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Questions and Answers
What is the total amount of current assets reported in the financial statements?
What is the total amount of current assets reported in the financial statements?
What is the annual interest expense on the long-term bank loan?
What is the annual interest expense on the long-term bank loan?
What is the total equity of APX Co according to the statement of financial position?
What is the total equity of APX Co according to the statement of financial position?
If APX Co maintains its current dividend payout ratio, how much will be paid in dividends next year if anticipated operating profit is $1,200,000?
If APX Co maintains its current dividend payout ratio, how much will be paid in dividends next year if anticipated operating profit is $1,200,000?
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How long is the inventory turnover period forecast for APX Co?
How long is the inventory turnover period forecast for APX Co?
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What is the effective current ratio of APX Co, considering current assets and current liabilities?
What is the effective current ratio of APX Co, considering current assets and current liabilities?
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How many days does APX Co have for trade receivables collection in the next year?
How many days does APX Co have for trade receivables collection in the next year?
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What will be the forecasted interest on the overdraft for the next year?
What will be the forecasted interest on the overdraft for the next year?
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What is the annual financial effect if management reduces the collection period to 60 days by offering an early settlement discount of 1% that all customers adopt?
What is the annual financial effect if management reduces the collection period to 60 days by offering an early settlement discount of 1% that all customers adopt?
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Which of the following services is NOT typically provided by a debt factor?
Which of the following services is NOT typically provided by a debt factor?
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Which method is LEAST likely to be utilized in managing foreign accounts receivable?
Which method is LEAST likely to be utilized in managing foreign accounts receivable?
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What is the total cost of L Co's factoring package, given a non-recourse cost of 1.5% of sales and an admin fee of $6,000 per annum, with sales of $1.5 million?
What is the total cost of L Co's factoring package, given a non-recourse cost of 1.5% of sales and an admin fee of $6,000 per annum, with sales of $1.5 million?
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Which of the following is NOT a drawback associated with the Economic Order Quantity (EOQ) model?
Which of the following is NOT a drawback associated with the Economic Order Quantity (EOQ) model?
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Which of the following is NOT a potential hidden cost of increasing credit taken from suppliers?
Which of the following is NOT a potential hidden cost of increasing credit taken from suppliers?
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Which of the following would be LEAST likely to arise from the introduction of a just-in-time inventory ordering system?
Which of the following would be LEAST likely to arise from the introduction of a just-in-time inventory ordering system?
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What financial impact results from a uniform 1% early settlement discount offered to all customers?
What financial impact results from a uniform 1% early settlement discount offered to all customers?
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What is the formula to calculate the Current Ratio?
What is the formula to calculate the Current Ratio?
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In the context of the Interest Coverage Ratio, how is it calculated?
In the context of the Interest Coverage Ratio, how is it calculated?
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What does the Profitability Index measure?
What does the Profitability Index measure?
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How is the weighted average cost of capital (WACC) calculated?
How is the weighted average cost of capital (WACC) calculated?
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What does the formula for Accounts Receivable Days measure?
What does the formula for Accounts Receivable Days measure?
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What is the formula for calculating the Dividend Yield?
What is the formula for calculating the Dividend Yield?
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How do you calculate the Equivalent Annual Cost (EAC)?
How do you calculate the Equivalent Annual Cost (EAC)?
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In the Capital Asset Pricing Model (CAPM), what does E(ri) represent?
In the Capital Asset Pricing Model (CAPM), what does E(ri) represent?
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Which formula correctly represents the calculation for Economic Order Quantity (EOQ)?
Which formula correctly represents the calculation for Economic Order Quantity (EOQ)?
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What is the main purpose of the Miller-Orr Model?
What is the main purpose of the Miller-Orr Model?
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How is the Cost of Equity calculated?
How is the Cost of Equity calculated?
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Which of the following is NOT a liquidity ratio?
Which of the following is NOT a liquidity ratio?
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What does $g$ represent in Gordon's Growth Approximation?
What does $g$ represent in Gordon's Growth Approximation?
