BEC Chapter 3B

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  1. Degree of Operating Leverage
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  2. Degree of Financial Leverage
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  3. Degree of Combined (Total) Leverage
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  4. Weighted Average Cost of Capital (WACC) - Formula
    WACC = (Cost of Equity * % of Equity in Capital Structure) + (Cost of Debt * % of Debt in Capital Structure)
  5. Weighted Averaged Interest Rate
    = Effective Annual Interest Payments/Debt Cash Available
  6. Symbol: Cost of Debt (Pre-Tax)
    • Kdt
    • = Effective Interest Rate
  7. Symbol: After Tax Cost of Debt
  8. Formula: After Tax Cost of Debt
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  9. Symbol: Cost of Preferred Stock
  10. Symbol: Net Proceeds of Preferred Stock
  11. Symbol: Preferred Stock Cash Dividend
  12. Formula: Cost of Preferred Stock
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  13. Symbol: Cost of Retained Earnings
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  14. Symbol: Market Risk Premium
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  15. Symbol: Risk Free Rate
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  16. Symbol: The Market Rate
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  17. Formula: The Market Risk Premium
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  18. Symbol: Beta Coefficient
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  19. Formula: The Risk Premium
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  20. Solve for Cost of Retained Earnings using CAPM
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  21. Symbol: Current Market Value of Outstanding Common Stock
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  22. Symbol: The Dividend per share Expected at the End of the Year
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  23. Symbol: Constant Rate of Growth in Dividends
  24. Solve for Cost of Retained Earnings using the DCF Model
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  25. Solve for Cost of Retained Earnings using BYRP Method
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  26. Formula: Profit Margin
    Profit Margin = Income/Sales
  27. Formula: Investment Turnover
    Aka: Asset Turnover
    Investment Turnover = Sales/Invested Capital
  28. Solve for Return on Investment (ROI):
    2 Formulas
    1) ROI = Income/Investment Capital

    2) ROI = Profit Margin * Investment Turnover
  29. Formula: Required Return
    2 Formulas
    1) Required Return = NBV * Hurdle Rate

    2) Required Return = Investment * Cost of Capital
  30. Formula: Net Book Value
    NBV = Historical Cost - Accumulated Depreciation
  31. Formula: Solve for Residual Income
    RI = Net Income - Required Return

    RI = NI - (Hurdle Rate * (Historical Cost - Accumulated Depreciation))
  32. Solve for Economic Value Added
    2 Steps
    1) Investment * Cost of Capital = Required Return

    2) Income after tax - Required Return = EVA
  33. Formula: Debt to Capital Ratio
    Total Debt / Total Capital
  34. Formula: Debt to Asset Ratio
    Total Debt / Total Assets
  35. Formula: Debt to Equity Ratio
    Total Debt / Total Equity
  36. Formula: Current Ratio
    Current assets / Current Liabilities
  37. Formula: Net Working Capital
    Current Assets - Current Liabilities
  38. Formula: Quick (Acid Test) Ratio
    (Cash + Receivables + Investments)/Current Liabilities
  39. APR of Quick Payment Discount
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    example: 1\10 net 30

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  40. Formula: Economic Order Quantity
    • E = Order Size
    • S = Annual Sales (in Units)
    • O = Cost per Purchase Order
    • C = Carrying Cost per Unit

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  41. Purpose of EOQ
    EOQ of inventory control anticipates orders at the point where carrying costs are nearest to restocking costs

    The objective is to minimize total inventory costs
  42. Formula: Inventory Turnover
    = COGS/Average Inventory
  43. Formula: Inventory Conversion Period
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  44. Formula: Accounts Receivable Turnover
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  45. Formula: Receivable Collection Period
    (Days - Sales - Outstanding)
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  46. Definition: The overall cost of capital is the:
    Rate of return on assets that covers the costs associated with the funds employed
  47. When does Financial Leverage Increase
    DFL increases when the debt-to-equity ratio increases

    Using a high % of debt (bonds) for future investments would increase financial leverage
  48. The imputed interest rate used in the residual income approach for performance measurement and evaluation is the
    Historical Weighted Average Cost of Capital for the Company
  49. Formula: Cash Conversion Cycle
    Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
  50. Accounts Payable Turnover
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  51. Formula: Accounts Payable Deferral Period
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  52. Formula: Market rate of interest
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  53. Definition: Materials Requirement Planning
    MRP is an inventory management technique that projects and plans inventory levels in order to control the usage of raw materials in the production process

    Applies primarily to WIP and Raw Materials
Card Set:
BEC Chapter 3B
2013-12-28 00:09:27
CPA Financial Concepts
Flash Cards based on terms and formulas in the financial portion of BEC
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