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CMA Part II Prep > CMA Part II > Flashcards

CMA Part II Flashcards

1
Q

Stock dividends require an adjustment to the weighted average of common shares outstanding. True or false?

A

True

The adjustment is done retroactively to reflect the change in capital structure as if it had occurred at the beginning of the first period presented

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2
Q

Definition of the internal rate of return

A

The discount rate at which the net present value of a project’s cash flows equals zero.

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3
Q

In practice, dividends

A

usually exhibit greater stability than earnings

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4
Q

If the central bank of a country raises interest rates sharply, the country’s currency will likely

A

increase in relative value.

money will pour in from all over the world in pursuit of that country’s higher returns. This increase in demand for the country’s currency will boost it’s purchasing power

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5
Q

What are the two issues concerning the time value of money?

A

1) The investment value of the money
2) The risk (uncertainty) inherent in any executory agreement.

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6
Q

Price-earnings ratio

A

Market price per share / basic earnings per share

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7
Q

The expected total cash inflow for any given year of a project includes

A

1) cash flows from ongoing operations (including taxes)
2) depreciation tax shield (annual depreciation x tax rate)
3) the after tax cash inflow from the sale of existing equipment (including taxes)
4) recovery of initial working capital

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8
Q

What is the beta coefficient?

A

The investment return’s sensitivity to changes in the market’s returns

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9
Q

What does the margin of safety measure?

A

The amount by which sales may decline before losses occur (equals budgeted or actual sales minus sales at breakeven point)

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10
Q

What ratio does exercising share options effect?

A

Debt-to-equity ratio

Exercising share options improves (decreases) the debt-to-equity ratio because equity is increased with no effect on debt. When share options are exercised, common stock, APIC, and cash are increased

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11
Q

Breakeven point in volume

A

fixed costs / contribution margin per unit

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12
Q

Total asset turnover ratio

A

sales / average total assets

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13
Q

Effective interest rate on a loan with a compensating balance

A

stated rate / (1-compensating balance)

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14
Q

When should joint products be processed further

A

If the incremental revenue exceeds the incremental costThe

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15
Q

What does the credibility standard require

A

1) communicating information fairly and objectively
2) providing all relevant information that could reasonably be expected to influence an intended user’s understanding of reports, analyses, or recommendations
3) reporting delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy or applicable law
4) communicating professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

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16
Q

What are the three categories of relevant cash flows?

A

1) net initial investment
2) annual net cash flows
3) project termination cash flows

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17
Q

In general, as a company increases the amount of short-term financing relative to long-term financing, the

A

greater the risk that it will be unable to meet principal and interest payments

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18
Q

market to book ratio

A

market value per share / book value per share

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19
Q

Debt ratio

A

Total debt at year end / total assets at year end

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20
Q

The working capital financing policy that would subject a company to the greatest level of risk is the one where the firm finances

A

permanent current assets with short-term debt because of the interest rate variability and loan renewal problems

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21
Q

The spot rate for the U.S. dollar is .6543 pounds and the 60-day forward rate is .6521 pounds. The pound is selling at

A

a forward premium with respect to the dollar.

A dollar fetches fewer pounds in the forward market than in the spot market. The pound is thus expected to gain purchasing power with respect to the dollar and is therefore selling at a foward premium

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22
Q

Return on equity

A

net income / total equity

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23
Q

If a project has a profitability index that is greater than 1.0, it means that

A

the required return is less than the internal rate of return

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24
Q

Examples of marketable securities

A

U.S. Treasury bills, Eurodollars, commercial paper, money-market mutual funds with portfolios of short-term securities, bankers’ acceptances, floating rate preferred stock, and negotiable CDs of U.S. Banks

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25
Q

Net working capital

A

Current assets - current liabilities

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26
Q

Current ratio

A

current assets / current liabilities

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27
Q

Quick (acid-test) ratio

A

(Cash + Market securities + net receivables) / current liabilities

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28
Q

cash ratio

A

(cash + marketable securities) / current liabilities

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29
Q

cash flow ratio

A

Cash flow from operations / current liabilities

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30
Q

net working capital ratio

A

(current assets - current liabilities) / total assets

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31
Q

debt to total capital ratio

A

total debt / total capital

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32
Q

Debt to equity ratio

A

total debt / stockholder’s equity

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33
Q

long-term debt to equity ratio

A

long-term debt / stockholders’ equity

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34
Q

Debt to total assets ratio

A

total liabilities / total assets

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35
Q

times interest earned ratio

A

earnings before interest and taxes / interest expense

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36
Q

earnings to fixed charges ratio

A

earnings before fixed charges and taxes / fixed charges

Fixed charges include interest, required principal repayments, and leases

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37
Q

Cash flow to fixed charges ratio

A

(cash from operations + fixed charges + tax payments) / fixed charges

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38
Q

degree of operating leverage

A

contribution margin / operating income or earnings before interest and taxes

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39
Q

degree of financial leverage

A

EBIT / earnings before taxes

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40
Q

return on assets

A

net income / average total assets

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41
Q

return on equity

A

net income / average total equity

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42
Q

DuPont Model for ROA

A

net profit margin x total asset turnover

total asset turnover is net sales / average total assets

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43
Q

earnings per share

A

net income available to common shareholders / weighted average common shares outstanding

