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Fiscal Management > 2013-09-24 CPA, BEC, Financial Management - CPA, BEC, Financial Management (1) > Flashcards

2013-09-24 CPA, BEC, Financial Management - CPA, BEC, Financial Management (1) Flashcards

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1
Q

Function of Financial management

A
  1. Capital budgeting
  2. Corporate Governance
  3. Risk management
  4. Financing funcition
  5. Financial Managment functions
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2
Q

Cash conversion cycle

A

The length of time its takes from purchasing product, converting and finally paying for it.

Inventory conversion cycle + Receivable conversion cycle -Payables deffaral peirod

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3
Q

Inventory conversion peirod

A

Average Inventory/ Cogs per day

Ave time require to convert materials into goods and sell those goods

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4
Q

Days sales outstanding or Receivable Conversion cycle

A

Average receivable / Credit sales per day

Average time to collect AR

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5
Q

Payable Deferral period

A

Average payable/ Cogs per day

Length of time between purchase of materials, labor and payment of cash

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6
Q

Why Cash management is necessary?

A
  1. To take advantage of trade discount
  2. Maintain credit rating
  3. Meet unexpected needs
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7
Q

Why do we need to hold cash

A

Transaction need

Compensating financial institution

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8
Q

Purpose of cash budget

A
  1. To take advantage of trade discount
  2. Maintain credit rating
  3. Meet unexpected needs (precautionary balances)
  4. take advantage of business opportunites (Speculative balance)
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9
Q

What is Float

A

Tme that elapses relating to mailing, processing and clearing chck

the goal is to extend payable float and minimize receivable float

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10
Q

What is Zero Balance Accounts

A

Receives daily fund drawn on customers acount from reverse bank. Regional bank then notify custoemr how much needed to clear all checks for the day

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11
Q

Advantages of Zero Balance Accounts

A

checks take longer to clear, longer disbursement float

extra cash doesnt have to be deposited for contengencies

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12
Q

Advantages of lockbox

A

Internal control
more timely deposites for receipts
reduces business risk

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13
Q

Concentration banking

A

Another way to shorten receivalbe float
customers pay at local bank
additional $ is then transferred to regional bank

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14
Q

Which system take float out of the process

A

EFT

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15
Q

Compensating balance

A

required minium level of deposit required by a loan agreement

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16
Q

Marketable securities factors

A 
minimum investment
security
liqudity
maturity
yield
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17
Q

Most important consideration for investing in marketable securities

A

Safety and liquidity

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18
Q

Who issues commercial paper

A

issued to the large credit worthy corportation

2 - 9 months

no active secondary market

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19
Q

Banker’s acceptance

A

A draft dwarn on bank for payment when presented to the bank. Generally arises from payment for foods by corp in foreign countries
30 to 90 days wait period
secondary market is available
slightly higher risk

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20
Q

Goals of inventory managment

A

Ensure adequet inventory to sustain operation

To minimize invenotry costs including carrying cost, ordering cost, receiving cost, cost of running out of stock

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21
Q

Economic order quantity

A

Square root of (2X ave order cost X annual deman in unit / carrying cost per unit)

