BEC deck 1

Question 1

How do you calculate the elasticity of supply?

Answer 1

% change in quantity / % change in price

Question 2

How do you calculate the effect on demand of a product if the coefficient of cross-elasticity of demand is 2.0 and the competitor decreased its price by 5%?

Answer 2

This cross-elasticity has an elastic coefficient greater than 1 for demand, and thus has a direct relationship with price. Therefore, 2.0 x 5% = 10% decrease in demand.

Question 3

How do you calculate marginal propensity to consume?

Answer 3

change in consumption / change in income

Question 4

What is the formula for the capital budgeting technique known as accounting rate of return (ARR)?

Answer 4

ARR = Expected increase in annual NI / Initial (or average) investment

Question 5

How do you begin to solve for Internal Rate of Return (IRR)?

Answer 5

First understand that: PV factor x Annual cash inflows (savings) = Investment Cost
Then rearrange the formula by solving for PV factor:
PV factor = Investment Cost / Annual Cash Inflows (savings)

Question 6

What is the profitability index and how is it computed? What’s its limitation?

Answer 6

It computes the expected return for each invested dollar.
Profitability Index = NPV / Project Cost
The limitation of profitability index is that it requires detailed long-term forecasts (i.e., amount and timing) of projects’ cash flows.

Question 7

What is commercial paper and how long can it be used before it expires?

Answer 7

Commercial paper is a short-term unsecured promissory note which is sold by large, highly creditworthy firms as a form of short-term financing. The maximum period it can be used is 270 days. Notes exceeding 270 days in maturity require SEC registration and would not be considered commercial paper.

Question 8

How do you calculate effective interest with a condition of a compensating balance being required? This is can be used for Annual Percentage Rate (APR)?

Answer 8

First, calculate the interest expense on the total borrowing - this is the cost of borrowing. Second, calculate the required compensating balance - this will be deducted from your usable funds. Lastly, plug into the effective interest rate equation
= cost / usable funds

Question 9

What alternatives should be considered when leasing an asset? Also, in a net-net lease agreement, who is responsible for executory costs and residual value?

Answer 9

The basic reason for leasing, rather than buying, is that leasing an asset cost less than purchasing it. Thus, even if the net present value of purchasing an asset is not positive, which shows that it is not economically feasible to purchase the asset and earn a positive return, it still may be economically feasible to lease the asset.

For a net-net lease agreement, the lessee assumes responsibility for both executory costs (i.e., insurance, taxes, maintenance, etc.) of the asset and for the asset having a preestablished residual value at the end of the lease.

Question 10

How do you determine the market price of a bond?

Answer 10

Whether the bond is issued at par, at a premium, or at a discount, the market price will be the present value of the principal amount plus the present value of future interest payments, all at the market (effective) rate of interest.

Question 11

What is the main difference between a debenture bond and secured bond?

Answer 11

Because a debenture bond is unsecured, it is likely to have a higher coupon rate than comparable secured bonds.

Question 12

Calculate the cost of a discount option (equivalent annual interest rate). Ex: Terms of 1.5/15, net 30

Answer 12

[Discount Percentage / (100% - Discount %)] x [360 days / (Total pay period - Discount period)]
Ex: [1.5% / (100% - 1.5%)] x [360 days / (30-15)] = 36.55%

Question 13

What is the capital turnover ratio?

Answer 13

Revenue / Capital (S/E)

Question 14

How do you calculate cash conversion cycle?

Answer 14

[Avg. End. Inv./(COGS/365)] - [Avg. End. AP/(COGS/365)] + [Avg. End. AR/(Sales/365)]
DIO + DPO + DSO

Question 15

Calculate average days collection period.

Answer 15

360 / AR turnover

Question 16

What is the trough of a business cycle?

Answer 16

A trough is characterized by the (lowest) unused capacity and (greatest) unwillingness from investors to risk new capital investments.

Question 17

How do you calculate the economic rate of return on common stock?

Answer 17

(Dividends paid + change in stock price) / beginning stock price

Question 18

What are the two main variables/ components of real gross domestic product (GDP)?

Answer 18

Labor productivity AND Total worker hours

Question 19

What is metadata? Give an example.

Answer 19

Metadata is a set of data describing the details of another dataset. Checking the file properties of a word document file is an example of metadata.

Question 20

To reduce the risk of a foreign subsidiary being expropriated by the local foreign government, what should the parent company do?

Answer 20

They should invest capital in the local country currency in case the foreign government takes away (expropriates) the subsidiary from the parent company. That way the creditors claim would have to deal with the foreign host government.

Question 21

What does selling a digitized product do?

Answer 21

It can reduce costs and improve quality (e.g. some online books are cheaper, include hyperlinks to resources and key terms, and include additional content).

Question 22

What is the equivalent annual interest rate (nominal rate) of forgoing the cash discount? Ex: cash discount basis is 2/10, net 40.

Answer 22

nominal rate=
[discount rate / (100% - discount rate)] x [360 days / (net days - discount days)]
[2% / (100% - 2%)] x [360 / (40 - 10)] = 24.49%

Question 23

What is a right of having participating preferred stock?

