CPA Business Environment and Concepts (BEC) : Discounted Cash Flow Formula
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Example Questions
Example Question #19 :Financial Management Formulas
Future payments must be discounted in a bond valuation in order to take into account the:
Difference between the market rate of interest and the coupon rate
Fact that the bond was sold at a premium
Expected interest rate on the coupon payments
Time value of money
Time value of money
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?
Accounting rate of return
Internal rate of return
Net present value
Payback
Net present value
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%.
12.20%
20%
21.10%
11%
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
Payback method
Accounting rate of return
Discounted cash flow method
Payback method
The payback method measures the time required to recover the initial investment.
Example Question #1 :Discounted Cash Flow Formula
Which of the following statements is true regarding the payback method?
It is the time required to recover the investment and earn a profit.
It does not consider the time value of money.
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?
None of the answer choices are correct
Cost of retained earnings
Cost of cash flow
Cost of debt
Cost of retained earnings
The Discounted Cash Flow formulas involving dividends, price, and growth is also known as the cost of retained earnings.
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