BEC Deck 2

Question 1

Profitabilty Index (PI)

Answer 1

NPV of net future cash inflows / Initial investment

It is used to evaluate projects and is calculated by dividing the net present value (NPV) of the annual after-tax cash inflows by the initial cost of the project.

If PI > 1, the project is considered acceptable.

Question 2

Annual financing costs (AFC)

Answer 2

Discount % / (100% - Discount %)

x

365 or (360 days if given) / (total pay period - discount period)

Question 3

Hierarchy of Data System

Answer 3

Character - Field - Record - File

Question 4

Time-based security (TBS)

Answer 4

• A method used to access and quantify the effectiviness of a given security measure (i.e. control)
• It applies 3 variables
  1. P(t) : time to BREAK the control
  2. D(t) : time to DETECT the attack and notify security
  3. R(t) : time to RESPOND and CORRECT any damage from the attack

Formula: P(t) > D(t) + R(t)

If the time to detect and respond to an attack is less than the time to break the security measure, the measure is effective.

If the time to break the control P(t) is greater than the time to detect and respond, the measure is ineffective.

Question 5

Dividend Growth Rate

Answer 5

Next expected dividend / Current Stock Price + Expected growth rate

Next expected divded = Dividend amount / Selling price

Question 6

Free cash flow (FCF)

Answer 6

NOPAT (net operating profit after taxes) + Depreciation + Amortization - Working Capital - Capital Expenditures

Question 7

Debt Ratio

Answer 7

Total Debt / Total assets

Question 8

Expected Return on stock

Answer 8

Expected profit or loss / Current stock value (beginning market price)

Expected profit = dividends (if paid) + / - the change in price

Question 9

Average Collection Period

Answer 9

% of customers paying in X days times X days +

% of customers paying in Y days timesY days

Question 10

Market capitalizaton formula

Answer 10

Current market price per share X Total number of outstanding shares

It is the amount an entity is worth based on current market prices. It does not include debt.

Question 11

Laffer Curve – Supply Side Theory

Answer 11

The Supply Side Theory argues that government laws and regulations
(–impediments: saving, investment, work, innovation) may be counterproductive.

The Laffer Curve illustrates this concept by showing that if tax rates are too high, increasing tax rates will yield less tax revenue.

Lowering high tax rates may increase tax revenues by stimulating the economy.

Question 12

Cost of Capital

        Also Gordon Growth Model

Answer 12

Next expected dividend / Current stock price + expected growth rate

Question 13

Business risks:

• -Credit risk
• • Interest rate risk
• • Liquidity risk
• • Market risk

Answer 13

Credit risk : Customers or borrowers fail to pay

Interest rate risk : Market rates exceed fixed long-term rates

Liquidity risk: Funds are inadequate to cover short-term obligations. It exists when short-term obligations outweigh access to liquid/available funds.

Market risk: Sales or asset values decline

Question 14

Bonds selling at a premium

Bond prices and Interest rates

Answer 14

If the market rate has decreased since the bond was issued, the bond should pay a higher interest rate than newly issued bonds. This will make the bond mroe valuable to investors, driving up the resale price, selling at a premium.

When coupon/face/nominal rate is more than market rate, bond is selling at a premium.

Question 15

Bonds coupon and effective rates

Answer 15

Coupon rate is a rate determined by the issuer and is usually a precent of the instruments face value.

The actual interest rate is the effective interest rate; this is determined by the financial marketplace and is generally based on the instruments risk.

Interest expense reduces the company’s taxable income, and it reduces taxes paid, shielding taxable income from additional taxes.

The interest rate is tax-adjusted by multiplying the effective rate by 1 minus the tax rate.

Question 16

Payback Period

Answer 16

Payback Period = Initial investment / annual net cash inflows

Question 17

Schools of Thought

Answer 17

Keynesian : inadequate demand : preferred policy - intervention to increase demand.
—This theory suggests that prices and wages do not adjust quickly enough to stablize business cycle swings. Therefore, governments must use fiscal polices (increasng or decreasing taxes or spending) to manage consumer and business demand.

Monetarist : unstable money subbply : preferred policy - stable growth in money supply
—This theory also recognizes that prices and wages may not be flexible over time. However, they argue that the Federal Reserve, not the government, should focus on monetary policy to minimize business cycle flucations (for example stabalize the money supply). They can do this by increaseing or decreasing interest rates, which direcly affects the money supply as needed to control the phases of the business cycle

New Keynesian : a combination of Keynesian and Monetarist theories
prferred policy - use both fiscal and monetary policies

Question 18

Fiscal Policy

Answer 18

States when the government wants to implement a expansionary phase; it must:

• —-Decrease tax rates
• —-Increase transfer payments (unemployment benefits)
• —-Increase spending on roads, bridges

To implement a contractionary phase, it must:

• —-Increase tax rates
• —-Decrease transfer payments (unemployment benefits)
• —-Decrease spending on roads, bridges

1. To stabalize the GDP growth, the goverenment will need to grow GDP near its potential by increasing the spending and decrease taxation.
2. To better distribute income and weatlh the government give support to the disadvantaged by increasing transfer payments (unemployment) and subsidies (to businesses or industries)
3. To improve resource allocation, the government should direct resources to industries/sectors by implementing special tax povisions or subsidies.

Question 19

Monetary Policy

Answer 19

Tool: open market operations : trade securities usually government securiteis

• —–Expansionary : buy securities
• —–Contractionary : sell secuirites

Tool: discount rate : interst charged to banks for short-term loans

• —-Expansionary : lower the discount rate (this will help increase borrowing, since it will cost less to borrow)
• —–Contractionary : raise the disount rate (this will slow down borrowing since it will cost more to borrow money)

Tool: Reserve requirments : set the % of bank deposits held in reserves

• ——Expansionary : decrease (this will allow banks to have more money to loan to people)
• —— Contractionary : increase (this will allow banks to have less money to loan, they will have to keep more in the reserve)

Question 20

Journal entry to record credit loss (bad debt) expense

Answer 20

Credit loss expense (increase) XXX
Allowance for credit losses (increases) XXX

This will decrease accounts receivable and working capital

Question 21

Working Capital

Answer 21

Current Assets - Current Liabilites

Working capital increases when current assets or liabilities decrease and it decreass when current assets or liabilities increase.

Question 22

Manufacturing Overhead Allocation Methods

Answer 22

If the manufacturing overhead account is immaterial at the end of the year, the entire amount is closed to costs of goods sold (COGS). For this approach, net income and the current ratio will decrease.

If the manufacturing overhead account is material, the balance should be allocated to work-in-process, finished goods, and COGS based on relative amounts of each amount. For this approach, net income and the current ratio will increase.

Question 23

Inventory Managment Techniques

Answer 23

Materials requirments planning (MRP) : uses finished goods demand forecasts to manage production. It focuses on which raw material, and how many of those items, must be ordered and delivered to meet FG demand forecasts in a timely manner.

Economic order quantity : a formuloa for determining optimal reorder point

Question 24

Interest rate gap

Answer 24

Interest-bearing assets - Interest-bearing liabilities

Interet rate risk is the probability that increases in interest rates will have a big impact on earnings.

Interest-bearing assets adjust to interest rate changes slowly, while interest-bearing liabilities adjust more rapidly.

Improving the match between the maturity of interest-bearing assets and liabilities can mitigate this risk.

Question 25

8 Components of ERM Framework

Answer 25

• Internal Environment
• Objective Setting
• Event identification
• Risk assessment
• Risk Response
• Control Activities
• Information and Communication
• Monitoring