All CPA Business Environment and Concepts (BEC) Resources
Example Questions
Example Question #1 : Discounted Cash Flow Formula
Using the discounted cash flow method, estimate the cost of retained earnings for a firm with a stock price of $30, an estimated dividend at the end of the first year of $3 per share, and an expected growth rate of 10%.
11%
21.10%
12.20%
20%
20%
$3/$30 + 10% = 20% Cost of retained earnings.
Example Question #2 : Discounted Cash Flow Formula
The length of time required to recover the initial cash outlay of a capital project is determined by using the:
Net present value method
Accounting rate of return
Payback method
Discounted cash flow method
Payback method
The payback method measures the time required to recover the initial investment.
Example Question #3 : Discounted Cash Flow Formula
Which of the following statements is true regarding the payback method?
It does not consider the time value of money.
It is the time required to recover the investment and earn a profit.
The salvage value of old equipment is ignored in the event of equipment replacement.
It is a measure of how profitable one investment project is compared to another.
It does not consider the time value of money.
The payback method determines the number of years that it will take for a company to recoup or be paid back for its investment. The payback method does not consider the time value of money.
Example Question #1 : Discounted Cash Flow Formula
Which of the following phrases could be used to describe the Discounted Cash Flow formula?
Cost of debt
Cost of retained earnings
Cost of cash flow
None of the answer choices are correct
Cost of retained earnings
The Discounted Cash Flow formulas involving dividends, price, and growth is also known as the cost of retained earnings.