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CPA > BEC Custom 6 > Flashcards

BEC Custom 6 Flashcards

1
Q

Cost vs. Expense

A
  • cost is the amount paid in cash or other resources for a good or service
  • expense is the portion of cost that relates to the portion of a good or service that has been used up
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2
Q

Sunk Costs

A

costs of resources that have been incurred in the past and can’t be changed by current or future decisions
*not relevant in making current decisions

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3
Q

Opportunity Cost

A

discounted dollar value of benefits lost from an opportunity not taken as a result of choosing another opportunity

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4
Q

Differential/Incremental Costs

A

Costs that are different between two or more alternatives

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5
Q

Cost of Capital

A
  • cost of long-term funds - debt/equity - used to finance an operation
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6
Q

Cost of Debt

A

Rate of return that must be paid to attract and retain lenders’ funds

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7
Q

Cost of Preferred Stock

A

rate of return that must be paid to attract and retain preferred shareholders’ investment

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8
Q

Cost of Common Stock

A

rate of return that must be paid to attract and retain common shareholders’ investment

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9
Q

Weighted Average Cost of Capital (WACC)

A

rate of return of each source of capital weighted by its share of the total capital

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10
Q

Present Value (PV) of Ordinary Annuity

A

determines value now of a series of equal amounts to be received at the end of equal intervals over a future period
*annuity is a series of equal dollar amounts

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11
Q

Future Value (FV) of Ordinary Annuity

A
  • determines the value at some future date of a series of equal amounts to be paid at the end of equal intervals
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12
Q

Present Value (PV) of Annuity Due

A

Determines value now of a series of equal amounts to be paid at equal intervals with payments at the beginning of each period

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13
Q

Stated Interest Rate

A

annual rate of interest specified (stated) in a contract

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14
Q

Simple Interest

A

interest computed on original principal only

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15
Q

Compound Interest

A

interest computed on principal plus accumulated unpaid interest
*interest is paid on interest

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16
Q

Effective Interest Rate

A

Annual interest rate implicit in the relationship between the net proceeds of a borrowing and the dollar cost of that borrowing

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17
Q

Annual Percentage Rate (APR)

A

Annualized effective interest rate without compounding on a borrowing that is for a fraction of a year

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18
Q

Effective Annual Percentage Rate (EAPR)

A

Annual percentage rate with compounding on borrowings for fraction of a year

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19
Q

Financial Valuation

A

the process of estimating the fair value of an asset, liability, or an entire business

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20
Q

Accounting Fair Value

A

price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

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21
Q

Level 1 Inputs

A

un-adjusted quoted prices obtained at the measurement date in active markets for assets and liabilities identical to those being valued
*the most reliable evidence of fair value

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22
Q

Level 2 Inputs

A

Observable for the item being valued, either directly or indirectly, but are other than quoted prices described in level 1

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23
Q

Level 3 Inputs

A

Un-observable for item being valued

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24
Q

Market Approach

A

uses prices and other relevant information generated by market transactions for items identical or comparable to item being valued

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25
Q

Income Approach

A

uses valuation techniques to convert future amounts of economic benefits or sacrifices of economic benefits to determine what the future amounts are worth at valuation date

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26
Q

Cost Approach

A

uses valuation techniques to determine the amount required to acquire or construct a substitute item

27
Q

Capital Asset Pricing Model (CAPM)

A

an economic model that determines a measure of relationship between risk and expected return

  • incorporates both -
  • time value of money - using risk-free rate of return
  • element of risk - using risk measure called “beta”
28
Q

CAPM basic formula

A

required rate of return = risk-free rate of return + beta (expected rate of return - risk-free rate of return)

29
Q

Beta

A

Measure of systematic risk as reflected by the volatility of an investment or other asset

30
Q

CAPM assumptions and limitations

A
  • there is an asset class and benchmark for the asset being valued
  • all investors have equal access to all investments of the class being valued and all use a one-period time horizon
  • asset risk is measured solely by variance of the asset being valued from asset class benchmark
  • no external costs involved
  • no restrictions on borrowing or lending at the risk free rate
  • use historical data, which may not be appropriate for computing future returns
31
Q

Option

A

Contract that entitles owner to buy or sell an asset at a stated price within a specified period

  • american-style - option permits exercise any time before expiration
  • european-style - option permits exercise only at maturity date
32
Q

What are the assumptions of the Black Scholes Model?

A
  • for european call options
  • stock pays no dividends
  • stock prices increase in small increments
  • risk-free rate of return is assumed constant
33
Q

What are the two unique features of the Black Scholes Model?

A
  • uses probabilities:
  • probably that the price of the stock (security) will pay off by the expiration date
  • probability that the option with be exercised
  • discounting of the exercise price
34
Q

Binomial Option Pricing Model (BOMP)

A
  • uses tree diagram to estimate values at a number of time points between the valuation date and the expiration date
35
Q

Business Valuation

A

the estimation of the economic value of a business entity or portion thereof

36
Q

Common-size analysis

A

Converting dollar amounts to percentages for comparison over time and with other entities

37
Q

Ratio analysis

A

Determining important ratios to assess change and compare with other entities

38
Q

Market Approach

A

determines value of a business by comparing it with highly similar entities for which there is a readily determinable value

39
Q

Income Approach

A

determines value by calculating net present value of the benefit stream generated by the entity being valued
*net present value = entity value

40
Q

Asset Approach

A

determines value by adding values of individual assets that comprise the entity being valued

  • fair value of each individual asset (and liability) is determined
  • sum of net assets is value of entity
41
Q

P/E ratio for a share of common stock

A

Market Price/EPS

42
Q

Business Forecasting

A

The estimation of the value of a variable at some future point in time

43
Q

Qualitative Forecasting

A
  • based on judgement and opinion
  • subjective
  • often based on consensus
  • useful when quantitative data is lacking
  • useful for long-range forecasting
44
Q

Quantitative Forecasting

A
  • based on quantitative data and models
  • objective
  • often based on mathematical calculations and determinations
45
Q

Executive Opinion (Qualitative Method)

A

Jury of executive opinion using collective judgement of executives and managers

46
Q

Market Research (Qualitative Method)

A

employs customers or other surveys to determine beliefs, preferences, etc.

47
Q

Delphi Method (Qualitative Method)

A

Develops a consensus of an expert group using a multi-stage process to converge on a forecast

48
Q

Time Series Models (Quantitative Method)

A

Uses patterns in past data to predict future values

49
Q

Casual Models (Quantitative Method)

A

Assume the variable being forecasted is related to other variables and makes projections based on assumptions

50
Q

For short-term (immediate future up to three months out) what business forecasting methods are appropriate?

A

time series methods

51
Q

For medium-term (from three months to two years) what business forecasting methods are appropriate?

A

time series and casual methods

52
Q

For long-term (periods longer than two years) what business forecasting methods are appropriate?

A

casual and qualitative methods

53
Q

Naive (Time Series)

A

uses the immediate past period’s actual value as the forecast for the next period

54
Q

Simple Mean or Average (Time Series)

A

Uses the average of past values as the forecast for a future period or periods

55
Q

Simple Moving Average (Time Series)

A

uses the average of a specific number of the most recent values as the forecast for a future period or periods

56
Q

Weighted Moving Average (Time Series)

A

Uses the average of a specific number of most recent values with each receiving a different emphasis or weight

57
Q

Exponential Smoothing (Time Series)

A

Uses the average of a specific number of most recent values with weights assigned to each which decline exponentially as data becomes older

58
Q

Trend-adjusted Exponential Smoothing (Time Series)

A

An exponential smoothing method which makes adjustments to past data when strong trend patterns are evident in the data

59
Q

Seasonal Indexes (Time Series)

A

Adjusts past data to accommodate seasonal patterns in data

60
Q

Linear Trend Line (Time Series)

A

uses least-squares to fit a straight line to past data and extends trend line to establish forecast

61
Q

Regression Models (Casual)

A

use mathematical equations that relate a dependent variable to one or more independent variables that influence the dependent variable

62
Q

Input-Output Models (Casual)

A

Describe the flow from one stage of a process or sector to another stage or sector

63
Q

Economic Models (Casual)

A

Specify statistical relationship believed to exist between economic quantities

CPA (16 decks)

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