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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
Net working capital
Current assets - current liabilities
26
Current ratio
current assets / current liabilities
27
Quick (acid-test) ratio
(Cash + Market securities + net receivables) / current liabilities
28
cash ratio
(cash + marketable securities) / current liabilities
29
cash flow ratio
Cash flow from operations / current liabilities
30
net working capital ratio
(current assets - current liabilities) / total assets
31
debt to total capital ratio
total debt / total capital
32
Debt to equity ratio
total debt / stockholder's equity
33
long-term debt to equity ratio
long-term debt / stockholders' equity
34
Debt to total assets ratio
total liabilities / total assets
35
times interest earned ratio
earnings before interest and taxes / interest expense
36
earnings to fixed charges ratio
earnings before fixed charges and taxes / fixed charges Fixed charges include interest, required principal repayments, and leases
37
Cash flow to fixed charges ratio
(cash from operations + fixed charges + tax payments) / fixed charges
38
degree of operating leverage
contribution margin / operating income or earnings before interest and taxes
39
degree of financial leverage
EBIT / earnings before taxes
40
return on assets
net income / average total assets
41
return on equity
net income / average total equity
42
DuPont Model for ROA
net profit margin x total asset turnover total asset turnover is net sales / average total assets
43
earnings per share
net income available to common shareholders / weighted average common shares outstanding net income available is net income minus preferred dividends
44
book value per share
total stockholders' equity - preferred equity / number of common shares outstanding
45
price-sales ratio
market price per share / sales per share
46
earnings yield
earnings per share / market price per share
47
dividend payout ratio
dividends to common shareholders / income available to common shareholders
48
shareholder return
ending stock price - beginning stock price + annual dividends per share / beginning stock price
49
dividend yield
dividend per share / market price per share
50
accounts receivable turnover
net credit sales / average accounts receivable
51
days' sales outstanding in receivables
days in year / accounts receivable turnover
52
inventory turnover
cost of goods sold / average inventory
53
days' sales in inventory
Days in year / inventory turnover
54
accounts payable turnover
purchases / average accounts payable
55
days' purchases in accounts payable
days in year / accounts payable turnover
56
Operating cycle
days' sales outstanding in receivables + days' sales in inventory
57
cash cycle
operating cycle - days' purchases in accounts payable
58
fixed asset turnover ratio
net sales / average net PPE
59
total asset turnover
net sales / average total assets
60
annual benefit
(daily cash receipts x days of reduced float) x opportunity cost of funds
61
cost of carrying safety stock
expected stockout costs + carrying cost
62
breakeven point in units
fixed costs / unit contribution margin
63
breakeven point in dollars
fixed costs / contribution margin ratio
64
margin of safety
planned sales - breakeven sales
65
margin of safety ratio
margin of safety / planned sales
66
target income in units
fixed costs + target operating income / Unit contribution margin
67
target income in units after tax
fixed costs + [target net income / (1-tax rate)] / unit contribution margin
68
multi-product break even point
total fixed expenses / weighted average contribution margin
69
financial leverage ratio
assets / equity
70
price earnings ratio
market price per share/ earnings per share
71
basic earnings per share
(net income - preferred divideds) / weighted average common shares outstanding
72
diluted earnings per share
(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
earnings yield
earnings per share / current market price per common share
74
dividend yield
Annual dividends per share / market price per share
75
sustainable growth rate
(1 - dividend payout ratio) x ROE
76
profitability index
PV of future cash flow / initial investment
77
Definition of liquidity
a firm's ability to pay it's current obligations as they come due and thus remain in business in the short run
78
definition of solvency
the ability of a business to meet its long-term obligations.
79
Advantages of debt financing
- interest paid on debt is tax deductible - control of the firm is not shared with debtholders
80
Disadvantages of debt financing
- 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
Advantages of equity financing
- 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
Disadvantages of equity financing
- 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
Definition of leverage
the relative amount of fixed cost in a firm's overall cost structure
84
What does a high operating leverage mean?
The firm carries a greater degree of risk because fixed costs must be covered regardless of the level of sales.
85
What does a high financial leverage mean?
The firm carries a greater degree of risk because debt must be serviced regardless of the level of earnings
86
What are the benefits of using EBITDA
- operational comparability - as a proxy for cash flows
87
Disadvantages of EBITDA
- overstates income - neglects working capital requirements
88
Factors involved in measuring profitability
- definition of income - the stability, sources, and trends of revenue - revenue relationships - expenses
89
Change in accounting principle and change in reporting entity require __________ application
retrospective
90
Change in accounting estimate requires __________ application
prospective
91
Limitations of book value per share
- 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
What are the two conditions that indicate a simple capital structure?
1) the firm has only common stock 2) the firm has no dilutive potential common stock
92
What does a high P/E reflect?
The stock market's positive assessment of the firm's earnings quality and prospects.
93
What does a high accounts receivable turnover imply?
customers may be paying their accounts promptly
94
What does a lower accounts receivable turnover imply?
customers are taking longer to pay
95
What does a higher inventory turnover imply?
Strong sales or that the firm may be carrying low levels of inventory
96
What does a lower inventory turnover imply?
the firm may be carrying excess levels of inventory or the inventory is obsolete
97
What does a higher accounts payable turnover imply?
The firm is taking less time to pay off suppliers and may indicate the firm is taking advantage of discounts
98
What does a lower accounts payable turnover imply?
the firm is taking more time to pay off suppliers or forgoing discounts
99
What does a higher fixed assets turnover ration imply?
effective use of net property, plant and equipment to generate sales
100
What does a higher total assets turnover ratio imply?
effective use of net assets to generate sales
101
The best advantage of a zero-coupon bond to the issuer is that the...
Interest can me amortized annually on a straight-line basis bus is a noncash outlay.
102
Annualized cost of not taking a discount
discount % / (100% - Discount %) x Days in year / (Total payment period - discount period)
103
What is an example of a transaction that would increase the current ratio?
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
What is an example of a transaction that decreases the current ratio but has no effect on working capital?
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
Assumptions of the Economic Order Quantity?
- delivery times are predictably consistent - sales are perfectly predictable - usage is constant
106
What would decrease the unit contribution margin the most?
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
Face amount of a loan with discounted (paid in advance) interest?
Amount needed / (1 - stated rate)
108
Cost of capital for preferred stock
Dividend / (par value - flotation cost)
109
What factors lower the present value?
- Increasing the discount rate - Increasing the discount period
110
Risk appetite should be considered in...
- aligning with development of strategy - aligning with business objectives - prioritizing risks - implementing risk responses
111
Which component of weighted average cost of capital is affected by tax?
Long-term debt
112
component cost of preferred stock
Dividend / market price
113
The over-the-counter (OTC) market is
a dealer market where brokers and dealers are linked by telecommunications equipment to trade securities
114
How to calculate weighted-average cost of capital
weight of long-term debt, common stock, and retained earnings multiplied by the component cost
115
What information is relevant to determine the profitability of a new credit policy?
- 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
What ethics-related leadership actions best support the effective deployment of a code of ethics by manager and supervisors
Establishing a code of conduct, deploying ethics training, and monitoring ethical behavior
117
how to determine beta coefficient
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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