Financial Management

Question 1

Managing inventory & receivables (current assets & liabilities)

Answer 1

Financial Management

Question 2

NWC : Current Assets - Current Liabilities

Answer 2

Financial Management

Question 3

Shorten the cash conversion cycle

Don’t negatively impact operations

Answer 3

Financial Management

Question 4

Average time needed to convert materials into finished goods and sell them

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

Answer 4

Financial Management

Question 5

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

Answer 5

Financial Management

Question 6

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)

Answer 6

Financial Management

Question 7

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle

(Inventory Really (-Pays) Cash)

Answer 7

Financial Management

Question 8

Liquid

Safe

Answer 8

Financial Management

Question 9

Used for importing goods.

Issued by importer’s bank.

Answer 9

Financial Management

Question 10

No interest cost if paid timely.

Answer 10

Financial Management

Question 11

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

Answer 11

Financial Management

Question 12

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

Answer 12

Financial Management

Question 13

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

Answer 13

Financial Management

Question 14

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

Answer 14

Financial Management

Question 15

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

Answer 15

Financial Management

Question 16

Advantages: Financing at less than Prime. No compensating balances required.

Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.

Answer 16

Financial Management

Question 17

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory

Answer 17

Financial Management

Question 18

The cost of keeping inventory.

Answer 18

Financial Management

Question 19

Cost of executing an order and starting product production.

Answer 19

Financial Management

Question 20

How low inventory should get before it should be re-ordered.

IOP : Average Daily Demand x Average Lead Time

Answer 20

Financial Management

Question 21

Orders inventory so that you get it just in time for when it’s needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

Answer 21

Financial Management

Question 22

Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection

Answer 22

Financial Management

Question 23

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

Answer 23

Financial Management

Question 24

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

Answer 24

Financial Management

Question 25

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%- for example

If the lending institution and the customer are not in the same country- the LIBOR rate is often used

Answer 25

Financial Management

Question 26

Interest rate stated on the face of a bond.

Answer 26

Financial Management

Question 27

CY : Interest Payment / Bond Price

Answer 27

Financial Management

Question 28

PV of Principle + Interest : Bond Price

Answer 28

Financial Management

Question 29

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

Answer 29

Financial Management

Question 30

High interest rate

High default risk

Answer 30

Financial Management

Question 31

Bonds unsecured by collateral

Answer 31

Financial Management

Question 32

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

Answer 32

Financial Management

Question 33

Provision in Bond contract allows demand of Bond payment under certain circumstances

Answer 33

Financial Management

Question 34

Borrower can pay off debt early

Answer 34

Financial Management

Question 35

Lender can demand payment via company stock instead of money

Answer 35

Financial Management

Question 36

Borrower deposits regular sums into an account that will eventually pay off the debt

Answer 36

Financial Management

Question 37

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

Answer 37

Financial Management

Question 38

Hold dividend priority over common stock

Answer 38

Financial Management

Question 39

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%

Answer 39

Financial Management

Question 40

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.

Answer 40

Financial Management

Question 41

(Interest Expense - Tax Benefit) / Carrying Value of Debt

Answer 41

Financial Management