net income available is net income minus preferred dividends

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44
Q

book value per share

A

total stockholders’ equity - preferred equity / number of common shares outstanding

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45
Q

price-sales ratio

A

market price per share / sales per share

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46
Q

earnings yield

A

earnings per share / market price per share

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47
Q

dividend payout ratio

A

dividends to common shareholders / income available to common shareholders

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48
Q

shareholder return

A

ending stock price - beginning stock price + annual dividends per share / beginning stock price

49
Q

dividend yield

A

dividend per share / market price per share

50
Q

accounts receivable turnover

A

net credit sales / average accounts receivable

51
Q

days’ sales outstanding in receivables

A

days in year / accounts receivable turnover

52
Q

inventory turnover

A

cost of goods sold / average inventory

53
Q

days’ sales in inventory

A

Days in year / inventory turnover

54
Q

accounts payable turnover

A

purchases / average accounts payable

55
Q

days’ purchases in accounts payable

A

days in year / accounts payable turnover

56
Q

Operating cycle

A

days’ sales outstanding in receivables + days’ sales in inventory

57
Q

cash cycle

A

operating cycle - days’ purchases in accounts payable

58
Q

fixed asset turnover ratio

A

net sales / average net PPE

59
Q

total asset turnover

A

net sales / average total assets

60
Q

annual benefit

A

(daily cash receipts x days of reduced float) x opportunity cost of funds

61
Q

cost of carrying safety stock

A

expected stockout costs + carrying cost

62
Q

breakeven point in units

A

fixed costs / unit contribution margin

63
Q

breakeven point in dollars

A

fixed costs / contribution margin ratio

64
Q

margin of safety

A

planned sales - breakeven sales

65
Q

margin of safety ratio

A

margin of safety / planned sales

66
Q

target income in units

A

fixed costs + target operating income / Unit contribution margin

67
Q

target income in units after tax

A

fixed costs + [target net income / (1-tax rate)] / unit contribution margin

68
Q

multi-product break even point

A

total fixed expenses / weighted average contribution margin

69
Q

financial leverage ratio

A

assets / equity

70
Q

price earnings ratio

A

market price per share/ earnings per share

71
Q

basic earnings per share

A

(net income - preferred divideds) / weighted average common shares outstanding

72
Q

diluted earnings per share

A

(net income - preferred dividends) / diluted weighted average common shares outstanding

(diluted EPS adjusts common shares by adding shares that may be issued for convertible securities and options)

73
Q

earnings yield

A

earnings per share / current market price per common share

74
Q

dividend yield

A

Annual dividends per share / market price per share

75
Q

sustainable growth rate

A

(1 - dividend payout ratio) x ROE

76
Q

profitability index

A

PV of future cash flow / initial investment

77
Q

Definition of liquidity

A

a firm’s ability to pay it’s current obligations as they come due and thus remain in business in the short run

78
Q

definition of solvency

A

the ability of a business to meet its long-term obligations.

79
Q

Advantages of debt financing

A
  • interest paid on debt is tax deductible
  • control of the firm is not shared with debtholders
80
Q

Disadvantages of debt financing

A
  • The payment of interest and principal is a legal obligation
  • this legal requirement increases a firm’s risk and reduces its retained earnings
  • Debt may require collateral
  • The amount available is limited
81
Q

Advantages of equity financing

A
  • common stock does not require a fixed dividend
  • common stock has no fixed maturity date for repayment of capital
  • the sale of common stock increases the creditworthiness of the firm by providing more capital for the corporation
82
Q

Disadvantages of equity financing

A
  • cash dividends on common stock are not tax-deductible and are paid from after tax profits
  • New common stock sales dilute EPS available to current shareholders
  • Underwriting costs typically are higher for common stock than for debt
83
Q

Definition of leverage

A

the relative amount of fixed cost in a firm’s overall cost structure

84
Q

What does a high operating leverage mean?

A

The firm carries a greater degree of risk because fixed costs must be covered regardless of the level of sales.

