Core 2 Flashcards
Type of costs
Prime cost - direct material + direct labour
Conversion cost - direct labour + manufacturing overhead
Period cost - non-manufacturing cost
Cost Steps
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
Finance - EAR formula
EAR = effective annual rate = ((1 + r / n)^n) – 1
Finance - PV
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
Mortgages
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
Growing annuity
PV = PMT [ 1/i-g - (1/i-g x [(1+g)/(1+i)]^n)
Need to consider all cost after tax
Rate x inflation
(1 + inflation rate) × (1 + real rate of return) = (1 + nominal rate of return)
Cost of capital
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
CAPM
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)]
WACC
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
marginal cost of preferred shares
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
Impact of leverage on cost of equity
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
financial risk return
Re - Ru
cost of equity - cost of equity when the entity is unlevered (no debt)
Impact on value of the firm as capital structure changes
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
Revised value of the firm
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
M&M Proposition I
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
M&M Proposition II
Re = Ru + D/E(Ru – Rd)(1 – T)
Open-book accounting
Sharing key corporate data with supply-chain partner
Internet of things
Objects, including appliances, home comfort systems, and even
cars, that can connect to the internet and interact with other “things” on the internet.
Total cost of ownership
Management accounting tool that assesses the accumulation of cost and value throughout the entire supply chain and makes decisions based on this information.
Blockchain
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.
economic order quantity (EOQ)
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
recapitalization
when the company raises capital to change its existing capital structure to increase more debt
Appropriate cost of capital for the project
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 )
