Study Unit 9 Flashcards

1
Q

Cost of Not taking a discount

A

(Discount % / 100%-Discount %) * (days in year / Total pmt pd- discount pd)

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2
Q

Term loan vs line of credit

A

term- definite time to repay

line of credit- revolving, no time

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3
Q

Effective interest rate

A

ratio of amnt company must pay to amnt company can use

Effective interest rate = Interest expense/usable funds
usable funds are the net proceeds (i.e. principle-charges)

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4
Q

Discount loan

A

interest and finance charges are paid at the beginning of loan term

Total borrowings= amnt needed/ (1.0-stated rate)

effective rate rate is higher than nominal rate
ER=net interest expense (annualized) / usable funds
net interest expense = total borrowings
ER=stated rate/ (1-stated rate)

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5
Q

loans with compensating balance

A

reduce risk as banks require borrowers to maintain compensating balance
Total borrowing= amnt needed/(1-compensating bal %)
ER=stated rate/(1-comp bal %)

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6
Q

Capital budgeting

A

planning and controlling investments for LT projects
LT aspect causes most challenges for accountants
affect multiple accounting pds and constrain org’s financial planning for LT; decisions tend to be relatively inflexible

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7
Q

Capital budgeting applications include

A
buying eqt
building facilities
acq a business
developing a product or product line
expansion into new mkts
replacing of eqt
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8
Q

Relevant cash flows

A

cost of new eqt
annual after tax cash savings or inflows
proceeds from eqt disposal (salvage value)
depreciation tax shield (reduces TI and outflow for tax expense)

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9
Q

Accounting RoR

A

assessing potential capital projects, ignores time value of $
RoR= Annual increase in GAAP NI/Req investment
= (Annual cash inflow-depreciation)/initial investment

s/h and analyst like Ror b/c Gaap #s available

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10
Q

Affects Accounting RoR

A

choosing the expenditures to capitalize vs expense

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11
Q

NPV

A

diff bet the PV of the net cash savings/inflows expected over the life of project and required dollar investment

  • diff > 0; do the project
  • diff
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12
Q

Adjust for inflation

A

compensate for loss of purchasing power, hurdle rates adjust upward

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13
Q

Adjust for risk

A

risky project assigned higher hurdle rates to ensure those whose potential returns are commensurate w/ risk are acceptable

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14
Q

Single company wide hurdle isn’t good when

A

large, complex firms have risk wrt capital costs,

-mgrs of high risk division to over invest in new projects and those of low risk divisions will be underinvested

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15
Q

IRR

A

d/c rate when investment’s NPV = 0
rate = PV of expected cash inflows w/ PV of expected cash outflows

IRR>Hurdle rate: accept project = positive NPV
IRR

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16
Q

Cash flow patterns

A

DM choose bet higher inflows in early years that fall off and one w/steady throughout life

higher hurdle rate, more quickly project must pay off
low hurdle rate prefer slow and steady paychec

17
Q

NPV vs IRR

A

reinvestment rate is critical
NPV assumes CF from investment can be reinvest @ desired RoR

both give info on whether to undertake or not when projects are independent

IRR assumes CF reinvested @ IRR
-NPV gives better grasp of problem in decision b/c reinvestment assumed to be in the desired RoR

18
Q

Payback pd

A
# of years req for net cash savings or inflow to equal the orig investment (time necessary to pay for itself)
-co's set max length of time w/in which project must pay to be considered acceptable

PP=initial investment/ (annual after tax cash savings/inflows)

if CF not constant, must do cumulative calculation

19
Q

Weakness of payback pd

A

disregards time value of $
(weighing all cash inflows equally ignores that funds have a time cost)
disregards cash inflows after payback cutoff date

20
Q

Discounted payback

A

overcomes drawbacks of basic payback mthd
D/c using pv factor to find D/c cash savings; subtract DCS from initial investment; the final # for Remaining investment is divided by the last DCS for the final pd
that number should be added to the last pd (yr) with the remaining initial investment