Term
| How to calculate the effective interest rate on 2/10 net 30 terms? |
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Definition
.02/.98 (sum to 1) x 1/20/360
that's 1 over 20/360, where 20 is the number of days that the interest is in effect--no interest for 10 days, interest for 20 out of 30 days, then use 360 day year. This = 36.73% |
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Term
| How to calculate the PV of an annuity due from an ordinary annuity table? |
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Definition
| The PV of the first payment is the full amount. Then use the PV factor for the N-1 row to get the multiplier for the rest of the pmts, and add these amts together. If you are GIVEN an annuity due table, just proceed normally. |
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Term
| How to calculate the FV of an annuity due from an ordinary annuity table? |
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Definition
| Here you use the N+1 row of the table and then SUBTRACT the amount of one pmt. If you are given an annuity DUE table just proceed normally. |
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Term
| What is the operating cycle and how is it calculated? |
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Definition
The operating cycle measures the average length of time to invest cash in inventory, convert the inventory to accounts receivable, and collect the receivables.
Thus, operating cycle is the sum of the co's number of days' sales in inventory plus the number of days' sales in trade accounts receivable.
Basically, this measures the number of days to go from cash through inventory and accounts receivable, back to cash. |
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Term
| What do I really need to watch out for in calculating receivables turnover? |
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Definition
| To use the NRV of the A/R and not the A/R amount--subtract out allowance for doubtful accts from A/R totals before calculating!!! |
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Term
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Definition
| Economic value added = residual income after cost of ALL capital incl equity has been deducted. = Earnings before Interest less (k times LTdebt + SE) |
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Term
| If you have a FV and need to figure out payments how can you do this? |
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Definition
| You'll need a PV table...figure out if it's ord annuity or annuity due and divide the FV by the factor from the table to get the pmt amt |
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Term
| For present value, the higher the interest or discount rate, the ____ (higher/lower) the present value of a future amount. |
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Definition
lower.
Since the higher the interest or discount rate, the more that is counted as interest, the less there is in present value.
For future value, the higher the interest rate, the greater the future value of a present amount. |
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Term
| How calculate accounting rate of return? |
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Definition
Average Annual Incremental Revenues - Average Annual Incremental Expense ______________________________________________
Initial (or Average) Investment .
Note if they are expressly giving you the incremental change they have already taken into acct deprec and you don't have to. |
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Term
| What's the difference between a firm's capital structure and its financial structure? |
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Definition
| Financial structure = all debt & all equity; capital strucutre = just long term debt & equity |
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Term
| What's the difference between pledging and factoring A/R? |
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Definition
| In pledging of accounts receivables, the receivables are used as collateral in a financing agreement with a lender. In factoring of accounts receivables, the receivables are sold at a discount for cash to a factor. In factoring of accounts receivables, the receivables are sold at a discount for cash to a factor. |
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Term
| Can current A/P provide short-term financiing? A/R? Inventory? |
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Definition
| All three can! A/P is through accruing payables...this allows you to put off pmt and is implicitly a type of financing--eg think trade payables |
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Term
| Financial risk vs business riski? |
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Definition
Financial risk is the additional risk a firm bears when it uses debt in addition to equity financing. Generally, firms that issue more debt would have higher (financial) risk than firms financed entirely by equity. Therefore, a firm which utilizes only equity financing would not have financial risk.
