BEC - Commonly Missed Practice Exam Questions Flashcards
Which of the following types of risk can be reduced by diversification?
- High interest rates
- Labor strikes
- Recessions
- Inflation
- No. High interest rates are a risk encountered when you participate in the economy. Nondiversifiable, systematic risk
- Yes. Labor strikes are an unsystematic risk (“diversifiable” risk). Diversification can mitigate your exposure to labor strikes, for example they are more prevalent in auto manufacturers than in finance companies
- No. Systematic risk, part of the economy. You cannot diversify your way out of recessions.
- No. Systematic risk, “nondiversifiable risk”. Part of the economy. You cannot diversify your way out.
Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Sales expected to increase by $3M a year. Cash investment in current assets averages 30% of sales. Current liabiltiies are 10% of sales. What is the estimated total investment for this expansion?
$4M investment in equipment
+ 30% of $3M … current assets resulting from more sales
- 10% of $3M … liabilities resulting from more sales
Total investment: $4.6M.
“Controllable margin” is used as a refined measure of strategic business unit reporting. It is best described as:
“Contribution margin, net of controllable fixed costs*”
*Controllable fixed costs = those costs that managers can impact in one year or less
Note: an incorrect answer is “Margins related to the revenues and costs specifically within their control”. This is because the BEST answer is “contribution margin, net of controllable fixed costs”. All other answers are inferior in this case.
Company can issue new preferred stock or new debentures. Preferred stock has an annual dividend payout of $6/share and an issue price of $103/share. Debentures have a coupon interest rate of 9% and an issue price of $101/share. Marginal income tax rate is 40%. Which approach is cheaper?
Preferred stock: $6/$103 = 5.825%
Debentures: (9 * (1 - 0.4)) / 101 = 5.347%
Debentures are cheaper.
Which method of the following should be used if capital rationing needs to be considered when comparing capital projects?
- NPV
- IRR
- Profitability index
- ROI
-Profitability Index: Used for capital rationing. Ratio of the PV of Net Future CF’s to the PV of the Net Initial Investment.
It then ranks and selects investments by listing projects in descending order, until the point where resources are exhausted.
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According to COSO, the difference between inherent risk and residual risk arises because of management’s:
Actions to reduce the inherent risk.
Inherent risk = Automatic risk if management does nothing.
Residual risk = risk AFTER management tries their best to reduce risk
Residual risk = inherent risk - management impact
Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to rank and analyze the individual and cumulative causes of defects is called a;
-Pareto diagram
Which one of the following is most relevant to a manufacturing equipment replacement decision?
- Disposal price of the old equipment
- Lump sum write-off from the disposal
- Original cost of the old equipment
- Gain or loss on the disposal
-Only one is relevant. The disposal price of the old equipment.
- Two possible scenarios: either the equipment is sold or is kept.
- If sold, there will be a cash inflow from the sale of the old equipment.
- If the old equipment is kept, there will be no inflow.
This is relevant to the decision.
Which of the following types of risk can be reduced by diversification?
- Recessions
- Labor strikes
- Inflation
- High interest rates
Being a part of the economy means being a part of the risk of:
- recessions
- inflation
- high interest rates
Labor strikes are not necessarily your automatic for participating in the economy though.
How do we calculate the market rate of interest on a one-year U.S. Treasury Bill?
= risk free rate of interest + inflation premium
Key: read the whole question. Don’t get lazy! These are easy ones - they’re for you to get right!
Company invests 100,000 in property. They are contracted to sell it for 120,000 in a year. Guaranteed interest rate by the bank is 10%. What’s NPV?
NPV = 120,000 (in) / (1+0.1)^1 (discount)
- 100,000 (original out)
= (120,000 / 1.1) - 100,000 = 9,091
First, discount the amount received so its adjusted for time value of money. Then subtract original output expended.
Company is developing a new product, surge protectors. VC are $8. Selling price is $14. Company will also be absorbing 120,000 of additional FC associated with the new product. A corporate fixed charge of 20,000 absorbed by other products currently will be allocated to this new product as well. What is the breakeven point in units?
CM = $6 FC = 120,000 (do not include the 20,000 fixed charge from other units allocated to this product - it was already there)
BE = 20,000 units
A manager's performance is measured using the residual income method. Working capital is 1,800 Revenue is 30,000 PP&E is 17,200 Imputed interest charge is 15%
He wants to have a residual income target of $2M. What will costs have to be to get to the target?
Residual income = Net income - target rate income
Target rate = 15% * Assets (1,800 + 17,200) = 2,850
RI = $2M, so net income = 2,850 + 2M = 4,850
Revenue = 30,000
Net income = 4,850
So… target costs = 25,150,000
If an investor’s certainty equivalent is greater than the expected value of an investment alternative, the investor is said to be?
Risk seeking.
Certainty equivalent, aka the point at which an investor is indifferent to risk, is greater than the expected return on an investment… then the investor is actually seeking lower return for his higher risk.
What are the processes in the SCOR model?
Plan, Source, Make, Deliver.
SCOR = Supply Chain Operations Reference
