BEC I BLAKE CPA

Question 1

Cost of R/E Earnings - 3 methods

Answer 1

CAP-M

Discounted Cash Flow

Bond Yield Risk Premium

Question 2

CAP-M

Answer 2

Cost of Retained earnings = Risk Free Rate + [Beta Coefficient * (Market Return - Risk Free Rate)]

Question 3

Discounted $ Flow (DCF)

Answer 3

Cost of Retained earnings = [(Year End Dividend Per Share)/(Market Price)] + Growth Rate

Y/E Dividend = D1

P0 = Price currently trading at

***D1 = D0 X (1 + Growth rate)

Question 4

Bond Yield Risk Premium (BYRP)

Answer 4

Cost of Retained earnings = Pre-Tax of L/T Debt + Market Risk Premium

Question 5

Cost of preferred stock

Answer 5

Preferred Stock Dividends (% * par value) / Net proceeds of Preferred stock (Market Value)

= $ out / $ in ***

Question 6

After Tax Cost of Debt

Answer 6

Pre-tax cost of bonds (%) * (1-Tax Rate)

Question 7

Written Communication

Answer 7

1. Read the Question Twice before you even think of starting your answer
2. When writing my answer, keep these grading tips in mind:
   -Spelling counts
   -Grammar counts
   -Punctuation counts
   -WRITE IN COMPLETE SENTENCES & PARAGRAPHS, NO BULLETED OR NUMBERED LISTS

-Do not use abbreviation unless I DEFINE it First.

ex: Do not use SEC unless I first type Securities ExchangeCommission (SEC)

Question 8

Written Communication Format - I-E-C

Answer 8

I: First paragraph: INTRODUCTION/ISSUE

E: Next Paragraph (s): EXPLANATION

C: Last paragraph: CONCLUSION/CLOSING

Question 9

What is the Projected Stock Price Formula (p0)?

PEG = 4 Current EPS = $10 Growth = 2.5%

Answer 9

(P0) = PEG X (EPS X (1 + Growth) X Growth %

4 X ($10 X (1 + .025) X 2.5% = 102.50 or $102

Question 10

Three elements needed to estimate the cost of equity capital are (D G P)

Answer 10

Return (R) = (D1/P0) + G

Current Dividends per share (D)

Expected growth Rate in Dividends (g)

Current market price per share of common stock (P)

Question 11

Internal Rate of Return Formula

Answer 11

Net Incremental Investment / Net annual Cash Flows = Present Value Factor

Higher the present value factor the lower the Internal Rate Of Return

Question 12

Annual Operating Cash flow formula

Answer 12

Pretax $ flow X (1-Tax Rate) + (Depreciation expense X Tax RAte)

Question 13

Profitability Index

PV of Future $ inflows / PV of net initial investment

Answer 13

Present value of net future cash inflows/ Present value of net initial investment

Question 14

Free Cash Flow Formula

Answer 14

Net Income + NonCash Expenses - Increase In working Capital - Capital Expenditures

Question 15

How do you strengthen Working Capital?

Answer 15

WC = CA - CL

Strengthened by CA going up or CL going Down

Also strengthened by:
-Speeding up collections
-Slowing Down Payments AKA Hold Cash Longer!

Question 16

Perfect (Pure) Competition

What is the Elasticity of Demand?

Answer 16

Most competitive, homogenous products, no differentiation, many firms, no barriers to entry, “price takers”

Perfectly Elastic: “Firm sells as much or as little, as it wants at the given market price”

Question 17

Monopolistic Competition

What is the Elasticity of Demand?

Answer 17

Highly Competitive
products are differentiated, higher price per unit
many firms
not many barriers to entry
have the ability to control price

Highly Elastic but Downward Sloping (Can adjust Q of products sold without affecting the price very much)

Question 18

Oligopoly

What is the Elasticity of Demand?

Answer 18

Ex: Automotive Industry
Less Competition
Products are similar but differentiated
Small Number of firms
Significant Barriers to Entry
Fixed or semi-fixed prices
Ability to Control Price & Output

Inelastic kinked Demand curves: “Firm faces a Kinked downward-sloping demand curve”

Best Cost provider does not work for an oligopoly

Question 19

Monopoly

What is the Elasticity of Demand?

Answer 19

No competition
Products are unique
Insurmountable barriers to entry
Set Price & Output to maximize Profit
“Price Setters”
Ignores Market Share

Inelastic: “Firm faces the entire demand curve for the product, which slopes downward”

Question 20

Prevention Costs

Answer 20

Planning
Maintenance
Training/education

Question 21

Appraisal Costs

Answer 21

Inspection
Calibration
Audits

Question 22

Internal Failure Costs

Answer 22

Rework
Scrap
Delays

Question 23

External Failure Costs

Answer 23

Customer Returns
Warranty Claims
Low Quality Image

Question 24

A/P Rollforward Equation

Answer 24

Beg A/P
+Purchases
-Disbursement
=End A/P

Question 25

What is Float?

Answer 25

The difference between the balance of checks outstanding that have not cleared the bank & deposits made but which have not cleared the bank

Question 26

A Company writes and receives checks totaling $10k. If it takes 5 days for the check to clear and be deducted from the company’s account and only four days for the deposit to clear, what is the float?

Answer 26

$10k check drawn but not cleared X 5 days: $50,000
LESS: $10k checks per day received but not cleared X 4 days = (40,000)

= Positive “Float” of $10.000

Question 27

IRR Calculation

Answer 27

Considers all estimated project cash flows
Considers Time Value of money

Weakness: Cash flows from the investment are assumed in the IRR analysis to be reinvested at the Internal Rate of Return

Question 28

Which of the following effects would a lockbox most likely provide for receivables management?

Answer 28

Minimized Collection Float:

b/c cash inflows are expedited by having the bank receive the payments from a company’s customers directly.

Deposited immediately

Question 29

Overall Cost of Capital AKA “Hurdle Rate” is the:

Answer 29

Rate of return required to cover the cost of resources employed

Minimum return a company must achieve in order to make an investment financially feasible.

Question 30

Beta Coefficient Formula

Answer 30

% Change in stock price / % Change in market Price

Calculated the ratio of % changes in a stock price to the % changes in Overall market values

Measures volatility