B. Business risk. A firm which utilizes only equity financing would face business risk. Business risk derives from the broad, macro-risk a firm faces largely as a result of the relationship between the firm and the environment in which it operates. The extent of that risk would depend on the susceptible of the firm to changes in the overall economic climate |
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Term
| Systematic risk vs unsystematic risk? Which can be diversified away? |
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Definition
| Unsystematic risk, also called diversifiable risk, can be mitigated or eliminated through diversification of investments. Systematic risk, also called non-diversifiable risk or market-related risk, cannot be mitigated or eliminated through diversification of investments. This type of risk is most closely associated with elements of the macroeconomic environment in which a firm operates and would include, for example, interest rate risk and inflation risk. |
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Term
| What is capital budgeting? |
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Definition
| Capital budgeting is the process of measuring, evaluating, and selecting long-term investment opportunities |
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Term
| How does a company decide its hurdle/discount rate? |
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Definition
| Based on the rate that the company must set in order to attract funding. |
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Term
| If there is no risk, does that mean that there's no return? |
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Definition
| No, the risk-free rate is above zero and is the reward expected for deferring consumption |
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Term
| How calculate NPV? Acceptance rule? |
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Definition
| Calculate the PV of all the cash inflows associated with the project--use after-tax income CFs, and don't forget to include the PV of the residual value if there is one. From this, subtract the cost of the original investment. Accept the project if NPV =>zero |
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Term
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Definition
| Take investment cost divided by annual CFs and use that number as your initial estimate of the PV factor. Go to the PV table and interpolate to make your guess as to return |
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Term
| another name for cost/benefit ratio? how calculated? |
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Definition
| profitability index. NPV/project cost. Can be used to rank projects....a project may have a higher NPV but given the cost outlay a lower index. NPV and CBR are the preferred methods of evaluating projects |
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
| ROE (NI/TSE) = PM x AT x EqMult |
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Term
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Definition
| Income less imputed interest on invested capital (in problems), theoretcallly Net Inc less required rate of return, where required rate of return = avg invested capital x k |
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Term
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Definition
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Term
| (CS) dividend payout rate |
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Definition
Cash div (to CS/h) / Net Inc (to CS/h)
On a per share basis cash div per share div by EPS |
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Term
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Definition
| div per CS div by mkt price per share |
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Term
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Definition
| SALES over investment ... I've seen it as both over TSE & TA...which is it in the demoninator? (more often in probs seems to be TA) |
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Term
| Primary disadv of using ROA rather than residual income? |
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Definition
| Mgrs may end up rejecting projects that yield positive cash flows b/c they don't want to lower their ROA |
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Term
| What is the difference between participating and nonparticipating bonds? |
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Definition
| distinguish whether or not preferred shareholders can receive dividends in excess of the stated preference rate. |
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Term
| formula for price of preferred stock (based on dividend)? |
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Definition
PSV = Annual Dividend divided by the
Required rate of Return
essentially value is like the PV of the cash flow of dividends, assumed to exist in perpetuity |
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Term
| *expected* rate of return on dividend on preferred stock =? |
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Definition
PSER = Annual Dividend divided by the
Market Price |
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Term
| for which is the cost of capital more, debt or equity? |
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Definition
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Term
| what is the hedging principle of financing? |
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Definition
| This guideline (also called the principle of self-liquidating debt) holds that long-term or permanent investments in assets should be financed with long-term or permanent sources of capital and short-term needs should be financed with short-term sources of financing. Thus, long-term assets (e.g. property, plant, and equipment, among others) and permanent amounts of current assets (e.g. level of accounts receivable and inventory generally on-hand) should be financed with long-term debt or equity. |
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Term
| should firms with high levels of business risk use more debt or more equity in their financing? |
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Definition
| Firms with higher business risk have an increased chance that operating results may cause default on fixed obligations and, therefore, should use less debt financing than a firm with steady operating results. |
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Term
| Financing short-term needs with long-term funds is a ______ strategy (aggressive/conservative). |
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Definition
| Conservative. (I don't really get this?) |
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Term
| value added vs non value added costs? |
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Definition
| In eyes of the consumer. Value added generally direct cost, nonvalue added is generally overhead |
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Term
| what are other names for the "constant coefficient" and the "variable coefficient" in a regression eqn? |
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Definition
Constant Coefficient = intercept
Variable Coefficient = slope |
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Term
| three overall steps in doing Process costing? |
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Definition
1. Determine Equivalent Units
2. Determine Cost per EU
3. Determine CGMf |
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Term
| How to calculate Equivalent Units/Wtd Avg |
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Definition
| ONLY use Completed, Normal Spoilage, and Ending by their percent complete to do the calculation! (RP method less confusing than CPAExcel) |
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Term
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Definition
