BEC MCQ 3.2

Question 1

Weighted Average Cost of Capital

Answer 1

Investment structure(percentage of that investments in the total investments) X cost of Investment= Weighted Average Cost of Capital

Question 2

Expected rate of Capital with CAPM

Answer 2

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

Question 3

Discounted cash flow method

Answer 3

D/P + G= K

Dividend next period /Stock price +Growth

Question 4

Factors might cause a firm to increase debt in financial structure

Answer 4

Corporate income tax rate

Question 5

Cost of capital

Answer 5

Cost of capital considers the cost of all funds whether they are short term long term new or old

Question 6

Financial leverage

Answer 6

Financial leverage increases when debt to equity ratio increases. When the company issues bonds

Question 7

residual income

Answer 7

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

Question 8

ROI formula

Answer 8

Income/Investment

Question 9

The amount of inventory that a company tend to hold in stock would decrease as the

Answer 9

variability of sale decreases
cost of running out of stock decreases
length of time a goods are in transit decreases

Question 10

Which of the following increase EOQ

Answer 10

Decrease in Carrying costs

Question 11

Which decrease EOQ

Answer 11

Decreased cost per order
Decreased safety stock level
Decreased quantity demanded

Question 12

Annual cost of credit or annual cost of not taking the discount

Answer 12

Number of days in a year usually 360/total pay period- discount period x Discount percentage/ 100-discount percentage

Question 13

Delays outflow of cash

Answer 13

Draft which increases payable float

Question 14

The optimal level of inventory

Answer 14

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

Question 15

In inventory management

Answer 15

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

Question 16

Changes because of Just in time inventory system

Answer 16

Inventory turnover increase inventory percentage decrease

Question 17

ROI

Answer 17

Ratio of operating income /Average operating assets
or operating profit/investment
or income/investment
ROI does not balance short and long term issues

Question 18

E= Squre root of 2so/c

Answer 18

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

Question 19

Assets turnover

Answer 19

Sales /Assets

Question 20

Profit Margin/ Sales

Answer 20

NI/Sales or Return of Investment/asset turn over

Question 21

concentration banking

Answer 21

concentration banking is the method by which a single bank is designated as a central bank as a means of controlling receipts.

Question 22

Lockbox

Answer 22

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)

Question 23

zero balance accounts

Answer 23

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.

Question 24

when the question ask for net cost of debt

Answer 24

effective interest rate X (1- tax rate)

Question 25

Residual income

Answer 25

is the difference between net income and desired return. The required return is net book value times the hurdle rate (required rate of return) .

Question 26

Optimal capitalization for an organization

Answer 26

Lowest weighted average total of capital or minimum weighted average of capital

Question 27

Economic value added

Answer 27

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.

Question 28

weighted average cost of capital

Answer 28

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

Question 29

which ratio is used to evaluate company profitability

Answer 29

gross margin =Gross margin/sales

Question 30

Invest turnover

Answer 30

sales/ average investment

Question 31

Company’s cost of preferred stock

Answer 31

Amount paid /net proceeds

where as amount paid is par value of the capital x % of preferred stock. net proceeds (Selling price-Flotation)

Question 32

Cash conversion cycle

Answer 32

Does not include cash discount period

Inventory Conversion period+ receivables collection period - payables deferral period

Question 33

Operating leverage

Answer 33

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

Question 34

Market rate of interest in one year of treasury bill

Answer 34

Risk rate plus inflation premium

Question 35

Cost of common equity-Discounted cash flow method

Answer 35

expected dividend/ current share price+ growth rate

Question 36

Material requirement planning(MRP)

Answer 36

Is specifically designed for WIP and Raw materials

Question 37

Cycle counting

Answer 37

Is an inventory auditing procedure

Question 38

Times interest earned ratio

Answer 38

Earnings before Interest and taxes/Total interest expense