B3: Financial Management

Question 1

What is Working Capital?

Answer 1

CA - CL

Question 2

What is the Economic Order Quantity (EOQ) formula?

Answer 2

E = (2SO)/C You can remember 2SOC - 2(Annual Sales*Order Cost/Carrying Cost Per Unit

Question 3

CAPM formula?

Answer 3

risk free rate + beta * (expected market yield - risk free rate) RF+B(RM-RF)

Question 4

What is the ROI formula?

Answer 4

income/ave investment; income = revenue - expense and investment = PPE and working capital

Question 5

Investment turnover =

Answer 5

Cogs / ave investment

Question 6

Quick ratio =

Answer 6

Current assets - inventories / current liabilities

Question 7

Inventory turnover =

Answer 7

Cogs / average inventory

Question 8

Cost of equity capital =

Answer 8

(dividend / market price of share) + % expected growth In div

Question 9

Why does profit margin = roi / asset turnover?

Answer 9

You must convert return percentage per order to annual percentage (so you divide by turnover)

Question 10

APR of not using 2/10 net 30 for a 360 day year?

Answer 10

(360/20) * (.02/.98)

Question 11

What is economic value added?

Answer 11

Residual income - cost of capital

Question 12

What is operating leverage?

Answer 12

The degree to which a firm uses fixed operating costs opposed to variable (high fixed cost = high leverage) - (change in EBIT) / (change in variable cost)

Question 13

What is the risk free rate + inflation rate

Answer 13

Rate on a US treasury bill

Question 14

Current ratio =

Answer 14

(Current assets - inventory - prepaid expenses) / current liabilities

Question 15

What is the diff between the quick ratio or Acid test and the current ratio?

Answer 15

Current ratio is only extremely current assets. So it’s current assets - inven - prepaid expenses over the current liabilities

Question 16

What is materials requirements planning (mrp)

Answer 16

One of the first software based integrated information systems designed to improve productivity for businesses. A materials requirement planning (MRP) information system is a sales forecast-based system used to schedule raw material deliveries and quantities, given assumptions of machine and labor units required to fulfill a sales forecast.

Question 17

What is the discount rate?

Answer 17

Rate of return that could be earned on an investment in the financial markets with similar risk

Question 18

T of F, you take the present value using the payback method

Answer 18

F

Question 19

What is the internal rate of return?

Answer 19

present value of the after-tax cash flows equals the initial investment on the project

Question 20

Define “working capital management”

Answer 20

managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other.

Question 21

How do you find the APR of credit terms such at 3/10 net 45?

Answer 21

=

360

(Total pay period − Discount period)

×

Discount %

(100% − Discount %)

=

[360 / (45 − 10)] × [3% / (100% − 3%)]

Question 22

In the “acid test” ratio, the numerator is current assets less…

Answer 22

prepaid expenses and inventory

Question 23

What is the “profitibility index”?

Answer 23

(PV of net future cash inflows) / (PV of net initial investment) = Profitiblity Index

Question 24

How is the “beta” calculated?

Answer 24

% Change in Stock Price / % Change in Market Price

Question 25

Define “earnings”?

Answer 25

after tax net income, or profit

Question 26

What is “operating leverage”?

Answer 26

presence of fixed costs in operations (small change in sales will make a large difference in profit)

Question 27

Do you take imputed interest out of ROI or RI?

Answer 27

RI only, RI is income whereas ROI is return