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BEC > B2 - Financial Management > Flashcards

B2 - Financial Management Flashcards

1
Q

Debt Financing

A

Use of short term and long term debt in capital structure

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2
Q

The following are ______ debt
commercial paper, line of credit

A

Short term debt

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3
Q

The following are _______ debt
debentures, bonds, finance leases

A

Long term debt

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4
Q

Commercial paper

A

Unsecured, ST debt instrument issued by a corp that matures in 270 days or less and must be used to finance current assets such as AR, inventory or meet ST obligations

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5
Q

Subordinated Debentures

A

Bond issue that is unsecured and ranks behind senior creditors in the event of an issuer liquidation; command higher interest rate

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6
Q

Income Bonds

A

Securities that pay interest only upon achievement of traget incme levels

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7
Q

Junk bonds

A

High default risk and high return

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8
Q

Mortgage bonds

A

Loan that is secured by residential or commercial real property; trustees act on behalf of bondholders to foreclose on mortgage assets in the event of default

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9
Q

What kind of lease?
Lease expense represents interest expense and amortization of the ROU asset will be recorded on IS

A

Operating Lease

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10
Q

What kind of lease?
Interest expense and amortization expense are accounted for separately on the income statement

A

Finance lease

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11
Q

Lease accounting

A

ROU asset and liability on balance sheet; ROU asset is amortized and the lease liability is paid down over the life of the asset

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12
Q

When do you not have to record an ROU Asset or lease liability?

A

short term

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13
Q

O in OWNES

A

Ownership transfer at the end of the lease

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14
Q

W in OWNES

A

Written purchase option that the lessee is reasonably certain to exervice

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15
Q

N in OWNES

A

Net present value of all lease payments and guaranteed residual value is equal or substantially exceeds the underlying asset FV

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16
Q

E in OWNES

A

Economic life of the underlying asset is primarily encompassed within the term of the lease

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17
Q

S in OWNES

A

Specialized asset such that it will not have an expected alternative use

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18
Q

What kind of financing
Variable cost with no maturity risk
high creditworthiness

A

Equity

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19
Q

What kind of financing
Lower ROE

A

Equity

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20
Q

Equity financing

A

rights of shareholders to a firm’s assets in bankruptcy are less than that of both secured and unsecured bondholders

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21
Q

Preferred stock

A

Require a fixed dividend that is similar to coupon payments made on debt instruments

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22
Q

What type of equity
Flexibility N
EPS Dilution N
Increase Financial Risk Y
Tax deductibility Y
Security issuance costs Low
investor return Fixed

A

Debt

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23
Q

What type of equity
Flexibility Y
EPS Dilution Y
Increase Financial Risk N
Tax deductibility N
Security issuance costs High
investor return Variable

A

Equity

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24
Q

Cost of capital < ROIC (return on invested capital)

A

+NPV; increased value

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25
Q

WACC: Interest rate

A

Use after tax rate

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26
Q

What does a higher working capital mean?

A

Less risk, lower ROA, more cash & mkt securities

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27
Q

What does a lower working capital mean?

A

More risk, higher ROA, less cash & mkt securities

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28
Q

What is the goal of working capital management?

A

Shareholder wealth and maximization

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29
Q

What does a decline in current ratio imply?

A

Increased risk - reduced ability to generate cash

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30
Q

What does an increase in current ratio imply?

A

Decreased risk - increased ability to pay off current liabilities

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31
Q

T/F Current ratio can be used to measure business health?

A

F

Ex) bookstore may have a high CA relative to CL, but be otherwise unhealthy because inventory isn’t being sold to generate cash

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32
Q

Cash conversion cycle

A

Days in inventory + Days sales in AR - Days payable outstanding

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33
Q

What does the cash conversion cycle tell us?

