BEC 11

Question 1

If an investment has a positive net present value at a specified rate of return - what does this mean for the Internal rate of return

Answer 1

The internal Rate of return on the investment is greater than the specified rate

Question 2

What is assumed when you calculate economic order quantity

Answer 2

It assumes that the cost of carrying a unit in inventory for one period remains constant

It also assumes that the demand for the period can be estimated

Question 3

Under the time adjusted Rate of Return method and the internal rate of return method what is calculated and compared to the hurdle rate of return - and when

Answer 3

A rate of return is calculated and compared to a hurdle rate of return

It can be done before or after the calculated return

Question 4

Under the net present value method when is the discount or hurdle rate of return calculated

Answer 4

It is determined in advance

Question 5

What is the gross margin ratio and what does it measure

Answer 5

gross margin to sales and measure profitability

it indicates the portion of each dollar earned in revenue that can be applied to covering selling, general. and admin costs and con contribute to profit

Question 6

What is days sales outstanding

Answer 6

Days sales outstanding =
360 / receivable turnover

receivable turnover =

net credit sales / avg A/R (net)

Question 7

Which method os bets suited for evaluating the performance of a firm’s capital in any given year

Answer 7

Economic value added

it is the net operating profit after taxes less the cost of financing

because it adjusts for the cost of financing - so well - makes it the best for evaluating the performance of a firm’s capital

Question 8

An increase in cost of carrying inventory means

Answer 8

larger quantities if inventory will be more expensive to maintain- causing management to reduce inventory

Question 9

What does an increase in the cost of placing an order mean

Answer 9

you will want to decrease the number of orders you place

- this would require larger orders and larger quantities of inventory on hand

Question 10

What does an increase in the annual demand for a project mean

Answer 10

you will increase the average inventory in order to prevent running out of stock

Question 11

What does an increase in lead time needed to acquire inventory mean

Answer 11

you will order inventory earlier than usual. This means there will be more inventory on hand when orders are placed increasing average inventory

Question 12

What is an advantage of using the pv modeling

Answer 12

Net present value is the excess of the present value of the cash flows over cash flows(investment today. These are then discounted using the time value of money.

An advantage is that it accounts for compounding of returns when cash flows are reinvested at the discount rate ( hurdle rate)

Question 13

What must you have in order to calculate economic order quantity

Answer 13

The periodic demand must be known or estimable

Question 14

What is the result on working capital when you record bad debt expense

Answer 14

Net A/R is reduces which reduces current assets so you will have a reduction in working capital

Question 15

What are the three theories on the reason for differences in yields

Answer 15

Liquidity preference
Market segmentation
Expectations

all are theories on the reason for differences in yields

Question 16

What does behavior finance theory relate to

Answer 16

The behavior of stocks

Question 17

If a company has a lower debt to equity ratio what kind of risk are they considered

Answer 17

They will be considered a lower risk and as a result will enable to company to borrow at lower interest rates

Question 18

If a company agrees to a debt covenant limiting long-term debt - why would they do this

Answer 18

They would do it to provide assurance to lenders that the ratio will not get too high there keeping the cost of borrowing lower for the company

Question 19

how do you calculate the reorder point

Answer 19

avg daily demand * avg lead time = reorder point without a safety stock

then you can add the safety stock

Question 20

What are the factors in an efficient market hypothesis

Answer 20

In an efficient capital market the prices reflect the underlying value - not market inefficiencies

Investors are knowledge - and will know about news that will affect pricing

They will know about it at the same time as financial advisors - so they do not have any extra advantage

The key is that the efficient market’s value is based on the underlying value - not on other factors like accounting changes or imperfect information