Cost of Capital - Formulas

Cost of Debt = Pre-tax Cost of Debt * (1 - Tax Rate)

Cost of Preferred Stock = (Cash Dividends) / (Net Proceeds of PS [i.e. gross proceeds - costs])

Cost of Retained Earnings:

Capital Asset Pricing Model (CAPM)
= Risk-Free Rate + (beta * [Market Rate - Risk-Free Rate])

Discounted Cash Flow Model (DCF)
= (Dividend at the end of YR 1 / Markte Value of CS ) + Growth Rate

Bond Yield Plus Risk Premium (BYRP)
= Pre-tax cost of LT debt + Market Risk Premium

Variance Analysis

Direct Materials:

Price = Actual Quantity Purchased * (Actual Price - Standard Price)

Quantity Usage = Standard Price * (Actual Quantity Used - Standard Quantity Allowed)

Direct Labor:

Rate = Actual Hours * (Actual Rate/Price - Standard Rate/Price)

Efficiency = Standard Rate * (Actual Hours - Standard Hours Allowed)

Manufacturing Overhead Variance:

Spending = Actual Overhead Costs Incurred - (Actual Hours Worked * Standard O/H Rate)

Efficiency = (Actual Hours Worked * Standard O/H rate) - (Standard Hours Allowed * Standard O/H Rate)

Volume = (Standard Hours Allowed * Standard O/H Rate) - Applied O/H

Sales & CM Variance:

Sales Price = Actual Units Sold * (Actual Price/Unit - Standard Price/Unit)

Sales Volume = Standard CM/Unit * (Actual Units Sold - Budgeted Sales Unit)

Threats in a Computerized Environment

• Virus  
• inserts itself into another program to propagate; 
• cannot run independently
• Worm 
• propagates itself over a network; 
• run independently; 
• cannot attach to other programs
• Trojan Horse 
• appears to be useful but has a hidden, unintended function that presents security risk; 
• cannot replicate itself
• Denial-of-Service Attack 
• bombards another computer with a flood of information to keep users from accessing the computer/network
• Phishing
• phony e-mails 

IT Risk Event Identification

• Strategic Risk - inappropriate technology
• Operating Risk - doing the right things the wrong way 
• Financial Risk - lost/waste/stolen financial resources
• Information Risk - loss of data integrity, incomplete transactions, hackers
• Specific Risk - errors, intentional acts, disasters