CPA Business Environment and Concepts (BEC) : Discounted Cash Flow Formula

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Example Questions

Example Question #11 : Financial Management Formulas

Future payments must be discounted in a bond valuation in order to take into account the:

Possible Answers:

Time value of money

Difference between the market rate of interest and the coupon rate

Expected interest rate on the coupon payments

Fact that the bond was sold at a premium

Correct answer:

Time value of money

Explanation:

The process of accounting for time value of money is discounting.

Example Question #12 : Financial Management Formulas

The discount rate is determined in advance for which of the following capital budgeting techniques?

Possible Answers:

Net present value

Payback

Accounting rate of return

Internal rate of return

Correct answer:

Net present value

Explanation:

In order to work with net present value, a discount rate must be calculated.

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%.

Possible Answers:

11%

21.10%

12.20%

20%

Correct answer:

20%

Explanation:

$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:

Possible Answers:

Net present value method

Accounting rate of return

Payback method

Discounted cash flow method

Correct answer:

Payback method

Explanation:

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?

Possible Answers:

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.

Correct answer:

It does not consider the time value of money.

Explanation:

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?

Possible Answers:

Cost of debt

Cost of retained earnings

Cost of cash flow

None of the answer choices are correct

Correct answer:

Cost of retained earnings

Explanation:

The Discounted Cash Flow formulas involving dividends, price, and growth is also known as the cost of retained earnings.

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