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BEC Flashcards

Pass BEC

1
Q

What is desired risk after implementing a response?

A

Target residual risk

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2
Q

What is risk when there are no actions to change it

A

Inherent risk

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3
Q

What is the risk that remains after responding to it

A

Actual residual risk

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4
Q

What is opportunity costs?

A

Opportunity cost is the (discounted) dollar value of benefits lost from an alternative (opportunity) as a result of choosing another alternative (opportunity)

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5
Q

If an investor’s certainty equivalent exceeds the expected return on an investment, then the investor is actually seeking lower return for high risk. What kind of behavior does this exhibit?

A

Risk seeking

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6
Q

If an investor’s certainty equivalent is equal to the expected return on the investment, what kind of behavior is this?

A

Risk indifferent

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7
Q

What is the risk associated with the unique circumstances of a particular company, as they may affect shareholder value of that company?

A

Business Risk

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8
Q

What is the risk associated with the exposure of lenders to the failure of borrowers to repay principal and interest on debt?

A

Financial Risk/ Default risk

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9
Q

What is a put option?

A

A put option gives its owner the right to sell a specific security at fixed conditions of price and time

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10
Q

What is a call option?

A

A call option gives its owner the right to buy/purchase a specific security at fixed conditions of price and time

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11
Q

What is an advantage and a disadvantage of short-term financing

A

Lower interest rate/ higher interest rate risks because risks will fluctuate more dramatically in the short-term

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12
Q

What is an advantage of long-term financing

A

Credit risk decreases because the company will be seek refinancing less frequently

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13
Q

When do you use Market value at risk analysis

A

Use when a financial institution is assessing its investment portfolio’s exposure to price changes.

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14
Q

What happens when a foreign competitor’s currency becomes weaker compared to the US dollar?

A

The product becomes less expensive in US dollars and will increase demand and result in an advantage in the US market

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15
Q

What impact does relative inflation rates have on the demand for a foreign currency

A

Inflation of foreign currency reduces the purchasing power of the foreign currency, which means that there will be less demand for the foreign currency na dmore demand for the domestic currency, which has higher purchasing power due to lower inflation

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16
Q

What option do you use if you have a foreign currency payable?

A

Call option

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17
Q

What option do you use if you have a foreign currency receivable?

A

Put option

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18
Q

What is a call option

A

A financial derivative that allows one to sell a commodity at a certain time and value if certain conditions are met

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19
Q

What is a put option

A

A financial derivative that allows one to buy a commodity at a certain time and value if certain conditions are met

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20
Q

How is an operating lease and a finance lease recorded in the financial statements?

A

Both are recorded as a right-of-use (ROU) asset and a lease liability on the balance sheet. ROU asset will be amortized and the lease liability paid down over the life of the lease

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21
Q

What does lease expense represent in an operating lease

A

Lease expense represents interest expense and amortization

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22
Q

Where is the lease expense recorded in an operating lease

A

Lease expense is recorded in the income statement for every payment made

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23
Q

Where is the lease expense recorded in a finance lease

A

Lease expense is recorded separately interest expense and amortization on the income statement

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24
Q

Can a lessee make an accounting policy election to not recognize ROU assets or leases with terms less than 12 months?

A

Yes

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25
Q

What are the requirements for a finance lease

A

If one of the criteria is met, then lease will be finance lease. If no criteria met and less is short term (less than 12 months) then is an operating lease

O-Ownership transfer at the end of the lease
W-Written purchase option that the lessee is reasonable certain to exercise
N-Net present value of all lease payments and guaranteed residual value is equal to or substantially exceeds the underlying asset’s fair value
E-Economic life of the underlying asset is primarily encompassed within the term of the lease
S-Specialized asset such that it will not have an expected alternative use to the lessor when the lease ends

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26
Q

How is Return on Equity (ROE) calculated?

A

Net Income/Equity

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27
Q

What is WACC?

A

Weighted Average Cost of Capital - it is the average cost of all forms of financing used by a company; usually used as a hurdle rate for capital investment decisions. Covers cost of funds employed

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28
Q

What is the theoretical optimal capital structure

A

All the forms of financing that produces the lowest WACC

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29
Q

How is the weighted average interest rate calculated

A

Total interest obligations on an annual basis divided the Debt Outstanding

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30
Q

What are the 3 methods for computing the Cost of Retained Earning

A
  1. CAPM - Capital Asset Pricing Model
  2. Discounted Cash Flow (DCF)
  3. Bond yield risk premium (BYRP)
31
Q

How do you calculate the Cost of Retained Earning using CAPM

A

= Risk free rate plus the Risk Premium

= Rfr + [beta(market return - Rfr)]

32
Q

How do you calculate the Cost of Retained Earnings using DCF method

A

D1/P0 + g (note numbers should subscript)

D1 = Dividend *(1+g)

33
Q

How do you calculate the Cost of Retained Earnings using the Bond Yield Risk Premium Method

A

Pretax Cost of Debt - Market risk premium

34
Q

What is operating leverage?