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Study Notes
Formulae and Calculations
- Economic Order Quantity (EOQ): EOQ = √(2C0D / Ch), where C0 = ordering cost, D = demand, Ch = holding cost per unit per year. (Chapter 5)
- Miller-Orr Model: Return point = Lower limit + (1/3 × spread). Spread = 3√(4 × transaction cost × variance of cash flows / interest rate). (Chapter 6)
- Capital Asset Pricing Model (CAPM): E(ri) = Rf + βi(E(rm) – Rf), where E(ri) = expected return of asset i, Rf = risk-free rate, βi = beta of asset i, E(rm) = expected return of market portfolio. (Chapter 15)
- Asset Beta Formula: βa = [(Ve/ (Ve + Vd(1-T))) × βe] + [(Vd(1-T)/ (Ve+ Vd(1-T))) × βd], where Ve = market value of equity, Vd = market value of debt, T = tax rate, βe = equity beta, βd = debt beta. (Chapter 16)
- Growth Model: P0 = D0(1 + g) / (re - g), where P0 = current stock price, D0 = previous dividend, g = growth rate, re = required return on equity. (Chapter 17)
- Gordon's Growth Approximation: g = b × re, where g = growth rate, b = retention ratio, re = required return on equity. (Chapter 17)
- Weighted Average Cost of Capital (WACC): WACC = [(Ve / (Ve + Vd)) × ke] + [(Vd / (Ve + Vd)) × kd(1-T)], where Ve = market value of equity, Vd = market value of debt, ke = cost of equity, kd = cost of debt, T = tax rate.(Chapter 15)
- Fisher formula: (1 + i) = (1 + r)(1 + h), where i = nominal interest rate, r = real interest rate, and h = inflation rate. (Chapter 19)
- Purchasing Power Parity and Interest Rate Parity: S1 = S0 × (1 + hc) / (1 + hb), F0 = S0 × (1 + ic) / (1 + ib ), where S1 = future spot exchange rate, S0 = current spot exchange rate, F0 = future forward exchange rate, hc = foreign inflation rate, hb = domestic inflation rate, ic = foreign interest rate, ib = domestic interest rate. (Chapter 19)
- Return on Capital Employed (ROCE): ROCE = Profit before interest and tax (PBIT) / Capital employed; or ROCE = Profit margin × asset turnover, where Profit margin = PBIT/Revenue, and Asset Turnover = Revenue / Capital employed.
- Gearing: Gearing = Debt / Equity or Debt / (Debt+Equity) : can use book or market values. Also, Gearing = Prior charge capital / Equity capital (including reserves).
- Interest coverage: Interest coverage = PBIT/Interest.
- Liquidity ratios: Current ratio = Current assets / Current liabilities; Acid test ratio = (Current assets – Inventory) / Current liabilities
- Shareholder investor ratios: Dividend yield = (Dividend per share / Market price per share) × 100 ; Earnings per share (EPS) = Profits distributable to ordinary shareholders / Number of ordinary shares issued; Price/Earnings (P/E) ratio = Market price per share / EPS.
- Accounts Receivable Days: Accounts receivable days= (Receivables / Credit sales) × 365 days.
- Inventory Days: (a) Finished goods =(Finished goods / Cost of sales) × 365 days; (b) Work-in-progress (WIP) = (Average WIP/Cost of sales) × 365 days; (c) Raw material = (Average raw material inventory/Annual raw material purchases) × 365 days
- Accounts payable period: Accounts payable period = (Payables/Credit purchases or cost of sales) × 365 days
- Internal Rate of Return (IRR): IRR = a + [(NPVa / (NPVa - NPVb)) × (b-a)], where a and b are discount rates, NPVa = net present value at discount rate a, NPVb = net present value at discount rate b. .
- Equivalent annual cost: Equivalent annual cost = (PV of cost over one replacement cycle / Annuity factor for the number of years in the cycle).
- Cost of equity: Cost of equity = D1 / P0 + g.
- Cost of debt: Cost of debt = i(1 - T) / P0.
- Cost of preference shares: Cost of preference shares = Preference Dividend / Market Value(ex div).
- Profitability index: Profitability index = PV of cash flows (not including capital investment) / Capital investment
Exam Information (Specific Cases)
- Collection Period Reduction (Exam Q): Reducing collection period to 60 days with early settlement discount of 1% would result in a $85,479 benefit.
- Debt Factor Services: Debt factors can do bad debt insurance, advancement of credit, receivables ledger management, and debt collection process management.
- Foreign Accounts Receivable Management: Letters of credit, bills of exchange, and invoice discounting is most common.
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Description
Test your knowledge on important financial formulas including Economic Order Quantity, the Miller-Orr Model, and the Capital Asset Pricing Model across various chapters. This quiz will challenge your understanding of fundamental concepts in finance and their applications.
