IMANET CMA Exam Dumps

A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income. -

The EOQ for inventory is a function of ordering cost per order, inventory demand, and carrying cost. In the cash model, the fixed cost per sale of securities is equivalent to the ordering cost, the demand for cash is similar to the demand for inventory, and the interest rate is effectively the cost of carrying a dollar of cash for the period. Substituting in the formula yields optimal cash balance of about $6,928. Thus, the average cash balance is $3,464 ($6,928 + 2).

The steps in a OVA are to

* Determine what customers value.

* Assign quantitative amounts to the elements of customer value and have customers rank their relative significance.

* Evaluate how well the firm and its competitors perform relative to each element.

* Focus on performance with respect to each element in relation to competitors in a given market segment.

* Repeat the foregoing steps as circumstances change.

The payback method calculates the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment required by the average expected cash, 1flow to be generated, resulting in the number of years required to recover the original investment. Payback is easy to 'calculate but has two principal problems: it ignores the time value of money, and it gives no consideration to returns, after the payback period. Thus, it ignores total project profitability'.

The current optimal capital structure is 40% debt and 60% equity. The $3 million to be retained 1from earnings in the coming year represents the equity portion of the maximum new capital outlay. To retain the optimal capital structure, $2 million of debt must be added to the $3 million of retained earnings. Hence, the maximum capital expansion is $5 million. The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated.

The following information for FLF Corporation is provided:

* The market price of common stock is $60 per shares

* The dividend next year is expected to be $3 per share.

* Expected growth in dividends is a constant 10%.

* New bonds can be issued at face value with a 10% coupon rate.

* The current capital structure of 40% long-term debt and 60% equity' is considered to be optimal.

* Anticipated earnings to be retained in the coming year are $3 million.

* The firm has a 40% marginal tax rate.