Core 2

Question 1

Type of costs

Answer 1

Prime cost - direct material + direct labour
Conversion cost - direct labour + manufacturing overhead
Period cost - non-manufacturing cost

Question 2

Cost Steps

Answer 2

Step 1: Compute units to be accounted for
Step 2: Compute output in terms of EU
Step 3: Compute costs to account for
Step 4: Compute cost per EU
Step 5: Assign total costs to units completed and to ending WIP

Question 3

Finance - EAR formula

Answer 3

EAR = effective annual rate = ((1 + r / n)^n) – 1

Question 4

Finance - PV

Answer 4

PV = present value = PV = FV / (1+i)^n
present value of constantly growing annuity = PMT / i-g
present value of a perpetuity with no growth = PMT / i

Question 5

Mortgages

Answer 5

mortgage rates are quoted as a semi-annual rate
mortgage payments are usually made monthly
Step 1: calculate EAR = ((1 + r / 2)^2) – 1
Step 2: calculate effective monthly rate = ((EAR+1)^(1/12))-1

Question 6

Growing annuity

Answer 6

PV = PMT [ 1/i-g - (1/i-g x [(1+g)/(1+i)]^n)
Need to consider all cost after tax

Question 7

Rate x inflation

Answer 7

(1 + inflation rate) × (1 + real rate of return) = (1 + nominal rate of return)

Question 8

Cost of capital

Answer 8

WACC = Weighted Average Cost of Capital
after-tax cost of debt = Debt (Rd) (1 – tax rate)
Preferred shares (Rp) = Total annual preferred dividends paid on preferred shares / Total market value of all preferred shares outstanding

Question 9

CAPM

Answer 9

capital asset pricing model (CAPM) = risk-free return (Rf) + risk premium related to risk of investment = risk-free return (Rf) + beta (β) × market risk premium (RPm)
= risk-free return (Rf) + beta (β) × [expected return of the market – risk-free return (Rf)]

Question 10

WACC

Answer 10

Weighted Average Cost of Capital (WACC)
D/V (Rd)(1 – T) + P/V (Rp) + E/V (Re)
D = debt
V = total of debt + equity
T = Tax
Rd = cost of debt %
P = preferred shares
Rp = cost of preferred shares %
E = equity
Re = cost of equity %
WACC = [weighting of debt × after-tax cost of debt] + [weighting of equity × cost of equity]
after-tax cost of debt = yield (1 - tax) / (1 - flotation)
cost of equity = [risk-free + beta x premium risk + small companies risk + specific risk] / (1- flotation)
OBS: use WACC for NPV discount rate

Question 11

marginal cost of preferred shares

Answer 11

net proceeds (NPp) = current share price [1 – (1 – tax) × flotation]
as issue (flotation) costs are tax deductible
[1 – (1 – tax) × flotation]
component cost of preferred shares = return / net proceeds

Question 12

Impact of leverage on cost of equity

Answer 12

Re = Ru + D/E(Ru – Rd)(1 – T)
Re = cost of equity
Ru = cost of equity when the entity is unlevered (no debt)
D/E = existing debt-to-equity ratio for the company based on market values, not book values
Rd = entity’s cost of debt
T = tax rate

Question 13

financial risk return

Answer 13

Re - Ru
cost of equity - cost of equity when the entity is unlevered (no debt)

Question 14

Impact on value of the firm as capital structure changes

Answer 14

VL = VU + TD
VL = the value of the levered firm (mix of debt and equity)
VU = the value of the firm in the unlevered state (all equity financed)
T = the corporate tax rate
D = the amount of borrowed debt

Question 15

Revised value of the firm

Answer 15

VL = Vu + TD – PV of expected financial distress costs
VL = the value of the levered firm (mix of debt and equity)
VU = the value of the firm in the unlevered state (all equity financed)
T = the corporate tax rate
D = the amount of borrowed debt

Question 16

M&M Proposition I

Answer 16

VL = VU + TD
VL = the value of the levered firm
VU = the value of the firm in the unlevered state (all equity financed)
T = the corporate tax rate D = the amount of borrowed debt

Question 17

M&M Proposition II

Answer 17

Re = Ru + D/E(Ru – Rd)(1 – T)

Question 18

Open-book accounting

Answer 18

Sharing key corporate data with supply-chain partner

Question 19

Internet of things

Answer 19

Objects, including appliances, home comfort systems, and even
cars, that can connect to the internet and interact with other “things” on the internet.

Question 20

Total cost of ownership

Answer 20

Management accounting tool that assesses the accumulation of cost and value throughout the entire supply chain and makes decisions based on this information.

Question 21

Blockchain

Answer 21

A distributed, decentralized public ledger that is considered secure because blocks can be viewed by anyone and changing a block changes its hash. The “blocks” are digital pieces of information, such as a transaction date, time, and dollar amounts, and can be linked to individuals by a digital signature.

