B3

formula for Capital Asset Pricing Model (CAPM)

C=R+beta(M-R) R=risk free M=market rate C=cost of capital

Formula of cost of equity

Expected dividend/ Current share price + Growth rate

Formula for cash conversion cycle

Inventory conversion period + Receivables collection period - Payables deferral period

internal return rate (IRR)

Present Value Factor= Net incremental investment (investment required)/ net annual cash flows The higher the present value factor, the lower the computed rate (IRR)

The three elements needed to estimate the cost of equity capital for use in determining a firm's weighted-average cost of capital are:

R=D/(P+G) -Current dividends per share (D) -Expected growth rate in dividends (G) -Current market price per share of common stock (P)

The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate of 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?

The net cost of debt is computed as the effective interest rate net of tax 14% x (1-30%) = 9.8%

Cost of credit discount formula

[360/ (total pay period - discount period) ] x[ Discount% / (100%-Discount%)]

Economic value added formula (EVA)

after-tax income- required return

The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the: 1. Historical weighted average cost of capital for the company 2. Average return on assets employed over a particular time period 3. Average return on investment that has been earned by the company over a particular time period

1

Which of the following decision-making models equates the initial investment with the present value of the future cash inflows? 1. Internal rate of return 2. Accounting rate of return 3. Cost-benefit ratio 4. Payback period

1

Which of the following inventory management techniques focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials? 1. Materials requirements planning 2. Safety stock reorder point 3. Economic order quantity 4. Cycle counting

1 Cycle counting is an inventory auditing procedure, not control technique Safety stock is to ensure supply requirements are met. it's not limited to or designed for work in process and raw materials inventory EOQ is an inventory model that attempts to minimize both ordering and carrying costs. The objective of the EOQ is to compute the quantity to order, not to comprehensively plan the requirements of production inventories

The optimal capitalization for an organization usually can be determined by the: 1. Lowest total weighted- average cost of capital (WACC) 2. Maximum degree of financial leverage (DFL) 3. Maximum degree of total leverage (DTL)

1 The optimal capitalization for an organization usually can be determined by the lowest total weighted-average cost of capital (WACC). Capitalization at WACC serves to maximize shareholder's equity

The profitability index is a variation of which of the following capital budgeting models? 1. Net present value 2. Discounted payback

1 Profitability index= present value of net future cash inflows/ present value of net initial investment

A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return? 1. Less than the project's internal rate of return. 2. Greater than the project's internal rate of return.

1- The IRR is the rate earned by an investment that equates to a net present value (NPV) of zero. By definition, a project with a positive NPV will have an IRR greater than the required rate of return used to compute that NPV.

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers? 1. ROI is a percentage, while RI is a dollar amount 2. ROI may lead to rejecting projects that yield positive cash flows

2

Which of the following phrases defines the internal rate of return on a project? 1. The discount rate at which the net present value of the project equals one 2. The discount rate at which the net present value of the project equals zero

2

What is an internal rate of return? 1. A net present value 2. A time-adjusted rate of return from an investment

2 Although the internal rate of return is the rate that yields a net present value of zero; the internal rate of return is not a net present value

A characteristic of the payback method (before taxes) is that it: 1. Uses accrual accounting inflows in the numerator of the calculation 2. Neglects total project profitability

2-the payback method neglects total project profitability. It simply looks at the time required to recover the initial investment; subsequent cash flows are ignored Payback uses cash flow, not accrual accounting income

In evaluating costs for decision-making, a company would always consider each of the following as relevant, except: 1. Differential costs 2. Avoidable costs 3. Variable costs 4. Incremental costs

3

Which of the following assumptions is associated with the economic order quantity formula? 1. The carrying cost per unit will vary with quantity ordered 2. The cost of placing an order will vary with quantity ordered 3. Periodic demand is known

3 The carrying cost and cost of placing an order remain constant

A firm that designs its cost structure to include a higher degree of operating fixed costs than variable costs by electing to pay salaries instead of commissions, is magnifying the impact of each additional sales dollar using the concept of: 1. fixed leverage 2. combined leverage 3. operating leverage 4. financial leverage

3- a firm that has high operating leverage has high fixed operating leverage has high fixed operating costs and relatively low variable operating costs and uses this cost structure to magnify the financial results of each additional dollar in sales Financial leverage: the degree to which a firm uses debt to finance the firm, not purely operating fixed costs. When making financing decisions, a firm can choose to issue debt or equity. When debt is issued, the firm generally must pay fixed interest costs Combined (total) leverage results from the use of both fixed operating costs and fixed financing costs to magnify returns to the firm's owners

A working capital technique,which delays the outflow of cash, is: 1. factoring 2. Compensating balances 3. A draft 4. A lock-box system

3- the use of a draft delays a cash disbursement and increases payable float A lock-box system is used to accelerate the inflow of funds Compensating balances are a bank requirement related to a loan. The bank will require a certain balance be maintained in cash. This amount cannot be used for working capital purposes

Which of the following inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost? 1. Materials requirements planning 2. Just-in-time 3. Kanban inventory control 4. Economic order quantity

4

The optimal level of inventory would be affected by all of the following, except: 1. Cost of placing an order for merchandise 2. Cost per unit of inventory 3. Lead time to receive merchandise ordered 4. Current level of inventory

4 The optimal level of inventory is affected by: -the time required to receive inventory -the cost per unit of inventory, which will have a direct impact on inventory carrying costs -the cost of placing on order impacts order frequency, which affects order size and optimal inventory levels