Answer 23

It gives holders the right to receive dividends in excess of the specified preference rate. It gives the holder right to participate with common shareholders in dividends, usually after common shares have received a specified amount.
Cumulative (not participating) preferred stock would give holders the right to receive dividends not paid in prior periods before common shareholder receive dividends.

Question 24

Calculate Return on Investment (ROI)?

Answer 24

(Income/Sales) x Asset turnover

Question 25

Calculate the Marginal Utility (MU).

Answer 25

MU per dollar = Marginal Utility of product / Price of product

Question 26

Calculate break even point for units.

Answer 26

BE units = Fixed costs / Contribution margin

Question 27

Calculate break even sales

Answer 27

BE sales = Fixed Costs / Contribution Margin Ratio

Question 28

Calculate project profit

Answer 28

Projected Profit = CMR (Sales) - FC

Question 29

Margin of safety formula:

Answer 29

Current Sales - BE sales

Question 30

What is the formula for direct material price variance on items PURCHASED?

Answer 30

AQ (AP - SP)

Question 31

What is the formula for direct material quantity variance on items USED?

Answer 31

SP (AQ - SQ)

Question 32

How do you calculate total direct material variance?

Answer 32

Add variance on items purchased plus variance on items used.

Question 33

What is the formula for labor rate variance?

Answer 33

AH (AR - SR)

Question 34

What is the formula for efficiency variance?

Answer 34

SR (AH - SH)

Question 35

What is the general rule for minimum and maximum transfer prices?

Answer 35

Minimum transfer price (floor) is equal to the avoidable outlay costs.
Maximum transfer price (ceiling) is equal to the market price.

However, this is only true when idle capacity exists. If there is no idle capacity, the max and mix = the market price value.

Question 36

What product costing system is normally used in high-speed automated environments? It is an alternative of delaying journal entries until after the physical sequences have occurred.

Answer 36

Backflush costing

Question 37

Public company external audit firms must audit their clients’:

Answer 37

Financial statements and internal controls.

Question 38

Calculate residual income:

Answer 38

Monetary return on sales - Imputed interest on assets invested

You may first need to compute invested assets by dividing sales by asset turnover (given in question).

RI = Operating income- [required rate of return x (invested capital)]

Question 39

What is SQL most directly related to?

Answer 39

Relational databases.

Question 40

In an activity-based costing system, what should be used to assign a department’s manufacturing overhead costs to products produced in varying lot sizes?

Answer 40

Multiple cause-and-effect relationships.

Question 41

What is the credit instrument known as a banker’s acceptance?

Answer 41

A banker’s acceptance is a time draft, payable on a specified future date, with the bank guaranteeing the payment.

Question 42

What is the capital budgeting evaluation approach that determines the number of periods required for the discounted cash inflows of a project to equal the discounted cash outflows?

Answer 42

Discounted payback period approach.

Question 43

Compute the required rate of return for an investment with beta?

Answer 43

Required rate = Risk-free rate + Beta(Expected rate - Risk-free rate)

Question 44

When an organization undergoes review of activities in an effort to reduce or eliminate nonvalue-added activities, an important dimension of the activity is:

Answer 44

Whether the customer would identify the activity as adding value.

Question 45

What are the four different types of variances and how are each of them calculated?

Answer 45

There are four types of variances of which fall under either materials variance or labor variance.
@ Materials includes Price* and Usage.
@ Labor includes Rate* and Efficiency.
There are three steps to easily calculate all variances:

1) Formula: Standard amount - Actual amount = difference or variance
Negative # is unfavorable. Positive # is favorable.

2) *Multiply the difference by Actual Quantity if it’s a price or rate variance.

3) **Multiply the difference by the Standard rate if it’s usage or efficiency

Question 46

Which rate is most commonly compared to the internal rate of return to evaluate whether to make an investment?

Answer 46

The weighted-average cost of capital. It provides a measure of the cost of the funds that the company is considering investing in a project.

Question 47

What is the best tax strategy a multinational company should use for transfer pricing?

Answer 47

Transferring as much cost as allowable to a country with a higher tax rate would lower profits in that country, and cause higher profits in the other country with a lower tax rate. This would cause a lower tax burden in the consolidated multinational company.

Question 48

What is the average days collection period if AR turnover is given?

Answer 48

360 / AR turnover

Question 49

What is are the derivatives currency risks can be hedged against, and how are they different?

Answer 49

Forward contract: are not executed on an exchange but directly between the two contracting parties.

Future contacts: are executed on an exchange. Both forward and future contracts require the holder to purchase or sell a specific quantity of an asset on a specific future date.

Call (buy) and Put (sell) options: are contracts that do not require the holder to purchase (or sell) a specific quantity of an asset but give the holder the option to do so. The holder would exercise the option only if it is financially beneficial to do so.

Question 50

Variations between business cycles are most likely attributable to which factors?

Answer 50

Duration and intensity