85
Q

What does a high financial leverage mean?

A

The firm carries a greater degree of risk because debt must be serviced regardless of the level of earnings

86
Q

What are the benefits of using EBITDA

A
  • operational comparability
  • as a proxy for cash flows
87
Q

Disadvantages of EBITDA

A
  • overstates income
  • neglects working capital requirements
88
Q

Factors involved in measuring profitability

A
  • definition of income
  • the stability, sources, and trends of revenue
  • revenue relationships
  • expenses
89
Q

Change in accounting principle and change in reporting entity require __________ application

A

retrospective

90
Q

Change in accounting estimate requires __________ application

A

prospective

91
Q

Limitations of book value per share

A
  • does not consider future earnings potential in determining a company’s valuation
  • The recorded values of assets on the books are subject to accounting estimates that vary across companies within the same industry
  • Book value will not account for a potential liability related to pledged collateral on a loan.
91
Q

What are the two conditions that indicate a simple capital structure?

A

1) the firm has only common stock
2) the firm has no dilutive potential common stock

92
Q

What does a high P/E reflect?

A

The stock market’s positive assessment of the firm’s earnings quality and prospects.

93
Q

What does a high accounts receivable turnover imply?

A

customers may be paying their accounts promptly

94
Q

What does a lower accounts receivable turnover imply?

A

customers are taking longer to pay

95
Q

What does a higher inventory turnover imply?

A

Strong sales or that the firm may be carrying low levels of inventory

96
Q

What does a lower inventory turnover imply?

A

the firm may be carrying excess levels of inventory or the inventory is obsolete

97
Q

What does a higher accounts payable turnover imply?

A

The firm is taking less time to pay off suppliers and may indicate the firm is taking advantage of discounts

98
Q

What does a lower accounts payable turnover imply?

A

the firm is taking more time to pay off suppliers or forgoing discounts

99
Q

What does a higher fixed assets turnover ration imply?

A

effective use of net property, plant and equipment to generate sales

100
Q

What does a higher total assets turnover ratio imply?

A

effective use of net assets to generate sales

101
Q

The best advantage of a zero-coupon bond to the issuer is that the…

A

Interest can me amortized annually on a straight-line basis bus is a noncash outlay.

102
Q

Annualized cost of not taking a discount

A

discount % / (100% - Discount %) x Days in year / (Total payment period - discount period)

103
Q

What is an example of a transaction that would increase the current ratio?

A

Selling inventory on account.

The decrease in inventory would be lower than the increase in accounts receivable because selling price is presumably higher than COGS

104
Q

What is an example of a transaction that decreases the current ratio but has no effect on working capital?

A

Purchase of inventory on credit

If the current ratio is greater than 1, equal increases in the numerator and the denominator decrease the current ratio

105
Q

Assumptions of the Economic Order Quantity?

A
  • delivery times are predictably consistent
  • sales are perfectly predictable
  • usage is constant
106
Q

What would decrease the unit contribution margin the most?

A

a 15% decrease in selling price

As long as UCM is positive, a given percentage change in selling price must have a greater effect than an equal but opposite percentage change in variable cost

107
Q

Face amount of a loan with discounted (paid in advance) interest?

A

Amount needed / (1 - stated rate)

108
Q

Cost of capital for preferred stock

A

Dividend / (par value - flotation cost)

109
Q

What factors lower the present value?

A
  • Increasing the discount rate
  • Increasing the discount period
110
Q

Risk appetite should be considered in…

A
  • aligning with development of strategy
  • aligning with business objectives
  • prioritizing risks
  • implementing risk responses
111
Q

Which component of weighted average cost of capital is affected by tax?

A

Long-term debt

112
Q

component cost of preferred stock

A

Dividend / market price

113
Q

The over-the-counter (OTC) market is

A

a dealer market where brokers and dealers are linked by telecommunications equipment to trade securities

114
Q

How to calculate weighted-average cost of capital

A

weight of long-term debt, common stock, and retained earnings multiplied by the component cost

115
Q

What information is relevant to determine the profitability of a new credit policy?

A
  • the proposed new credit terms
  • the expected additional sales
  • the expected contribution margin
  • the expected bed debt losses
  • the investment in additional receivables
  • the period of the investment
  • the opportunity cost of funds
116
Q

What ethics-related leadership actions best support the effective deployment of a code of ethics by manager and supervisors

A

Establishing a code of conduct, deploying ethics training, and monitoring ethical behavior

117
Q

how to determine beta coefficient

A

required rate of return + beta coefficient x (expected rate of return - risk-free rate of return)

CMA Part II Prep (1 decks)

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