A

Length of time from the date of the initial expenditure for production to the date cash is collected from the customers offset by the length of time it takes to pay vendors

34
Q

Days in inventory

A

Ending inventory/(COGS)/365

35
Q

Days sales in AR

A

Ending AR/(Net Sales/365)

36
Q

Days of payables outstanding

A

Ending AP/(COGS/365)

37
Q

Working capital turnover

A

Sales/Avg working capital

38
Q

In a period of rising prices, which inventory valuation factor would result in:
Higher COGS

A

LIFO

39
Q

In a period of rising prices, which inventory valuation would result in:
Lower EI

A

LIFO

40
Q

In a period of rising prices, which inventory valuation would result in:
Higher EI

A

FIFO

41
Q

In a period of rising prices, which inventory valuation would result in:
Lower COGS

A

FIFO

42
Q

In a period of falling prices, which inventory valuation would result in:
Lower EI

A

FIFO

43
Q

In a period of falling prices, which inventory valuation would result in:
Higher COGS

A

FIFO

44
Q

In a period of falling prices, which inventory valuation would result in:
Lower COGS

A

LIFO

45
Q

In a period of falling prices, which inventory valuation would result in:
Higher EI

A

LIFO

46
Q

Reorder point formula

A

Safety stock + (Lead time * Sales during lead time)

47
Q

Safety stock

A

Cushion in case demand exceeds forecast

48
Q

Reorder point

A

Inventory level a company should reorder or manufacture additional inventory

49
Q

Which inventory valuation using Lower cost or market?

A

LIFO

50
Q

Which inventory valuation uses NRV

A

FIFO/WA

51
Q

Lower of cost or market

A

median value of the replacement cost, market ceiling, and market floor

52
Q

Market floor

A

NRV - Profit

53
Q

Economic order quantity

A

Sqrt(2SO/C)

54
Q

APR of quick payment discount

A

360/(Pay Period-Discount Period) X Discount %/100%-Discount%

55
Q

T/F Short term financing has higher rates?

A

F

56
Q

T/F long term financing has higher rates?

A

T

57
Q

When the value of inventory falls below original cost, the inventory must be restated to the _________

A

Lower of market value or NRV

58
Q

Market value

A

Median value of the item’s replacement cost

59
Q

Market ceiling

A

NRV

60
Q

NRV

A

Net selling price less costs to complete and dispose

61
Q

Periodic inventory system

A

Inventory quantities are determined by physical counts performed at least annually

62
Q

Perpetual

A

Inventory balance is updated after each purchase or sale

63
Q

Motives for holding cash:
Transaction

A

Company holds cash to make necessary payments

64
Q

Motives for holding cash:
Speculative

A

Cash may be needed to take advantage of temporary opportunities

65
Q

Motives for holding cash:
Precautionary

A

Having enough cash on hand to meet unexpected needs

66
Q

When maintaining high cash levels, ROA..

A

Declines

67
Q

How does reducing operating cycle affect cash

A

Increases - sell and collect quickly

68
Q

Letter of credit

A

external credit enhancement used by a company issuing otherwise unsecured debt to enhance its credit

69
Q

Line of credit

A

Bank loan

70
Q

Advantages of ST Financing

A

Increase profitability and decreased financing costs

71
Q

Advantages of LT Financing

A

Decreased interest rate risk and increased capital availability

72
Q

Disadvantages of ST Financing

A
73
Q

What does operating leverage measure

A

how sensitive a company’s operating income is to changes in sales

74
Q

How do you calculate operating leverage

A

% change EBIT/% change in sales

75
Q

What does a high operating leverage mean

A

small changes in sales cause a large change in income; higher fixed to variable costs

76
Q

what does financial leverage measure

A

how sensitive a company’s EPS is to changes n operating income

77
Q

How do you calculate financial leverage

A

% change EPS/% change in EBIT

78
Q

what does a high financial leverage means

A

small changes in EBIT cause large change in EPS; higher fixed financing costs (interest) to variable

79
Q

What are the ways to calculate ROI?

A

Profit margin X investment turnover
Operating income/ Total investment OR average assets

80
Q
A

BEC (9 decks)

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