| To value (1) Ending WIP and 2) Cost of Goods MANUFACTURED (i.e, what's still here and what went away) |
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Term
| two methods to use to apply process costing? |
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Definition
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Term
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Definition
| TOTAL COSTS/TOTAL Equivalent Units = Cost per unit--need to multiply by units to figure actual costs! To get EUs, use Completed @ 100%, Normal Spoilage @ 100%, & Ending at % Given. Costs = conversion costs for Beg + Started. |
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Term
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Definition
| Costs from THIS PERIOD divided by Equivalent Units worked on THIS PERIOD gives you Cost per unit==need to multiply by # units to figure transferred costs. EUs are tricky--want JUST this year so pay attention to Beg vs Started when you calc Completed. Beg you want JUST the % worked on this year, so use ** (1-x%) where x% is the % complete the item came in with (everything completed is at 100%, so 1-x gives you the amt completed this year); then started is at 100%. Conversion costs are JUST the ones from this year (started). |
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Term
| Setup to memorize for process costing |
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Definition
Beginning
+Started
= Total Units to Account for
Less Finished/Transferred
Less Normal Spoilage
= Ending |
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Term
| Check on costs transferred in process costing |
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Definition
| total costs (beg + started) given should equal your final allocation to ending inv plus your final allocation to transferred out |
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Term
| What is goal congruence and goal incongruence? |
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Definition
| Goal congruence are when the goals of indivs are consistent with the goals of the org; incongruence = goals of indiv (mgrs) incons w/goals of org--eg PDG, each dept head tries to max own rev so the transfer prices they arrange are not in the optimal interest of the org as a whole (relevant to transfer pricing) |
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Term
| What is the General Transfer Pricing Rule? |
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Definition
| Transfer Price per Unit = Additional Cost Outlay per unit + Opportunity Cost per unit. Additional cost outlay = variable production costs incurred plus storage, frt, sg&a. Opportunity cost per unit = sales price per unit less additional outlay cost per unit (matters if the unit is wking at capacity & selling all it produes; if not, doesn't matter b/c nothing being given up) |
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Term
| What is theoretical best transfer price? |
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Definition
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Term
| Theoretical transfer price at full capacity vs less than full capacity? |
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Definition
| at full capacity, transfer price = market price (= sum of costs to produce units + the opportunity cost, or the difference between selling internally vs selling externally); At less than full capacity, price = just cost of add'l outlay b/c opp cost is zero |
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Term
| Theoretical transfer price at full capacity vs less than full capacity? |
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Definition
| at full capacity, transfer price = market price (= sum of costs to produce units + the opportunity cost, or the difference between selling internally vs selling externally); At less than full capacity, price = just cost of add'l outlay b/c opp cost is zero |
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Term
| adv/disadv of full-cost absorption & cost-plus pricing in transfer pricing? |
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Definition
| by trying to cover fixed costs, FC are treated like VC and decrease calculated profits--may lead to dec to reject a transfer pricing when CM pricing would --> accept decision |
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Term
| Transfer price==rule to use for less than full vs full capacity |
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Definition
| Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. However, this is only true where idle capacity exists to make the transfer. If there is no idle capacity, market price = min AND maximum |
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Term
| How allocate Joint Costs? |
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Definition
| most freq tested method is to set up 3 pts: initial to Split-off (joint costs), then add'l proc to sales. Wk bkwds f sales: sales less add'l proc cost = joint cost--total and allocate proportionately. If one produce is a byproduct, subtract its revenue from the total costs rather than allocating |
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Term
| NRV of byproduct & what to do with it? |
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Definition
| Sales price less separable costs = NRV; subtract it from Joint Product cost rather than giving it its own COGS |
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Term
| NRV for price allocations of joint products? |
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Definition
| For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off |
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Term
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Definition
Prevention cost
Appraisal cost
Internal failure cost
External failure cost. |
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Term
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Definition
Economic value Added
EVA = NOPAT - WACC (Total Assets - Current Liabilities) 1. NOPAT = net operating profit after tax; WACC = weighted average cost of capital |
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Term
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Definition
CFROI = (CFO - ED) / cash invested --
1.
For CFROI, economic depreciation (ED) is defined as the annual cash investment required to replace fixed assets; CFO is cash flow from operations.
2. CFROI is a cash-based metric that is designed to compute the real internal rate of return on a company's assets and is stated as a rate.
3. CFO - ED is designed to approximate free cash flow (FCF), which is approximately equal to cash flow from operations (CFO) less net investment in fixed assets. This amount represents cash that is potentially distributable to shareholders.
4. CFROI is often used for incentive compensation, valuation, and capital budgeting. This is likely due to the emphasis on cash flow, and the wide acceptance of cash flow for these purposes |
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Term
| key themes of value based management? |
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Definition
| Accrual-based metrics are discredited , Cost of capital is increasingly emphasized , Shareholders and shareholder value as the primary element of interest is common; Relating VBM to strategy and making linkages to drivers of success is important |
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Term
| What do I really have to watch out for in calculating WACC |
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Definition
| Remember that there is a tax benefit to bonds..don't just do the straight weighted average, do the tax calc too |
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Term
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Definition
| Net Op Inc after taxes + deprec add back - change in working capital - capital expenditures |
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