BEC - Section #3 - Financial Mgmt. & Capital Budgeting

Question 1

Payback Method Formula

Answer 1

initial investment / undiscounted periodic cash flows

• does not consider the time value of money

Question 2

Current Ratio formula

Answer 2

current assets / current liabilities

• the higher the number the more liquid the company is

Question 3

NEED TO LOOK UP - Internal Rate of Return formula

Answer 3

need to look up

• based on cash flows
• excludes depreciation expense
• includes residual sales value of project

Question 4

Weighted Average Cost of Capital - formula

Answer 4

ABC pays a cost of 8% on its debt of $1 million and 9% on its equity of $2 million

weighted average rate
8% x $1,000,000/$3,000,000 + 9% x $2,000,000/$3,000,000 or 2.7% + 6%, which equals 8.7%

Question 5

How to calculate “Quick-Ratio?” What is included in Current Assets?

Answer 5

(cash+mkt sec+accts rec) / current liabs

Question 6

How to calculate Net Present Value

Answer 6

pres val of future net cash flows - initial net investment

Question 7

How to calculate Times Interest Earned

Answer 7

earnings before interest and taxes
divided by
amount of interest

Question 8

How to calculate Inventory Turnover

Answer 8

COGS / AVG INVENTORY

cogs = beg inv + purch - end inv

avg = beg + end / 2

Question 9

How to calculate Receivable Turnover Ratio

Answer 9

Net Credit Sale / Avg AR.

Question 10

How to calculate Return on Equity

Answer 10

income / equity

With a profit margin of 11% on sales of $2,000,000, profit is $220,000. Total assets are $2,500,000. If the debt ratio is reduced to 40%, debt will be $1,000,000 and equity will be $1,500,000. The return on equity would then be $220,000/$1,500,000 or 14.7%.

Expanded explanation: assets = $2,500,000 = debt + equity
debt = 0.40 x assets = 0.40 x $2,500,000 = $1,000,000
equity = 0.60 x assets = 0.60 x $2,500,000 = $1,500,000
return on equity = income / equity = $220,000 / $1,500,000 = 0.147

Question 11

Calculate Return on Investment

Answer 11

profit / investment

11 profit / 40 invested = 27.5% return

Question 12

Calculate Working Capital

Answer 12

current assets - current liabilities

Question 13

Calculate Economic Order Quantity, what does it assume

Answer 13

economic order quantity is calculated by taking the square root of 2AP/S where A is the periodic demand in units, P is the cost of placing an order and S is the cost of maintaining a unit in inventory for an entire period. It is assumed that the cost of placing an order will remain constant

Question 14

Calculate Economic Order Quantity, what does it assume

Answer 14

economic order quantity is calculated by taking the square root of 2AP/S where A is the periodic demand in units, P is the cost of placing an order and S is the cost of maintaining a unit in inventory for an entire period. It is assumed that the cost of placing an order will remain constant

Question 15

What are the four CAPITAL BUDGETING TECHNIQUES ?

Answer 15

Payback
Internal rate of return
Accounting rate of return
Net present value

The net present value method measures the future cash flows that will be derived from an investment by discounting them at a predetermined discount rate to determine if the present value of the cash flows equal or exceed the cost of the investment, indicating that it will earn a return that is at least equal to the established minimum. The payback method is the investment divided by annual cash flows and does not involve a predetermined interest rate. The accounting rate of return involves dividing financial statement income by total assets to calculate a return rather than using a predetermined one. The internal rate of return involves calculating an effective discount rate rather than using a predetermined one by evaluating the relationship between annual cash flows and the investment