During inflationary periods, last-in, first-out inventory accounting will generally have a: Flashcards
During inflationary periods, last-in, first-out inventory accounting will generally have a:
higher cost of goods sold and lower inventory value.
A corporation would receive cash if it entered into a(n):
In an equity carve-out divestiture, a company creates a new company from an existing part of the company (for example, a business line). It then undertakes an initial public offering of at least some of the stock of this newly created company to the public. The parent usually only offers a small portion of the stock in order to retain control of the new company. It receives cash from outside investors who purchase the stock in the newly created company.
sustainable growth rate
“Return on equity × (1 − Dividend payout ratio).”
A company has received a one-year commercial bank loan of 7.5% discounted interest with a 12.5% compensating balance. The effective annual cost of the bank loan is closest to:
The effective annual cost of this loan is 9.38% (7.5% ÷ (1 − 7.5% − 12.5%)).
The effective annual cost of a bank loan takes into account loan features such as whether the loan is a discounted loan and whether a compensating balance is required. The effective annual cost can be calculated as “Interest cost ÷ Funds available from the loan.” Discounted loans are loans where interest is paid at the beginning of the loan. This reduces the funds available and increases the effective annual cost of the loan. Compensating balances are amounts a borrower is required to keep on deposit by a bank as a condition for the bank making a loan. This also reduces the funds available and increases the effective annual cost of the loan.
Stock Dividend
A stock dividend is a payment to shareholders that consists of additional shares rather than cash. The stock dividend has the advantage of rewarding shareholders without reducing the company’s cash balance—but it does increase its liabilities.
Stock dividends are not taxed until the shares are sold by their owner.
Like stock splits, stock dividends dilute the share price because additional shares have been issued.
Stock dividends do not affect the value of the company.
A company may prefer to pay dividends in stock rather than cash in order to preserve its cash reserves.
Risk mitigation
Risk mitigation(or reduction) is a response where a company takes action to lower the risk related to an activity. Reducing the check amount requiring two signatures reduces the risk that company resources will be used incorrectly.
Which of the following financial ratios is most likely to be distorted by inflation?
Interest coverage ratio (times interest earned)
Inflation can distort financial information as values can increase because of higher prices and not because more units are purchased or sold. This can possibly lead to distorted financial ratios. The key is whether the numerator and denominator of the ratio are similarly impacted by inflation. If they are similarly impacted, the impact will be small. If not, the impact will be more significant. The numerator of the interest coverage ratio (operating income or earnings before interest and taxes) will likely be significantly impacted by inflation. However, the denominator (interest expense) will not be significantly impacted. Therefore, the interest coverage ratio will likely be overstated when inflation is high.
dividend payout ratio
Dividend Payout Ratio= Dividends Paid / Net Income -PD
or DPS/EPS
Dividend Payout Ratio=1−Retention Ratio
Retention Ratio= (EPS−DPS) / EPS
where:
EPS=Earnings per share
DPS=Dividends per share
If a company’s payout ratio is over 100%, it is returning more money to shareholders than it is earning and will probably be forced to lower the dividend or stop paying it altogether.
The retention ratio is a converse concept to the dividend payout ratio. The dividend payout ratio evaluates the percentage of profits earned that a company pays out to its shareholders, while the retention ratio represents the percentage of profits earned that are retained by or reinvested in the company.
Accounts receivable turnover
Net Credit Sales ÷ Average Accounts Receivable
degree of operating leverage (DOL)
DOL= % change in EBIT / % change in sales
contribution margin / operating income
For every 1% change in sales there will be a 1.12% change in EBIT.
The degree of operating leverage measures how much a company’s operating income changes in response to a change in sales.
The DOL ratio assists analysts in determining the impact of any change in sales on company earnings.
A company with high operating leverage has a large proportion of fixed costs, meaning a big increase in sales can lead to outsized changes in profits.
Baljit Inc. purchased machinery from a Japanese firm and will have to pay ¥278,450,000 in 90 days. Baljit has three choices: (1) wait 90 days and purchase the Yen on the spot market on settlement date, (2) enter into a forward contract with a rate of ¥105.46/$ to buy the required Yen on the settlement date, or (3) purchase the Yen today on the spot market at a rate of ¥102.50/$. The risk-free rate is 6% in both Japan and the US. What is the cost today if Baljit purchases the Yen today on the spot market?
The cost of purchasing the Yen today is ¥278,450,000 ÷ (1 + .06 × 90 ÷ 360) = ¥274,334,975 ÷ ¥102.50/$ = $2,676,439.
fixed asset turnover
“Sales / Average Net Fixed Assets.”
Operational risks
Operational risks are related to an organization’s ongoing, everyday operations. They represent the risk of loss from inadequate or failed internal processes, people, and systems. One way to reduce operational risk is to shift the cost structure so that there is less reliance on fixed costs in exchange for greater reliance on variable costs.
sinking fund for bond repayment
Establishing a sinking fund for bond repayment involves setting aside cash that is to be used exclusively to pay back bonds. This increases the likelihood that sufficient assets will be available to pay back bonds. Increasing the likelihood that sufficient assets will be available to pay back bonds decreases financial risk.
Target Price formula
Targeted Price per Unit
(Profit + All Other Costs in Total)
÷
(Unit Rate for the Cost Basis Selected ×
Volume)
