PTD13 Flashcards
Net present value as used in investment decision-making is stated in terms of which of the following options?
Net income.
Earnings before interest, taxes, and depreciation.
Earnings before interest and taxes.
Cash flow.
Cash flow.
This Answer is Correct
Net present value as used in investment decision-making is stated in terms of cash flow; specifically, in terms of the present value of cash flow. If the net present value of cash flow is zero or positive, an investment project is economically feasible.
Determining the appropriate level of working capital for a firm requires
(This question is CMA adapted)
Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.
Changing the capital structure and dividend policy of the firm.
Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt.
Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
This Answer is Correct
The main reason to retain working capital is to meet the firm’s financial obligations. Therefore, the amount is determined by offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
The following is available for Armstrong Enterprises for 2012:
Net operating income after taxes $36,000,000
Depreciation expense 15,000,000
Change in net working capital (increase) 10,000,000
Invested capital (net assets) 100,000,000
Weighted average cost of capital 10%
What is the amount of the economic value added (EVA)? 20,000,000 26,000,000 15,000,000 36,000,000
26,000,000
This answer is correct. The formula for EVA is net operating profit after taxes minus cost of invested capital. EVA would be computed as follows:
Net operating income after taxes $36,000,000
– Capital charge on invested capital ($100,000,000 × 10%)
(10,000,000)
= Economic value added
Over the past 50 years, how has the share of total U.S. purchases and output represented by imports and exports, respectively, changed? Imports as Share of Purchases Exports as Share of Output Increased Increased Increased Decreased Decreased Increased Decreased Decreased
Increased Increased
Over the past 50 years, U.S. imports as a share of GDP and exports as a share of GDP have both increased.
An entity reviews its ERM practices. Which question is the organization least likely to investigate as a part of this review?
What is the relationship between our strategy and objectives?
How did the entity perform?
Are we taking sufficient risks to attain desired performance?
Were risk estimates accurate?
What is the relationship between our strategy and objectives?
Correct! A review of ERM practices primarily focuses on realized versus targeted risk. This question is tangential to investigating realized versus targeted risks.
Reggie Sloanback, the operations manager, writes a spreadsheet to keep track of fixed assets at Mason’s Masonry and Stoneworks, a manufacturer of stone structures and sculptures. His spreadsheet does not link to the ERP used at Mason’s. The most serious internal control concern about this situation is
Incompatibility of operating systems.
Overcentralization of systems.
User-developed systems can create control issues.
The use of incompatible devices.
User-developed systems can create control issues.
This Answer is Correct
Correct! User-created systems can create multiple control issues. Users often inadequately test and review the systems that they develop.
The ultimate purpose of competitor analysis is to
(This question is CMA adapted)
Identify the competition.
Determine the competition’s strength and weaknesses.
Identify the competition’s major customers.
Understand and predict the behavior of the competition.
Understand and predict the behavior of the competition.
This Answer is Correct
The ultimate purpose of competitor analysis is to understand and predict the behavior of a major competitor.
A company purchases an item for $43,000. The salvage value of the item is $3,000. The cost of capital is 8%. Pertinent information related to this purchase is as follows:
Net cash flow Present value factor at 8% Year 1 $10,000 0.926 Year 2 15,000 0.857 Year 3 20,000 0.794 Year 4 27,000 0.735 What is the discounted payback period in years?
- 10
- 25
- 90
- 14
Correct! The period required to recover the initial investment ($43,000) is 3.25 years, calculated as follows:
Present Value of Cash Inflows by Year:
Net cash flow Present value factor at 8% Present Value Sum of Present Values
Year 1 $10,000 0.926 $ 9,260 $ 9,260
Year 2 15,000 0.857 12,855 22,115
Year 3 20,000 0.794 15,880 37,995
Year 4 27,000 0.735 19,845 57,840
Net amount to recover = $43,000
Present value of cash inflows for Years 1, 2 and 3 = 37,995
Balance needed from Year 4 = $ 5,005
Balance needed from Year 4 = $5,005/Year 4 total amount = $19,845 = .250
Total period needed to recover incorrect $43,000 = 3.25 years (the correct answer)
What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?
ROI is a percentage, while RI is a dollar amount.
ROI may lead to rejecting projects that yield positive cash flows.
ROI does not necessarily reflect the company’s cost of capital.
ROI does not reflect all economic gains.
ROI may lead to rejecting projects that yield positive cash flows.
This answer is correct because if a unit is being evaluated based on ROI, it may not want to undertake a project with a lower ROI than its current average even though the project has positive RI.
Which one of the following characteristics is not an advantage of the Black-Scholes option pricing model?
Incorporates the probability that the price of the stock will pay off within the time to expiration.
Incorporates the probability that the option will be exercised.
Discounts the exercise price.
Accommodates options when the price of the underlying stock changes significantly and rapidly.
Accommodates options when the price of the underlying stock changes significantly and rapidly.
This Answer is Correct
The Black-Scholes option pricing model does not accommodate options when the price of the underlying stock changes significantly and rapidly. The Black-Scholes model assumes that the stock for which the option is being valued increases in small increments.
The system that most resembles a managerial accounting, budgeting system is: Operational system. MIS. DSS. ESS.
MIS take planning information (budgets, forecasts, etc.) data and compare it to actual results in periodic management reports (summary reports, variance reports, and exception reports). Hence, MIS can be considered similar to, and may incorporate, traditional budgeting systems.
