Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BEC > BEC 3 > Flashcards

BEC 3 Flashcards

1
Q

Define sunk costs.

A

Costs that have already been incurred, are unavoidable in the future, and will not vary with the course of action taken

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the formula for after-tax cash flow?

A

(1.0 - Tax Rate) x Pre-tax cash flows = After-tax cash flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The forumla for computing a depreciation tax shield is:

A

Tax rate x depreciation deduction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the three general stages in which capital investment cash flows are categorized?

A
  1. Cash flows at the inception of the project
  2. Operating cash flows
  3. Cash flows from the disposal of the project
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What approaches can management take to select the desired rate of return for a project?

A
  • Use a weighted average cost of capital (WACC) method
  • Assign a target rate for new projects
  • Recommend that the discount rate be related to the risk of the project
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Define net present value (NPV)

A

Difference between the present value of the cash inflows and outflows from a project

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How are investment decisions made using the NPV method?

A

-If NPV is positive, then the investment should be made.
-If NPV is negative, then the investment should not be made.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the profitability index?

A

Ratio of the present value of net future cash inflows to the present value of the net initial investment.
The higher the profitability index, the more desirable the project.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define internal rate of return (IRR)

A

Discount rate at which the present value of the cash inflows equals the present value of the cash outflows from an investment/project

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How are investment decisions made using IRR?

A

When IRR exceeds the hurdle rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the payback method formula?

A

Payback period = Net initial investment / increase in annual net after-tax cash flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define operating leverage

A

Degree to which a firm uses fixed operating costs, as opposed to variable operating costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the degree of operating leverage (DOL) formula?

A

DOL = Percentage change in EBIT (earnings before interest and taxes) / Percentage change in sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define financial leverage

A

Degree to which a firm’s use of debt to finance the firm magnifies the effects of a given percentage change in EBIT on the percentage change in EPS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the degree of financial leverage (DFL) formula?

A

DLF = Percentage change in EPS / Percentage change in EBIT

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the degree of combined leverage (DCL) formula?

A

DCL = Percentage change in EPS / Percentage change in sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Define weighted average cost of capital (WACC).

A

Average cost of debt and equity financing associated with the firm’s existing assets and operations

18
Q

What is the after-tax cost of debt formula (kdx)?

A

kdx = Pre-tax cost of debt x (1 - Tax Rate)

19
Q

What is the cost of preferred stock formula (kps)?

A

kps = Dps / Nps

Dps = Preferred stock cash dividends
Nps = Net proceeds of preferred stock

20
Q

What is the cost of retained earnings (kre) using the CAPM formula?

A

kre = kft + (risk premium/[bi x (km - krf)]/PMR)

krf = Risk-free rate
bi = Beta coefficient of the stock
PMR = Market risk premium
km = Market rate

21
Q

What is the cost of retained earnings (kre) using discounted cash flow (DCF)?

A

kre = (D1/P0) + g

D1 = Dividend per share expected at the end of one year
P0 = Current market value or price of outstanding common stock
g = Market rate

22
Q

What is the cost of retained earnings (kre) under bond yield plus risk premium (BYRP)?

A

kre = kdt + PMR

kdt = Pre-tax cost of debt
PMR = Market risk premium

23
Q

Define the weighted average cost of capital by formula

A

Terminology used in the cost of capital and is part of the WACC formula:
- wdx = (weighted for) long-term debt
- wps = (weight for) preferred stock
- wcs = (weight for) common stock equity
- kwc = weighted average cost of capital

“k” stands for the specific COST of each type of capital
and “w” stands for the WEIGHT of each. So, WACC would be:

kwc = (kdx x wdx) + (kps x wps) + (kre x wcs)

24
Q

Define return on investment (ROI)

A

Used to assess the percentage return relative to capital investment risk.

ROI can be calculated as:
Income / invested capital

or

  • Product of profit margin (income/sales)
  • Investment turnover (sales/assets)
25
Q

List the two alternative formulas of Return on Investment

A

ROI = Income / Investment Capital

ROI = Profit Margin (or Return on Sale) x Investment Turnover (Sales/Assets)

26
Q

What are the limitations of ROI?

A
  • Short-term focus
  • Disincentive to invest
27
Q

Define residual income

A

Measures the excess of actual income earned by an investment over the hurdle rate

28
Q

What is the formula for residual income?

A

Residual income = Net income - Required Return

Where the required return is equal to:
Net book value x Hurdle Rate

If the amount of the income from the investment exceeds the computed required return, performance objectives have been met

29
Q

Define economic value added (EVA).
How does EVA differ from residual income?

A

Measures the excess of income after taxes earned by an investment over the rate of return defined by the company’s WACC.

EVA differs from residual income in the following ways:
- WACC must be used to calculate EVA
- Income and investment numbers used to calculate EVA are generally adjusted to produce a more accurate analysis of economic profit

30
Q

Define the steps and formula for economic value added

A

Step 1: Calculate required amount of return and income after taxes
Required return = Investment x Cost of Capital

Step 2: Compare income to the required return
Economic value added = Income after taxes - Required return

31
Q

What is the formula for working capital?

A

Working capital = Current assets - Current liabilities

32
Q

What are three common motivations for holding cash?

A
  1. Transaction Motive: having enough cash to meet payments arising from the ordinary course of business
  2. Speculative Motive: having enough cash to take advantage of temporary opportunities
  3. Precautionary Motive: having enough cash to maintain a safety cushion so that unexpected needs may be met
33
Q

What methods can be used to speed collections?

A
  • Customer screening
  • Prompt billing
  • Payment discounts
  • Expedite deposits
  • Concentration banking
  • Factoring accounts receivable
34
Q

What methods can be used to delay disbursements?

A
  • Defer payments
  • Drafts
  • Line of credit
  • Zero balance accounts
35
Q

What is the formula for computing the annual percentage rate for quick payment discounts?

A

(360 / Pay period - Discount Period) x (Discount % / 100% - Discount %)

36
Q

What is the cash conversion cycle formula?

A

Cash conversion cycle = Inventory conversion period + Receivables collection period - Payables deferral period

37
Q

How is the inventory conversion period calculated?

A

Inventory turnover = COGS / Avg inventory

Inventory conversion period = 365 / Inventory turnover

38
Q

How is the receivables collection period calculated?

A

AR turnover = Sales / Avg AR

Receivables collection period = 365 / AR Turnover

39
Q

How is the payables deferral period calculated?

A

AP Turnover = COGS / Avg AP

Payables deferral period = 365 / AP turnover

40
Q

What is the equation for economic order quantity EOQ)?

A

EOQ = Squareroot (2SO/C)

S = (S)ales in Units
O = Cost per Purchase (O)rder
C = (C)arrying Cost per Unit

BEC (29 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions