BEC Custom 6

Question 1

Cost vs. Expense

Answer 1

• 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

Question 2

Sunk Costs

Answer 2

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

Question 3

Opportunity Cost

Answer 3

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

Question 4

Differential/Incremental Costs

Answer 4

Costs that are different between two or more alternatives

Question 5

Cost of Capital

Answer 5

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

Question 6

Cost of Debt

Answer 6

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

Question 7

Cost of Preferred Stock

Answer 7

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

Question 8

Cost of Common Stock

Answer 8

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

Question 9

Weighted Average Cost of Capital (WACC)

Answer 9

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

Question 10

Present Value (PV) of Ordinary Annuity

Answer 10

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

Question 11

Future Value (FV) of Ordinary Annuity

Answer 11

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

Question 12

Present Value (PV) of Annuity Due

Answer 12

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

Question 13

Stated Interest Rate

Answer 13

annual rate of interest specified (stated) in a contract

Question 14

Simple Interest

Answer 14

interest computed on original principal only

Question 15

Compound Interest

Answer 15

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

Question 16

Effective Interest Rate

Answer 16

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

Question 17

Annual Percentage Rate (APR)

Answer 17

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

Question 18

Effective Annual Percentage Rate (EAPR)

Answer 18

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

Question 19

Financial Valuation

Answer 19

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

Question 20

Accounting Fair Value

Answer 20

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

Question 21

Level 1 Inputs

Answer 21

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

Question 22

Level 2 Inputs

Answer 22

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

Question 23

Level 3 Inputs

Answer 23

Un-observable for item being valued

Question 24

Market Approach

Answer 24

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

Question 25

Income Approach

Answer 25

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

Question 26

Cost Approach

Answer 26

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

Question 27

Capital Asset Pricing Model (CAPM)

Answer 27

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"

Question 28

CAPM basic formula

Answer 28

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

Question 29

Beta

Answer 29

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

Question 30

CAPM assumptions and limitations

Answer 30

- 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

Question 31

Option

Answer 31

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

Question 32

What are the assumptions of the Black Scholes Model?

Answer 32

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

Question 33

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

Answer 33

- 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

Question 34

Binomial Option Pricing Model (BOMP)

Answer 34

- uses tree diagram to estimate values at a number of time points between the valuation date and the expiration date

Question 35

Business Valuation

Answer 35

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

Question 36

Common-size analysis

Answer 36

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

Question 37

Ratio analysis

Answer 37

Determining important ratios to assess change and compare with other entities

Question 38

Market Approach

Answer 38

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

Question 39

Income Approach

Answer 39

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

Question 40

Asset Approach

Answer 40

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

Question 41

P/E ratio for a share of common stock

Answer 41

Market Price/EPS

Question 42

Business Forecasting

Answer 42

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

Question 43

Qualitative Forecasting

Answer 43

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

Question 44

Quantitative Forecasting

Answer 44

- based on quantitative data and models - objective - often based on mathematical calculations and determinations

Question 45

Executive Opinion (Qualitative Method)

Answer 45

Jury of executive opinion using collective judgement of executives and managers

Question 46

Market Research (Qualitative Method)

Answer 46

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

Question 47

Delphi Method (Qualitative Method)

Answer 47

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

Question 48

Time Series Models (Quantitative Method)

Answer 48

Uses patterns in past data to predict future values

Question 49

Casual Models (Quantitative Method)

Answer 49

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

Question 50

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

Answer 50

time series methods

Question 51

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

Answer 51

time series and casual methods

Question 52

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

Answer 52

casual and qualitative methods

Question 53

Naive (Time Series)

Answer 53

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

Question 54

Simple Mean or Average (Time Series)

Answer 54

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

Question 55

Simple Moving Average (Time Series)

Answer 55

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

Question 56

Weighted Moving Average (Time Series)

Answer 56

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

Question 57

Exponential Smoothing (Time Series)

Answer 57

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

Question 58

Trend-adjusted Exponential Smoothing (Time Series)

Answer 58

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

Question 59

Seasonal Indexes (Time Series)

Answer 59

Adjusts past data to accommodate seasonal patterns in data

Question 60

Linear Trend Line (Time Series)

Answer 60

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

Question 61

Regression Models (Casual)

Answer 61

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

Question 62

Input-Output Models (Casual)

Answer 62

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

Question 63

Economic Models (Casual)

Answer 63

Specify statistical relationship believed to exist between economic quantities