BEC MCQ 3.2 Flashcards
Weighted Average Cost of Capital
Investment structure(percentage of that investments in the total investments) X cost of Investment= Weighted Average Cost of Capital
Expected rate of Capital with CAPM
c= R+B(M-R) c=cost of capital R=risk free rate B= Beta coefficient of comparable publicly traded stock M= Market rate of return where B is referred to a s particular change in stock compared to the overall market change.
change in stock price/change in market price
Discounted cash flow method
D/P + G= K
Dividend next period /Stock price +Growth
Factors might cause a firm to increase debt in financial structure
Corporate income tax rate
Cost of capital
Cost of capital considers the cost of all funds whether they are short term long term new or old
Financial leverage
Financial leverage increases when debt to equity ratio increases. When the company issues bonds
residual income
Residual income is defined as income in excess of a minimum rate of return. Residual income is defined as segment margin of an investment center after deducted imputed interest rate (hurdle rate) on the assets used by the investment center. Residual income measures actual dollars that an investment earns over its required return rate. Performance evolution on this basis will mean the desirable investment decision will not be rejected by high return divisions . Residual income is accrual method
ROI formula
Income/Investment
The amount of inventory that a company tend to hold in stock would decrease as the
variability of sale decreases
cost of running out of stock decreases
length of time a goods are in transit decreases
Which of the following increase EOQ
Decrease in Carrying costs
Which decrease EOQ
Decreased cost per order
Decreased safety stock level
Decreased quantity demanded
Annual cost of credit or annual cost of not taking the discount
Number of days in a year usually 360/total pay period- discount period x Discount percentage/ 100-discount percentage
Delays outflow of cash
Draft which increases payable float
The optimal level of inventory
is not affected by current level of inventory
but it is affected by
lead time to receive merchandise
the cost of unit per inventory
the costs of placing an order impacts order frequency which affects order size and optimal inventory levels
In inventory management
safety stock will increase variability time increases.
A high carrying cost would decrease safety stock
A lower stock out cost would decrease safety stock
If the order cost decrease then inventory will be ordered more frequently and less safety stock will be needed
Changes because of Just in time inventory system
Inventory turnover increase inventory percentage decrease
ROI
Ratio of operating income /Average operating assets
or operating profit/investment
or income/investment
ROI does not balance short and long term issues
E= Squre root of 2so/c
E= Order size (EOQ) S= Annual sales in units O= Cost per purchase order C= Carrying cost per unit EOQ assumes that periodic demand is known
Assets turnover
Sales /Assets
Profit Margin/ Sales
NI/Sales or Return of Investment/asset turn over
concentration banking
concentration banking is the method by which a single bank is designated as a central bank as a means of controlling receipts.
Lockbox
A lockbox system generally relates to expediting deposits over a specific group of transactions. The technique arranges for direct mailing of customers remittances to a bank post office box and subsequent deposit. ( Minimize collection float)
zero balance accounts
represents a account that maintains zero balance. Zero balance accounts are accompanied by a master or parental account that serves fund any negative balances and is designed to minimize cash not control receipts.
when the question ask for net cost of debt
effective interest rate X (1- tax rate)
Residual income
is the difference between net income and desired return. The required return is net book value times the hurdle rate (required rate of return) .
Optimal capitalization for an organization
Lowest weighted average total of capital or minimum weighted average of capital
Economic value added
EVA is a residual income technique used for capital budgeting and performance evolution. It represents residual excess income of project earnings in excess of cost of capital (including equity) associated with invested capital.
weighted average cost of capital
the weighted average cost of capital is frequently used as the hurdle within capital budgeting techniques. Investments that provide a return more than wacc is the best…hurdle rates
which ratio is used to evaluate company profitability
gross margin =Gross margin/sales
Invest turnover
sales/ average investment
Company’s cost of preferred stock
Amount paid /net proceeds
where as amount paid is par value of the capital x % of preferred stock. net proceeds (Selling price-Flotation)
Cash conversion cycle
Does not include cash discount period
Inventory Conversion period+ receivables collection period - payables deferral period
Operating leverage
is defined as the degree to which a firm uses its fixed operating cots as to variable operating costs. A firm that has high operating leverage has high fixed costs and relatively low variable cost and uses this cost structure to magnify the financial result of each additional dollar in sales
Market rate of interest in one year of treasury bill
Risk rate plus inflation premium
Cost of common equity-Discounted cash flow method
expected dividend/ current share price+ growth rate
Material requirement planning(MRP)
Is specifically designed for WIP and Raw materials
Cycle counting
Is an inventory auditing procedure
Times interest earned ratio
Earnings before Interest and taxes/Total interest expense
