BEC I BLAKE CPA Flashcards
Cost of R/E Earnings - 3 methods
CAP-M
Discounted Cash Flow
Bond Yield Risk Premium
CAP-M
Cost of Retained earnings = Risk Free Rate + [Beta Coefficient * (Market Return - Risk Free Rate)]
Discounted $ Flow (DCF)
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)
Bond Yield Risk Premium (BYRP)
Cost of Retained earnings = Pre-Tax of L/T Debt + Market Risk Premium
Cost of preferred stock
Preferred Stock Dividends (% * par value) / Net proceeds of Preferred stock (Market Value)
= $ out / $ in ***
After Tax Cost of Debt
Pre-tax cost of bonds (%) * (1-Tax Rate)
Written Communication
- Read the Question Twice before you even think of starting your answer
- 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)
Written Communication Format - I-E-C
I: First paragraph: INTRODUCTION/ISSUE
E: Next Paragraph (s): EXPLANATION
C: Last paragraph: CONCLUSION/CLOSING
What is the Projected Stock Price Formula (p0)?
PEG = 4 Current EPS = $10 Growth = 2.5%
(P0) = PEG X (EPS X (1 + Growth) X Growth %
4 X ($10 X (1 + .025) X 2.5% = 102.50 or $102
Three elements needed to estimate the cost of equity capital are (D G P)
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)
Internal Rate of Return Formula
Net Incremental Investment / Net annual Cash Flows = Present Value Factor
Higher the present value factor the lower the Internal Rate Of Return
Annual Operating Cash flow formula
Pretax $ flow X (1-Tax Rate) + (Depreciation expense X Tax RAte)
Profitability Index
PV of Future $ inflows / PV of net initial investment
Present value of net future cash inflows/ Present value of net initial investment
Free Cash Flow Formula
Net Income + NonCash Expenses - Increase In working Capital - Capital Expenditures
How do you strengthen Working Capital?
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!
Perfect (Pure) Competition
What is the Elasticity of Demand?
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”
Monopolistic Competition
What is the Elasticity of Demand?
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)
Oligopoly
What is the Elasticity of Demand?
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
Monopoly
What is the Elasticity of Demand?
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”
Prevention Costs
Planning
Maintenance
Training/education
Appraisal Costs
Inspection
Calibration
Audits
Internal Failure Costs
Rework
Scrap
Delays
External Failure Costs
Customer Returns
Warranty Claims
Low Quality Image
A/P Rollforward Equation
Beg A/P
+Purchases
-Disbursement
=End A/P
What is Float?
The difference between the balance of checks outstanding that have not cleared the bank & deposits made but which have not cleared the bank
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?
$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
IRR Calculation
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
Which of the following effects would a lockbox most likely provide for receivables management?
Minimized Collection Float:
b/c cash inflows are expedited by having the bank receive the payments from a company’s customers directly.
Deposited immediately
Overall Cost of Capital AKA “Hurdle Rate” is the:
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.
Beta Coefficient Formula
% 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
