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CPA Exam - BEC > BEC 3: Finanical Management > Flashcards

BEC 3: Finanical Management Flashcards

1
Q

What are the three general stages of cash flows?

A
  1. Inception of the project
  2. Operations
  3. Disposal of the project

Step 1: Invoice + Shipping + Installation (O)
+ Increase in working capital (O)
less: Cash proceeds on sale of old (net of tax) (I)
= Net initial outflow

Net proceeds on sale of old (net of tax):
Proceeds on sale (I)
less: tax paid on gain (GT) (O)
+ tax saved on loss (LT) (I)

Step 2:

a. Pretax cash info. * (1-T) (I)
b. Depreciation * tax (I)

Step 3:
a. Asset sold/tax effects (net inflow)
b. Direct exps. incurred for disposal ( less outflow)
c. Asset scrapped/donated (+inflow)
d. Working capital - dec. work. cap. (+inflow)
= Terminal yr. net inflow

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2
Q

Discounted cash flow is the basis for net present value methods. What is the formula for NPV?

A
  1. Calculate after tax cash flows = Annual net cash flow * (1 - tax rate)
  2. Add dep. benefit = Dep. * tax rate
  3. Multiply result by appropriate PV of an annuity
  4. Subtract initial cash outflow
    Result: NPV
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3
Q

What is the profitability Index formula?

A

PV of net future cash inflow/PV of net initial investment

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4
Q

What is the pay back period formula?

A

Net initial investment/Increase in annual net after-tax cash flow

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5
Q

What is operating leverage and the degree of operating leverage formula?

A

The degree to which a firm uses fixed operating costs as opposed to variable operating costs; high leverage = high fixed operating costs and low variable operating costs; higher the degree, the greater the potential profit, but the greater the risk.
DOL = % change in EBIT/% change in sales

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6
Q

What is financial leverage and the degree of financial leverage formula?

A

The degree to which a firm’s use of debt to finance the firm magnifies the effects of a given % change in EBIT on the % change in its EPS; the higher the degree = higher degree of fixed financing costs
DFL = % change in EPS/% change in EBIT

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7
Q

What is combined (total) leverage and the degree of combined leverage formula?

A

Use of fixed operating costs and fixed financing costs to magnify returns; the higher the degree = greater portion of sales goes to bottom line.
DCL = % change in EPS/% change in sales = DOL * DFL

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8
Q

What is the WACC formula, the weighted-average interest rate, and the cost of debt?

A

WACC = (cost of equity * % equity in capital structure) + (weighted avg. cost of debt * % debt in capital structure)

WAIR = Effective annual interest payable/debt cash available

Cost of debt = (after-tax) = int. rate * (1 - tax rate)

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9
Q

What is Kdt?

A

Pre-tax cost of debt - cost of debt before considering tax shielding effects of the debt.

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10
Q

What is Kdx?

A

Cost of LT debt/after-tax cost of debt - After-tax cost of debt by raising LT funds through borrowing
= Kdt * (1 - tax rate)

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11
Q

What is Kps?

A

Cost of preferred stock - tax considerations irrelevant b/c dividend not tax deductible
= DPS/NPS
NPS: inflow - net proceeds of preferred stock; gross proceeds - flotation costs
DPS: outflow - preferred stock cash dividend; finance charge to company for raising capital with preferred stock.

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12
Q

What is Kre and the three common methods for computing it?

A

Cost of R/E - cost of equity capital obtained through R/E is equal to the rate of return required by a firm’s common stockholders.

a. Capital Asset Pricing Model (CAPM)
b. Discounted Cash Flow (DCF)
c. Bond Yield plus Risk Premium (BYRPP

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13
Q

What is the cost of R/E formula - CAPM?

A

Kre = risk-free rate + risk premium
Kre = krf + the stock’s beta coefficient (bi) * market risk premium (PMR)
Kre = krf + [bi * (km - kfr)] (km = mkt rate)
Note: krf - “US” Treasury Securities

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14
Q

What is the cost of R/E formula - DCF?

A 
Kre = (D1/P0) + g
P0 = current market value or price of the out. c/s
D1 = dividend per share expected at the end of yr. 1
g = constant rate of growth in dividends
D1 = D0(1+g)
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15
Q

What is the cost of R/E formula - BYRP?

