The Efficient Markets Hypothesis(EMH) hypothesizes that stocks are always in equilibrium and that it is impossible for an investor to consistently “ beat the market.” On a norm, this theory advocates that stocks in general are neither overvalued nor undervalued namely they are fairly priced and in equilibrium.
There are several degrees of EMH namely:
(a) The weak-form of the EMH states that all information contained in past price movements is fully reflected in current market prices
(b) The semistrong-form of the EMH states that current market prices reflects all publicly available information. Implications of this form of EMH implies that there is no abnormal returns can be gained by analyzing stocks and whenever information is released to the public, stock prices will respond only if the information is different from what had been expected.
(c) The strong-form of the EMH states that current market prices reflect all pertinent information, whether publicly available or privately held (inside information). If this form holds, even insiders would find it impossible to earn abnormal returns in the stock markets.
Below is the answer to the earlier question test paper on capital investment/budget/appraisal:-
answer to true or false question bank on capital budget
Below is a true or false question test paper (with answer) on simple capital budget to refresh your learning of the topic:
{click here for answer}
True or false question test on capital budget
Activity-based costing is A PART of Activity-based management. Management uses the findings of activity-based costing to see the cause-effect relationship between activities and costs. And also by using activity-based management techniques, they find ways to reduce or eliminate non-value-added activities. Activity-based management is essential for companies who wish to strive for continuous improvement to maintain or obtain a competitive advance. Activity-based management focuses on the activities involved in the production/performance process as the way to improve the value customers receive and the profit the company realizes.
Basic notes on activity-based management:
- ABM helps to increase the company’s efficiency and effectiveness and Compute more accurate costs
- Is closely related to total quality management and business process reengineering.
- Activity-based management should incorporate strategic planning and company’s cost management system
- ABM requires an analysis of the company’s activities ( like movements, work sequences that a company performs to fulfill business function.)
- Activity-based management concepts also emphasize on the relationships among function areas.
- ABM & ABC promote continuous improvement, reduce lead times, and enhance flexible manufacturing by helping managers to
(a) Recognize and monitor major technology costs
(b) Trace many technology costs to products
(c) Increase market share through target costing
(d) Identify cost drivers
(e) Identify non-value-added activities
(f) Understand the effect of new technologies on all aspects of performance
(g) Translate company goals into activity goals
(h) Analyse performance of activities across business functions
(i) Analyse performance problems and
(j) Foster standards of excellence
For managerial accounting accounting purpose, it is very useful to recast the normal income statement into a contribution margin format. So what is the difference between the normal gross margin format and the contribution margin format.
The difference is self-explanatory -refer to the formula:
Gross margin = Revenues – Cost of Sales
whereas:
Contribution margin = Revenues – Total Variable Cost
Simple illustration of the contribution margin format:
Revenues $500,000
Variable costs 50,000
Contribution margin 450,000
Fixed costs 30,000
Operating Income $420,000
The advantage of the contribution margin format is to provide data for break-even point calculations and cost volume-profit analysis.
Question No 4 on Capital Investment Appraisal
Answer to Question No.4
Answer to Question no 4
Question No 3 on Capital Investment Appraisal
Answer to Question No. 3(above)
Answer to Question No.3 (above)
- Question No.2 On Capital Investment Appraisal
- Answer to Question No.2 (above)
Question No.1 with answer on Capital Investmen Appraisal
Answer on Question No.1 (above)
Below article describes the meaning of operating leverage, some of the ratios to measure operating leverage, its application and users and an illustrated example on how to compute operating leverage.
(a) Meaning of Operating Leverage:
- Refers to the existence of fixed costs in a company’s cost structure
- Is used to measure operating risk
(b) Following ratios being used to measure operating leverage:
- Fixed cost/total cost
- % change in operating income/percentage change in sales volume or
Change in profit/profit
———————————-
Change in quantity/quantity
(c) Usefulness ,Applications and other salient points to note:
- Operating leverage are important to managers and financial analysts to understand the degree of operating leverage of a company. A high operating leverage means greater fixed cost committments that have to be met even when sale volume declines [ note that high degrees of operating leverage plus highly elastic product demand will result in high levels of variability in earnings although such a condition may be inherent in the industry like the airline and auto industries.
- Note that the effects of operating leverage diminish as revenue increases above the breakeven point, since the bases to wich increases in earnings are compared become progressively larger. Therefore it is important to examine the relationship between sales and the breakeven point
- A company with a high breakeven point is quite vulnerable to economic declines. A high ratio of variable cost to total cost indicates greater stability, because variable cost can be adjusted more easily than fixed cost to meet a declin product demand.
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