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1 Becker BEC > B3 > Flashcards

B3 Flashcards

1
Q

Characteristics of Relevant Costs

A
  • direct costs
  • prime costs
  • discretionary costs (periodic annual budgeting decisions)
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2
Q

Alternative Terms for Relevant Costs and Revenues

A

Incremental Costs
Avoidable Costs and Revenues
**unavoidable and sunk costs

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3
Q

Cash Flow Effects: Direct and Indirect

A
  • Direct: pays or receives cash

* Indirect: depreciation; net proceeds on the sale of old offsets cost of new

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4
Q

How to treat sale of old asset

A

Cash proceeds +tax savings from loss or -tax on gain

*same goes for selling the equipment in the year of disposal

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5
Q

Should pre-tax or after tax cash flows be used?

A

AFTER tax cash flows

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6
Q

Don’t forget to include the __________

A

DEPRECIATION TAX SHIELD

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7
Q

New equipment can do the following

A

Increase revenues and/or reduce expenses

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8
Q

What is the rate usually used for DCF?

A

*WACC (hurdle rate)

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9
Q

Limitation of DCF?

A

*uses one single interest rate even though rates are subject to fluctuate

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10
Q

Interpreting the NPV Method

A 
Positive = Make Investment
Negative = Do Not Make Investment
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11
Q

NPV Method

A

*can use different interest rates to adjust for risk and inflation

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12
Q

NPV Method is Superior to IRR because

A

*it is flexible enough to consistently handle either uneven cash flows or inconsistent rates of returns

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13
Q

Limits of the NPV Method

A

*not providing the true rate of return on the investment

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14
Q

Limited Capital and NPV

A

*allocate capital to the combination of projects with the maximum net present value

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15
Q

Profitability Index

A

= (present value of net future cash inflow)/(present value of net initial investment)

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16
Q

IRR

A
  • determines the present value factor that yields an NPV equal to zero
  • rate at which the present value of the cash inflows equals the present value of the cash outflows
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17
Q

Limitation of IRR

A

*cash is assumed to be reinvested at the internal rate of return
*can’t take into account uneven cash flows or differing rates
*does not consider profit, only the interest rate
SIZE MATTERS

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18
Q

Payback Period Method

A
  • does not consider profitability
  • measures the time it will take to recover the initial investment
  • the greater the risk, the shorter the payback period should be
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19
Q

Payback Period Formula

A
  • (net initial investment)/(increase in annual net after-tax cash flow)
  • TAX SHIELD DEPRECIATION IS INCLUDED!!
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20
Q

Advantages/Disadvantages of Payback Method

A
  • easy to use and understand
  • emphasis on liquidity
  • time value is ignored
  • ignores future profitability
  • reinvestment of cash is not considered
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21
Q

Discounted Payback Method

A

*same as payback period except it takes into account the time value of money

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22
Q

Degree of Operating Leverage

A

(delta EBIT) / (delta sales)

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23
Q

Degree of Financial Leverage

A

(delta EPS) / (delta EBIT)

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24
Q

Degree of Total Leverage

A

(delta EPS) / (delta sales)

  • or: DOL x DFL
  • *DO NOT ADD TOGETHER!!

*the greater the degree of leverage, the greater the risk but also potential for profits

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25
Who influences operating and financial leverage?
Operating - the industry | Financial - management
26
WACC
(cost of equity x percentage) x (cost of debt after tax x percentage)
27
How can management maximize the value of the firm?
*mixture of debt and equity that produces the lowest WACC
28
Weighted Average Cost of Debt
(effective annual interest payments) / (debt cash available)
29
kre vs. kdx
``` kre = cost of equity financing kdx = cost of debt financing ```
30
Cost of Preferred Stock
(Dps) / (Nps) | outflow) / (NET inflow
31
Cost of Retained Earnings (kre)
CAPM = krf + [bi x (km - krf)] DCF = (Div1 / P0) + g Bond Yield Plus Risk Premium = kdt + PMR (pre-tax YTM + risk premium)
32
Return on Investment
ROI = income / (average assets = average PPE + average WC) ROI = profit margin x investment turnover
33
Return on Assets
net income / average total assets
34
The higher the denominator used in the ROI computation...
the lower the return
35
Limitations of ROI
* short-term focus | * managers don't want to invest because it lowers ROI
36
Residual Income Approach
= Net income - required return * required return = net book value * hurdle rate * ARBITRARY RATE
37
Economic Value Added (EVA)
*same as residual income except it uses the WACC * Positive = performance is meeting standards * Negative = performance is not meeting standards
38
Economic Value Added Component Issues
* Investment Valuation Issues: capitalization of R&D and current valuation of the balance sheet * Income may be adjusted
39
Debt-to-capital ratio
(total debt) / (total capital = debt + equity) total capital = total assets - NONINTEREST BEARING LIABILITIES *INTEREST BEARING ONLY
40
Debt-to-equity Ratio
(total debt) / (total shareholder's equity)
41
Working Capital Management
managing cash so that a company can meet its short-term obligations and includes administration of CA and CL
42
Net working capital =
CA - CL
43
Aggressive Working Capital vs. Conservative Working Capital
``` Aggressive = current ratio low Conservative = current ratio high ```
44
Quick Ratio
(cash + marketable securities + A/R) / current liabilities
45
Limitations of the Current Ratio
*cannot be used by itself; not necessarily the best indicator of the health of a company
46
Working Capital and Risk
*possible failure to meet current obligations and difficulty in obtaining short-term financing
47
Motives for Holding Cash
* transaction motive * speculative motive * precautionary motive (liquidity/safety)
48
Cost of Not Taking Payment Discount
(360 / (pay period - discount period)) * (discount% / 1 - discount%)
49
Lockbox Systems
good if additional interest income > bank fees
50
Concentration Banking
*single bank as a central depository; improved controls over inflow and outflow of cash
51
Factoring Accounts Receivable
* benefit > cost | * annualize all of it (know the difference between the annual fee and the financing fee)
52
Methods to Delay Disbursements
* defer payments * drafts * line of credit * zero balance accounts (JIT checking)
53
Other Cash Management Techniques
* managing float (bank > books) * overdraft protection * compensating balance
54
Cash Conversion Cycle
= days in receivable + days in inventory - payables deferral period
55
How to Calculate Components in Cash Conversion Cycle
*figure out the turnover ratio and then divide 365 by that answer
56
Credit Policy Trade-offs
*if strict, days to collect go down but days in inventory increase
57
What is the largest source of short-term credit for small firms?
*trade credit
58
Most important factor in determining how much inventory a company is willing to carry
the carrying cost of the inventory
59
Most important factor for determining safety stock
*the sales forecast
60
Reorder Point
= safety stock + (lead time x sales during lead time)
61
Economic Order Quantity
*aims to minimize both ordering and carrying costs
62
Economic Order Quantity Formula
sqrt((2SO)C) | 2 x annual sales x cost per purchase order) / (carrying cost per unit
63
Primary Purchase Order Cost
*production set-up costs
64
Other Inventory Management Issues
1. JIT 2. Kanban - visual signals that an item is needed 3. Computerized Inventory Control - real-time communication 4. Materials Requirements Planning - control the use of raw materials
65
Management of Marketable Securities
United States T Bills (least risk) --> Commercial Paper/Equity Securities * HIGHLY liquid, low risk, higher returns than cash * used as a hedge against a credit crunch
66
Periods of Low Rates vs. Periods of High Rates for Marketable Securities
``` Low = hold cash High = hold securities ```

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