they receive 55% of it by check and 45% by credit card after they receive the invoice all of it goes to

A

accounts receivable bc they aren’t paying it until they receive an invoice not immediate payment

82
Q

Concentration banking is when

A

company establishes a single bank as its central depository

83
Q

Lockbox System accelerated

A

accounts receivable because its systems of mailboxes in many locations where customers send payments. Company checks mailboxes and immediately deposits checks

84
Q

A lockbox most likely provides for receivable management

A

a minimized collection float because its expedites cash inflows

85
Q

The primary reason for a company to agree to debt covenant

A

limiting the percentage of its LT debt is to reduce the coupon rate on the bonds being sold

86
Q

Stock price will grow at the same rate as the dividend if the company uses

A

a constant growth dividend discount model to forecast the value of share of common stock

87
Q

Price sales ratio is a valuation of estimation technique that can be adapted

A

to start up companies and other situations where earnings are very low

88
Q

Capital Budgeting is accelerated method of

A

depreciation provide tax shields that are advantageous from a present value point of view

89
Q

Estimating Cash Flow for use in capital budgeting, depreciation is utilized in

A

determining the tax costs or benefit

90
Q

Increase in manufacturing flexibility, improved product delivery and service, reduction in new product development cost are factors in making capital budgeting decisions

A

development cost are factors in making capital budgeting decisions

91
Q

When buying a new van and selling the old van the relevant costs are

A

Purchase Price of new van, disposal price of old van

92
Q

Capital Budgeting is based on predictions of an

A

uncertain future, financing large expenditures, making investments that produce returns over long period of time, selecting among long term investment alternatives

93
Q

Opportunity Cost is the potential benefit lost by selecting a different course of action.

A

by selecting a different course of action.

94
Q

When buying a new machine the orginal price of the old machine is a

A

sunk cost that will not change, sunk costs are not relevant in deciding to buy new machines

95
Q

MACRS method of capital budgeting is equal to

A

straight line depreciation (only timing differs)

96
Q

Evaluating a capital budget project the use of the net present value is generally affected by

A

initial cost of the project, amount of added working capital needed for operations, amount of the projects associated depreciation tax allowance

97
Q

Calculations of payback period

A

discounted cash flow, internal rate of return and net present value rely on the forecasting of future data

98
Q

A projects net present value ignoring income tax considerations

A

is normally affected by proceeds from sale of the asset replaced

99
Q

Net Present Value analysis uses

A

cost of capital, hurdle rate, and discount rate

100
Q

Using accelerated method instead of straight-line

A

increases the present value of the depreciation tax shield

101
Q

When the risks of the individual components of a projects cash flows are different an acceptable

A

procedure to evaluate cash flows is to discount each cash flow using a discount rate that reflects the degree of risk

102
Q

An advantage of net present value over internal rate of return is

A

NPV can be used when there is no constant rate of return required for each year of the project

103
Q

Limitations of the profitability Index is it

A

requires detailed long term forecasts of the projects cash flows

104
Q

Profitability Index should be used if capital rationing needs to be considered

A

when comparing capital projects

105
Q

When net present value is positive (greater than zero) the project should

A

be accepted, considering only present value is wrong because it ignores cash outflows, considering only IRR is wrong because it could be less than minimum desired rate

106
Q

Internal Rate of Return (IRR) rate of interest where the

A

net present value is equal to zero

107
Q

Factor of the IRR Formula=

A

Net Incremental Investment (Investment Required)
_______________________
Net annual cash flows

108
Q

Internal Rate of Return equates the present value of a projects expected

A

cash inflows to the present value of the projects expected cash outflows

109
Q

Internal Rate of Return decision making models equates

A

the initial investment with the present value of the future cash inflows

110
Q

A time adjusted rate of return from an investment is

A

the internal rate of return

111
Q

Present Value Factor =

A

Investment
____________
Cash Flows

112
Q

Internal Rate of Return (IRR) is equal

A

to the discount rate

113
Q

IRR and NPV method may be different if the two projects have unequal lives

A

and the size of the investment for each project is different

114
Q

Internal Rate return method is less reliable than the net present value technique when

A

there are several alternating periods of net cash inflows and net cash outflows

115
Q

Evaluating capital budgeting analysis techniques

A

the payback period emphasizes liquidity

116
Q

In capital budgeting the total amount of the initial outlay for the project

A

is included in the payback model calculation

117
Q

The payback rule ignores all cash flows after

A

the end of the payback period

118
Q

A limitation of using the discounted payback method

A

to evaluate a projects is that it ignore cash flows after the payback period

119
Q

Trade Credit provides

A

the largest source of short term credit for small firms

120
Q

A practitioner considers when determining the sufficiency of the procedures is

A

In a agreed upon procedures engagement the sufficiency of the procedure is determined based on THE NEEDS AND UNDERSTANDING OF THE INTENDED USERS

121
Q

In a review of interim financial information, the auditor report should

A

a statement that the auditor is not aware of any material modifications that should be made to the interim financial information (no assurance, reviews give negative assurance)

122
Q

Company best ensure the reliability of its financial data

A

System automatically verifies the math and consistency of financial data. Automated data validation controls provide real time assurance of data reliability. The system checks mathematical accuracy, consistency, and completeness of data, ensuring reliability.

BEC Flashcards (40 decks)

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