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CPA > BEC Custom 7 > Flashcards

BEC Custom 7 Flashcards

1
Q

Capital Budgeting

A

the process of measuring, evaluating, and selecting long-term investment opportunities for a firm

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2
Q

Risk (in reference to project risk)

A

the possibility of loss or other unfavorable results that derives from uncertainty implicit in future outcomes

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3
Q

Reward

A

the benefit expected or required from investment of resources in capital projects and other undertakings

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4
Q

Payback Period Approach

A

Determines the number of years needed to recover the initial cash investment in a project and compares that time with a pre-established maximum payback period
*ignores time value of money

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5
Q

Discounted Payback Period Approach

A

Determines the # of years needed to recover the initial cash investment in a project using discounted cash flows and compares that time with a pre-established maximum payback period

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6
Q

Accounting Rate of Return Approach (ARR)

A
  • determines the expected annual incremental accounting net income from a project as a percent of the initial (or average) investment
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7
Q

ARR Formula

A

average annual incremental revenue - average annual incremental expenses / initial (or average) investment
*accrual accounting

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8
Q

Net Present Value Approach (NPV)

A

Determines the present value of expected cash inflows and compares that value with the present value of expected outflows in the project
*present value is determined using discount rate, also called “hurdle rate”, based on cost of capital to firm (WACC)

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9
Q

Internal Rate of Return Approach (IRR)

A

Determines the discount rate that equates the present value of expected cash inflows with the present value of expected cash outflows
*IRR computes the discount rate that makes the NPV of cash flows equal to zero

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10
Q

Profitability Index Approach (PI) - Cost Benefit Ratio

A

Determines project rankings by taking into account both the net present value and the cost of each project

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11
Q

Profitability Index calculation

A

PI = NPV of project inflows/PV of project cost

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12
Q

Financial Structure

A

The mixture of liabilities and owners’ equity accounts of a firm

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13
Q

Capital Structure

A

The long-term sources of funding - long-term debt and owners’ equity

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14
Q

Short-term or Working Capital Financing

A

The funding provided by obligations which become due within one year (i.e. current liabilities)

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15
Q

Payables

A

Occur through the acquiring of goods or services financed by incurring an obligation to pay in the future

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16
Q

Accrued Accounts Payable

A

Result from acquiring cash and other benefits financed by an obligation to be financed in the future

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17
Q

“Stand-by” credit

A

An arrangement to have financing available for a specific purpose or period of time

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18
Q

Line of credit

A

Informal agreement whereby a financial institution agrees to a maximum amount of credit that will be extended at any one time

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19
Q

Revolving credit

A

formal agreement whereby a financial institution or other lender agrees to a maximum amount of credit that will be extended

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20
Q

Letter of credit

A

A conditional commitment by a financial institution to pay a third party in accordance with specified terms and conditions

21
Q

Commercial Paper

A

short-term, unsecured promissory notes sold by large, highly-creditworthy firms

22
Q

Pledging Accounts Receivable

A

using accounts receivable as security for short-term borrowings

23
Q

Factoring Accounts Receivable

A

Factoring is the sale of Accounts Receivable

- buyer is called the “Factor”

24
Q

Without recourse

A

The factor (buyer) bears the risk associated with collectability, expect in the case of fraud

25
Q

With recourse

A

The factor (buyer) has recourse against the seller for some or all of the risk associated with uncollectability of the receivables

26
Q

Inventory Secured Loans

A

Occur when a firm pledges all or part of its inventory as collateral for a short-term loan

27
Q

Floating Lien Agreement

A

Borrower gives a lien on all of its inventory, but retains control of its inventory, which it continuously sells and replaces

28
Q

Chattel Mortgage Agreement

A

Lender has a lien against specifically identified inventory, borrower retains control of that inventory, but can’t sell it without lender approval

29
Q

Field warehouse agreement

A

Inventory remains at borrower’s warehouse, but under the control of an independent third party

30
Q

Terminal warehouse agreement

A

Inventory is moved to a public warehouse and placed under the control of an independent third party

31
Q

Net lease

A
  • lessee assumes cost associated with ownership:
    maintenance, taxes and insurance
  • called “executory costs” in accounting
32
Q

Net-net lease

A

Lessee assumes cost associated with ownership (above) and responsibility for residual value at end of the lease

33
Q

Bonds

A
  • long-term promissory notes
  • in return for proceeds (cash), the issuer of the bonds (the borrower) promises to pay bondholder (the investor) a fixed amount of interest each period and repay the face or principal of the bond at maturity
34
Q

Bond indenture

A

bond contract

35
Q

Par/face value

A

bond principal

36
Q

Coupon rate of interest

A

Annual rate of interest stated on face of bond (“stated rate”)

37
Q

Debenture bonds

A
  • unsecured
  • no specific assets are designated as collateral
  • they carry more risk and have higher cost than secured bonds
38
Q

Secured bonds

A
  • have specific assets designated as collateral
39
Q

Current yield (CY) - bonds

A

Ratio of annual interest payments to current price of the bonds in the market

40
Q

“market interest rate” risk

A

The risk that the market value will go down due to interest rates going up in the market

41
Q

Preferred Stock

A

Ownership interest with preference claims (over common stock)

  • usually does not having voting rights
  • dividends are usually limited in amount and expected (like bond interest) - not required
42
Q

Callable preferred stock

A

gives the firm the right to buy back preferred shares, usually at pre-established price

43
Q

Preferred stock theoretical value (PSV) calculation

A

Annual Dividend/Required Rate of Return

44
Q

Preferred stock expected rate of return (PSER) calculation

A

annual dividend/market price

45
Q

Common stock

A 
the basic ownership interest in a corporation 
*regulatory requirements limit most companies to one class of common stock
46
Q

Common Stock (CS) valuation

A
  • the present value of expected cash flows

- 2 cash flows - commons dividends and common stock appreciation

47
Q

Common Stock Expected Rate of Return (CSER)

A

(1st year dividend/market price) + growth rate

48
Q

Hedging principle of financing

A

calls for matching cash flows from assets with cash requirements needed to finance those assets

CPA (16 decks)

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