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BEC Flash Cards > BEC 3 > Flashcards

BEC 3 Flashcards

1
Q

What is capital budgeting?

A

Process for evaluating and selecting long term investment projects.

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2
Q

What is the advantage of NPV?

A

It is flexible but limited by not providing the true rate of return on the investment.

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3
Q

What is profitability Index?

A

Present value of FCF/ Present value of initial investment

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4
Q

What is objective of IRR?

A

It focuses on the discount rate at which the present value of the cash inflows equals the present value of cash outflows.

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5
Q

What are limitations of IRR?

A

Unreasonable reinvestment assumptions

Inflexible cashflow assumptions

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6
Q

What is operating leverage?

A

Degree to which a company used fixed operating costs rather than variable operating costs. Capital intensive are generally high operating leverage.

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7
Q

What is financial leverage?

A

Degree to which a company uses debt rather than equity to finance the company.

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8
Q

What is benefit of debt?

A

Debt carries lowest cost of capital and is tax deductible

The higher the tax rate, the more incentive exists to use debt financing

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9
Q

What are three methods of computing Cost of Retained Earnings?

A

Capital asset pricing model
DCF
Bond yield plus risk premium

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10
Q

What is Dupont ROE?

A

Net Profit/ Sales x Sales/ Average Assets x Average Assets/ Equity

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11
Q

What is advantage of residual income method issues?

A

Realistic target rates

Focus on target return and amount

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12
Q

What is disadvantage of residual income method issues?

A

Reduced comparability

Target requires judegement

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13
Q

What are disadvantages of high levels of cash?

A

The negative arbitrage effect
Attractiveness as takeover target
Investor dissatisfaction with allocation of assets

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14
Q

What are methods of speed collections?

A

Customer screening
Prompt billing
Payment discounts

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15
Q

What is APR of quick payment discount?

A

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

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16
Q

What is Inventory turnover?

A

COGS/ Average Inventory

17
Q

What is accounts receivable turnover?

A

Sales/ Average A/R

18
Q

What is accounts payable?

A

COGS/ Average accounts payable

19
Q

What are optimal inventory methods?

A 
Inventory turnover
Safety stock
Reorder point
Economic order quantity
Materials requirements planning
20
Q

What is re-order point for inventory?

A

Safety stock + (Lead time x sales during lead time)

21
Q

What is Economic Order Quantity?

A

(2 x Sales x Order Cost/ Carrying value per unit) 1/2

BEC Flash Cards (11 decks)

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