Question 22

economic order quantity (EOQ)

Answer 22

EOQ = √ 2DP/C
D = demand = Annual demand in units
P = ordering cost = Relevant ordering costs per purchase order
C = carrying costs = Relevant carrying costs to carrying one unit of inventory for one year

Question 23

recapitalization

Answer 23

when the company raises capital to change its existing capital structure to increase more debt

Question 24

Appropriate cost of capital for the project

Answer 24

Step 1: Calculate the levered equity beta under the new capital structure
βE = βU + D/E(βU– βD )(1 – T)

Step 2: Calculate the cost of equity under the new capital structure
Cost of equity = risk-free return (Rf ) + [beta (β) × market risk premium (RPm)]

Step 3: Calculate the WACC for the project
WACC = D/V(Rd)(1 – T) + P/V(Rp) + E/V(Re )

Question 25

Variance Analysis

Answer 25

Static budget variance = actual result – static budget amount
Actual results = (AQ × AP)
Midpoint = (AQ × SP)
Static budgets = (SQ × SP)
Flexible budget = (AQ × SP)
Static budget variance = (SQ × SP) – (AQ × AP)
Flexible budget variance = (AP – SP) × AQ
Sales volume variance = (AQ – SQ) × SP
Flexible budget = (SQ for actual output × SP)
Rate variance = (AP – SP) × AQ

Efficiency variance
Efficiency variance = (AQ – SQ for actual output) × SP
Midpoint 1 = (AQ × SP = ATQ × AM% × SP)
Midpoint 2 = (ATQ × SM% × SP)
Flexible budget = (STQ × SM% × SP)
Mix variance = ATQ × (AM% – SM%) × SP
Yield variance = (ATQ – STQ) × SM% × SP

AQ = actual volume of units = actual quantity (unit)
AP = actual price per unit of output = actual price
SQ = standard (budgeted) volume of units = standard quantity (unit)
SP = standard (budgeted) price per unit of output = standard price
ATQ = actual total units of input
AM% = actual mix percentage
STQ = standard total units of input allowed for actual output
SM% = standard mix percentage

Question 26

Cost Variances

Answer 26

AQ = actual volume of units = actual quantity (unit)
AP = actual price per unit of output = actual price
SQ = standard (budgeted) volume of units = standard quantity (unit)
SP = standard (budgeted) price per unit of output = standard price
ATQ = actual total units of input
AM% = actual mix percentage
STQ = standard total units of input allowed for actual output
SM% = standard mix percentage

Question 27

Actual results

Answer 27

Actual results = (AQ × AP)

Question 28

Flexible budget

Answer 28

Flexible budget = (AQ × SP)

Question 29

Static budgets

Answer 29

Static budgets = (SQ × SP)

Question 30

rate variance

Answer 30

rate variance = (AP – SP) × AQ
AP = actual price
SP = standard price
AQ = actual quantity

Question 31

Efficiency variance

Answer 31

Efficiency variance = (AQ – SQ for actual output) × SP
AQ = actual quantity
SQ = standard quantit
SP = standard price

Question 32

value of a right

Answer 32

Value of a right = (rights-on share price – subscription price) / (number of rights required to buy one share + 1

Question 33

ex-rights share price

Answer 33

Ex-rights share price = rights-on share price – value of a right

Question 34

PV of Tax shield

Answer 34

PV of tax shield
= I x T x CCA /
( CCA + R) x {1 + [(1.5 x R)/(1+R)]}
I = Investment
T = tax rate
CCA = Capital cost allowance rate
R = Discount rate

Question 35

PV CCA 100% deduction

Answer 35

Investment: PV of the tax shield on CCA for the investment = Investment × corporate tax rate / 1 + discount rate

Salvage: PV of the tax shield on CCA for the salvage = Salvage × corporate tax rate / (1 + discount rate) ^ period

Salvage: PV of the tax shield on CCA for the salvage (UCC positive) =
Salvage × corporate tax rate x CCA / ( CCA + discount rate ) x
x [1 / (1 + discount rate) ^ period ]

Question 36

PV CCA Accelerated Investment Incentive (AII)

Answer 36

Investment: PV of the tax shield on CCA for the investment
= ( Investment × corporate tax x CCA ) / ( CCA + discount rate )
x [ 1 + (Accelerated Investment Incentive x discount rate ) ] / ( 1 + discount rate)

Salvage: PV of the tax shield on CCA for the salvage =
= ( Salvage × corporate tax rate x CCA ) / ( CCA + discount rate )
x (1/ (1 + discount rate) ^ period)

Question 37

Net discount formula

Answer 37

1/10 net 30
means 1% in 10 days with normal net term 30 days

Effective annual interest rate = { 1 + [ cash discount / (price - cash discount) ] } ^ [ 365 / (normal term - new term ) ] - 1

Question 38

Cash conversion cycle

Answer 38

Cash conversion cycle = CCC
CCC = Inventory period + average collection period – days payables outstanding
CCC = Operating cycle – days payables outstanding
operating cycle = inventory period + average collection period
average collection period = AR x 365 / credit sales
Inventory period = inventory x 365 / COGS
days payables outstanding = AP x 365 / COGS

Question 39

Inventory holding cost

Answer 39

Hold cost after tax
+ after tax financing cost of an inventory unit
financing cost = inventory cost x (1 - tax rate ) x [ ( 1 + discount rate ) ^ time - 1 ]

Question 40

performace measurement

Answer 40

Return on investment = operating income / average operating assets
Residual income = operating income - ( required rate of return x investment )