BEC Deck 2 Flashcards
Profitabilty Index (PI)
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.
Annual financing costs (AFC)
Discount % / (100% - Discount %)
x
365 or (360 days if given) / (total pay period - discount period)
Hierarchy of Data System
Character - Field - Record - File
Time-based security (TBS)
- 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.
Dividend Growth Rate
Next expected dividend / Current Stock Price + Expected growth rate
Next expected divded = Dividend amount / Selling price
Free cash flow (FCF)
NOPAT (net operating profit after taxes) + Depreciation + Amortization - Working Capital - Capital Expenditures
Debt Ratio
Total Debt / Total assets
Expected Return on stock
Expected profit or loss / Current stock value (beginning market price)
Expected profit = dividends (if paid) + / - the change in price
Average Collection Period
% of customers paying in X days times X days +
% of customers paying in Y days timesY days
Market capitalizaton formula
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.
Laffer Curve – Supply Side Theory
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.
Cost of Capital
Also Gordon Growth Model
Next expected dividend / Current stock price + expected growth rate
Business risks:
- -Credit risk
- Interest rate risk
- Liquidity risk
- Market risk
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
Bonds selling at a premium
Bond prices and Interest rates
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.
Bonds coupon and effective rates
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.
Payback Period
Payback Period = Initial investment / annual net cash inflows
Schools of Thought
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
Fiscal Policy
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
- To stabalize the GDP growth, the goverenment will need to grow GDP near its potential by increasing the spending and decrease taxation.
- To better distribute income and weatlh the government give support to the disadvantaged by increasing transfer payments (unemployment) and subsidies (to businesses or industries)
- To improve resource allocation, the government should direct resources to industries/sectors by implementing special tax povisions or subsidies.
Monetary Policy
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)
Journal entry to record credit loss (bad debt) expense
Credit loss expense (increase) XXX
Allowance for credit losses (increases) XXX
This will decrease accounts receivable and working capital
Working Capital
Current Assets - Current Liabilites
Working capital increases when current assets or liabilities decrease and it decreass when current assets or liabilities increase.
Manufacturing Overhead Allocation Methods
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.
Inventory Managment Techniques
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
Interest rate gap
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.
8 Components of ERM Framework
- Internal Environment
- Objective Setting
- Event identification
- Risk assessment
- Risk Response
- Control Activities
- Information and Communication
- Monitoring