A

Kre = Kdt + PMR
Kre = pretax cost of LT debt + mkt. risk premium
* Kdt = pretax YTM (firm’s own bond yield)

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16
Q

What is ROI and its formula?

A 
Provides for the assessment of a company's % return relative to its capital investment risk - the higher the better. 
= Income/Invested Capital   OR 
profit margin * Investment Turnover
PM = Income/Sales
IT = Sales/Invested Capital
17
Q

What is ROA?

A

Return on Assets = NI/Avg. Total Assets

18
Q

What is residual income and its formula?

A

Measures the excess of actual income earned by an investment over the required (target or hurdle) return rate required by the company.
=NI (from I/S) - Required Return
*Required Return = NBV * Hurdle Rate

19
Q

What is EVA and its formula?

A

Economic value added - measures the excess of income after taxes earned by an investment over the return rate defined by the company’s cost of capital.
= 1. Investment * cost of capital = required return
2. Income after taxes - required return = EVA

20
Q

What are the debt-to-total capital, debt-to-asset, and debt-to-equity ratios?

A
  1. Total debt/total capital (debt & equity)
    - > related to LT debt paying ability
    - > the lower, the better the ability
  2. Total debt/total assets
    - > LT debt paying ability
    - > The lower, better creditor protection
  3. Total debt/total S/E
    - > Indicates degree of leverage used
    - > The lower, the lower the risk involved
21
Q

What is net working capital, an aggressive working capital management, and a conservative working capital management?

A
  1. CA - CL
  2. Current ratio down, working capital down
    More CA financed with CL
  3. Current ratio up, working capital up
    More CA financed by non-CL
22
Q

What is the current ratio and the quick (acid test) ratio?

A

Measures # of times CAs exceed CLs and measures ST solvency - a firm’s ability to generate cash to meet its ST obligations - higher, the better - liquidity at a point in time.
= CA/CL

More rigorous test - higher, the better
= Cash + marketable securities + receivables/CL
=Cash - inv. - prepaids/CL

23
Q

What is the formula for calculating the annual cost (APR) of a quick payment discount?

A

[360/(pay period - disc. period)] * [Disc./(100-disc. %)]

24
Q

What is the cash conversion cycle and how you get to it?

A

“Net Operating Cycle” - Length of time from the date of cash expenditure for production to the date of cash collected from customers (cash-to-cash)
= Inv. Conversion Period + Rec. Collection Period - Pay. Deferral period
a. Inv. turnover = COGS/Avg. Inv.
Inv. Conversion Period = 365/Inv. Turnover
b. A/R turnover = Sales/Avg. A/R
Rec. Collection period = DSO = 365/A/R Turnover
c. A/p turnover = COGS/Avg. A/P
A/P def. period = 365/A/P turnover

25
Q

Name the 4 carrying costs.

A
  1. Storage
  2. Insurance
  3. Opportunity cost of inv. investment
  4. Obsolescence or spoilage loss
26
Q

Name the 5 inventory models and systems used for determining the optimal level of inventory.

A
  1. Inv. Turnover
  2. Safety Stock
  3. Reorder Point
  4. Economic Order Quantity
  5. Materials Requirement Planning
27
Q

Name the 5 factors the determination of safety stock depends on.

A
  1. Reliability of sales forecasts
  2. Possibility of customer dissatisfaction due to back orders
  3. Cost of running out of inventory
  4. Lead time (time that elapses from the placement to the receipt of an order)
  5. Seasonal demands on inventory
28
Q

What is the reorder point formula and what is the EOQ equation and components?

A

Safety stock + (lead time * sales during lead time)
“When I say “two,” you say “SOC””
E = square root of 2SO/C = 2 * annual Sales * Order cost/Carrying cost per unit
E = order size (EOQ)
S = annual Sales (in units)
O = cost per purchase Order (primarily production setup costs)
C = Carrying cost per unit

29
Q

Name the 7 common marketable securities.

A

Least risk to most risk:

  1. US Treasury Bills (“T-bills”)
  2. Negotiable Certificates of Deposit (CDs)
  3. Banker’s Acceptances
  4. Commercial Paper
  5. Equity Securities of Public Companies
  6. Eurodollars
  7. Hedge Transactions

CPA Exam - BEC (6 decks)

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