CPA Business Environment and Concepts (BEC) : CPA Business Environment and Concepts (BEC)
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Example Questions
Example Question #2 : Financial Management Formulas
Which of the following measurement models is being used if a calculation includes risk-free rate, beta coefficient, rate of return, and required rate of return?
Overall cost of capital
Capital asset pricing
Constant growth
Weighted marginal cost of capital
Capital asset pricing
These factors are included in the calculation of CAPM.
Example Question #1 : Weighted Average Cost Of Capital Formula
Which of the following would never be included in the WACC formula?
Required rate of return
Tax rate
Summed market values of a firm's capital structure
Risk
Risk
Risk is not assessed in calculating the WACC. WACC is used to determine the cost of financing for a firm.
Example Question #1 : Capm Formula
The overall cost of capital is the:
Cost of the firm's equity capital at which the market value of the firm will remain unchanged
Minimum rate a firm must earn on high risk projects
Rate of return on assets that covers the costs associated with the funds employed
Maximum rate of return on assets
Rate of return on assets that covers the costs associated with the funds employed
Firms must at least earn a rate of return on investments equal to their cost of capital, otherwise the investments are losing money and decreasing value.
Example Question #2 : Capm Formula
ABC company is determining how to finance some long term debt projects. ABC has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the creditworthiness of the company. Which of the following would best meet ABC's financing requirements?
Common stock
Short term debt
Bonds
Long term debt
Common stock
Common stock does not require payment, does not mature, and decreases the debt to equity ratio as there is no debt incurred.
Example Question #1 : Financial Management Formulas
Using the capital asset pricing model, the required rate of return for a firm with a beta of 1.25 when the market return is 14% and the risk-free rate is 6% is:
16%
7.50%
14%
17.50%
16%
Cost of retained earnings=6% + 1.25 (14% - 6%) = 16%
Example Question #1 : Financial Management Formulas
The cost of debt most frequently is measured as:
Actual interest rate minus tax savings
Actual interest rate
Actual interest rate plus a risk premium
Actual interest rate adjusted for inflation
Actual interest rate minus tax savings
Actual interest rates minus tax savings is the most frequently used measure for cost of debt.
Example Question #3 : Capm Formula
The benefits of debt financing over equity financing are likely to be highest in which of the following situations?
Low marginal tax rates and few noninterest tax benefits
High marginal tax rates and few noninterest tax benefits
Low marginal tax rates and many noninterest tax benefits
High marginal tax rates and many noninterest tax benefits
High marginal tax rates and few noninterest tax benefits
The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high and if there are few noninterest tax benefits.
Example Question #45 : Cpa Business Environment And Concepts (Bec)
Of the following, which would not impact the CAPM formula in determining a firm's cost of retained earnings?
Risk-free rate
Treasury yield
Net income
Beta
Net income
Treasury yield is the same as the risk-free rate, which would be included in CAPM as well as beta. Net income is not.
Example Question #1 : Calculate Discounts On Accounts Payable
If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360 day year.
24.74%
36%
31.81%
37.11%
31.81%
[360 / (45 - 10)] * [3% / (100% - 3%)]
Example Question #2 : Calculate Discounts On Accounts Payable
If a firm's credit terms require payment within 45 days but allow a discount of 2 percent if paid within 15 days (using a 360 day year), the approximate cost/benefit of the trade credit terms is:
48%
24%
36%
16%
24%
[360 / (45 - 15)] * [2% / (100% - 2%)]
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