A

The impact on operating income resulting from the change in sales. The degree to which a company uses fixed operating costs verses variable operating costs

35
Q

What is the financial leverage?

A

It is the degree to which a company uses debt verses equity to finance the company. This ratio compares the change in earnings after interest and taxes to the change in earnings before interest and taxes. The higher the ratio, the greater the return available to companies who finance their asset purchase with debt

36
Q

How do you calculate the cost of equity

A

Use the Dividend Growth Model -

Cost of Common Equity = (Dividend/Price)+Growth Percentage

37
Q

What does it mean for WACC if x=y=0

A

It means that WACC equals the cost of equity

38
Q

What happens to WACC if debt increases

A

The WACC increases

39
Q

What ratios measure the profitability of a company

A

ROS - Return on Sales
ROI - Return on Invested
ROA - Return on Assets
ROE - Return on Equity

40
Q

Equation for ROS

A

Income before interest income, interest expense and tax expense/ Sales (net)

41
Q

Equation for ROI

A

Net Income/ Average Invested capital

42
Q

Equation for ROA

A

Net Income/ Average total assets

43
Q

Equation for ROE

A

Net Income/ Average Total Equity

44
Q

What is the times interest earned ratio

A

It measures the number of times the interest charges are covered by net operating income
Calculated - Earnings before interest and taxes (EBIT) divided by interest expense

45
Q

How do you define Net Working Capital

A

Current Assets - Current Liabilities

46
Q

What is pecking order theory

A

Indicates that the order of financing of a company follows the path of the least effort.

47
Q

What is the Cash Conversion Cycle

A

Days in Inventory + Days in Receivables - Days in Payables

48
Q

How do you calculate Days in Inventory

A

Ending Inventory/ ((COGS/365))

49
Q

How do you calculate Days in Receivables

A

Ending AR/ ((Net Sales/365))

50
Q

How do you calculate Days in Account Payables

A

Ending AP/ ((COGS/365))

51
Q

How do you calculate Inventory Turnover Ratio

A

COGS/ Average Inventory

52
Q

How do you calculate Payables Turnover Ratio

A

COGS/Average Payables

53
Q

What is the average inventory when the standard economic order quantity mode is used

A

One-half of the EOQ

54
Q

What is the average inventory when the standard economic order quantity mode is used

A

One-half of the EOQ

55
Q

What is Economic Order Quantity (EOQ)

A

The quantity of inventory that should be ordered at one time in order to minimize the associated costs if carrying and ordering inventory

56
Q

How do you calculate the Average Gross Receivable Balance?

A

Average Daily Sales X Average Collection Period.

57
Q

As it relates to accounts receivable, a mathematical relationship that can define the optimal credit level?

A

Carrying costs = Opportunity costs

58
Q

When is float created?

A

Float is created when checks are written and not yet processed

59
Q

Do you ignore fixed costs in EOQ model calculation

A

Yes

60
Q

In EOQ calculation, do you include cost of capital as part of calculating per unit costs?

A

Yes

61
Q

How do you calculate a firm’s average gross receivable balance?

A

Average daily sales times average collection period

62
Q

What is the Collection Ratio

A

Accounts Receivable/ Average Daily Sales

63
Q

What 5 elements is required for the Black-Scholes price variation model of financial instruments method?

A 
current stock price
Option exercise price
time to expire for options, 
interest rate 
volatility
64
Q

What is the formula for the Sharpe Measure for portfolio performance

A

(Portfolio Return - Risk free rate)/ Standard Deviation

65
Q

What is the formula for the Treynor Index for portfolio performance

A

(Portfolio Return - Risk free rate)/ Beta

66
Q

What is the formula for the Jensen measure for portfolio performance?

A

Risk free rate + ((Return on market index - Risk free rate) x Beta)

67
Q

What is a sales-type lease?

A

If at the inception of a lease involving land only. Criterion A1 (transfer of ownership) is met and the lease gives rise to dealer’s profit (loss), the lease s a classified as a sales-type lease

68
Q

What is the Treynor Index

A

Based on the premise that there are two components of risk:

  1. Risk produced by fluctuations in the market
  2. Risk produced by fluctuations of the individual stock
69
Q

What costs are included in Conversion Costs

A

Direct Labor and Manufacturing Overhead

70
Q

What is relevant range

A

The range of activity within which the relationships of fixed costs and variable costs are meaningful and valid

71
Q

What costs are associated with Direct Labor?

A

Prime Cost, Conversion Cost and Product Cost

72
Q

What is variable cost?

A

It is a cost that varies but is fixed per unit

73
Q

What happens to abnormal spoilage? Is it part of costs?

A

It reduces income and is not part of costs

74
Q

What is the purpose of cost allocation?

A

Measuring income and assets for external reporting

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