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22
Q

Order Point

A

(Daily Deman X Leadtime) + safety stock

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23
Q

Safety stock vs carrying cost

A

Safety stock reduces stock out cost but increases carrying cost

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24
Q

Carrying costs

A 
Storage
Interest
Insurance
property tax
spoilage/obsolence
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25
Stock out costs
Profit lost on sales customer ill will idle equipment work stoppage
26
What is MRP
Material Requirement planning Manufectures finishes good based on demand forecast production planning drices master schedule which drives material plans
27
Charateristics of JIT
Most important is relationship with suppliers | Suppliers must inspect their own product
28
To accomplish JIT, Mgmt must do what:
1. Emphesize reducing production cycle and set up time 2. Emphasize production flexibility 3. Emphasize solving production problems immidiately 4. Focus on simplyfying production activity
29
Advantages if JIT production
Lower interest and inventory and storage space lower inventory carrying and handling cost Reduces risk of defective and obsolete products Able to deal with better quality supplier Recude manufecturing cost Able to user simplifed costing system such as Backflush costing
30
Disadvantages of JIT
Suppliers do not provide timely and quanlity material Employees are not well trainined Technology/Equipment are not reliable
31
Credit policy should consist
discount credit period credit rating collection policy
32
Days sales outstanding
total receivables/credit sales per day
33
Permanent current assets should be financed by
long term assets such as stocks and bonds
34
What are temporary current assets
cash, inventory, Receivables
35
Disadvantages of short term debt financing
Firm may not be able to pay off as it comes due Recession may render the firm unable to meet obligation Volatile interest rate
36
Disadvantages of long term debt financing
more expensive covenant may restrick firms future action prepayment penalties can be expensive
37
Maturity matching of debt
Also known as hedging apporach and self liquidating approach | Financing assets with same liablity maturing date
38
Cost of not taking discount
(discount rate/100% - discount rate) / (365/payment days - discount days)
39
Features of bank loans
short term, less than 90 days promissory notes Interest flactuates based on short term indexes
40
Prime rate
the rate bank chagnes to its most credit worthy customer
41
LIBOR
London interbank offered rate | Rate to borrow fun in the international market
42
Effective interest rate on compensating balance
Interest payment / Available principal
43
Source of Accounts receivalbe financing
1. AR Pledging 2. Factor 3. Asset backed public offering 4. Inventory Financing 5. Hedging to reduce interest rate
44
Types of inventory financing
Blanket inventory lien trust receipt warehousing
45
Interest computation for factor
(Flat fee + Monthly interest rate) X 12 months = annual rate
46
Securitization of assets
Creation of assets backed securities
47
Trust receipts
Borrower holds inventory and proceeds from sales goes to a trust to cancel trusts receivable aka floor planning common in automobiel, industrial equipment
48
warehousing
most secure souce of inventory financing Inventory is stored in public warehouse under control of public warehouse personnel goods can only be removed with the lenders permission
49
types of private debt
1. From financial institution for which rate is tied to LIBOR or prime rate 2. Private palcement of unregistered bonds to acredited investors
50
types of private debt
1. From financial institution for which rate is tied to LIBOR or prime rate 2. Private palcement of unregistered bonds to acredited investors
51
Negative debt covenant
Restriction on 1. sale of certain asset 2. top employee compensaton 3. issuance of additioanl debt 4. payment of dividend
52
Positive debt covenant
borrower must do: 1. provide audited financial statements 2. maintain a certain financial ration 3. carry life insruance on key employees
53
Debenture
A bond that is not secured by the pleget of a specific property higher yeild than other secured bond
54
Suordinated debenture
bondholder are paid after genral creditor and other senior debt holder have been paid very high yields
55
Current yield
Interest expense/Selling price of bond
56
Yield to maturity
(Annual interest rate +(principal payment - bond price / # of years to maturity)) / ( .6 X price of the bond + .4 X principal payment)
57
types of bond
``` zero coupon rate floating rate registered junk foreign eurobonds ```
58
Advantages of debt financing
Interest is tax deductible obligatoin is generally fixed in terms of interest and pricipal payment peirods of inflation debt is paid off with dollars that are worth less owners dont give up control debtor dont participate in excess earning
59
Disadvantages of debt financing
Interest and principal msut be paid regardless of economic position Interest rates are fixed covenants can make firm less flexible can increse risk of equity holder
60
Capital lease criterial
bargain purchase price transfer of ownership 75% of life should be leased PV of lease payment should be 90% of the fair value of the property
61
Advantages of lease
1. Can lease when unable to uy 2. provisions are less stringent than a bond indenture 3. may not have downpayment requirement 4. creditor claim on lease is restricted 5. operating lease is not considered a liability, so has tax advantage
62
Advantages of issuing common stock
1. Firm has no obligation to pay 2. Reduces cost of capital 3. More attractive because of profit potential
63
Disadvantages of issuing common stock
1. ownership right given up 2. Issurance cost is greater than debot 3. Dividends are not tax deductible 4. Shareholder require higher rate of return than lender 5. Issurance of too much common stock may increase the cost of capital
64
Advantages of issuing Preferred stock
1. No obligation to pay dividend 2. Reduces cost of capital 3. Common Shareholder do not give up control 4. Do not participate in superior earnings
65
Disadvantages of issuing Preferred stock
1. Cost of issurance 2. Dividend not tax deductible 3. Too much dividend in arrears can cause financial pproblems
66
Operating leverage formula
% change in operating income / % Change in unit volumn Measure the degree of which fixed cotst are part of operation. Lower sales period, high fixed cost can cause financial problems
67
Financial Leverage Formula
% change in EPS/ % change in EBIT to which extent firm uses debt financing
68
2 ways common equity can be raised
1. Retained earnings | 2. Issuing common stock
69
Methods of estimating cost of existing common equity (4)
1. CAPM 2. Arbitrage 3. Bond yield plus 4. Divident yield growth
70
CAPM - Capital Asset Pricing Model
Ks = Krf + Km X beta coefficient Krf = Risk free rate Km = expected rate of return bi- Beta, votalitity of the firm stock
71
Arbitrade Pricing Model
Uses a series of systematic risk factors to develop a valoue that reflects the multiple dimentsions of systematic risk
72
Arbitrade Pricing Model Formula
Rp = bi (K1 = Krf) + b2 (K2 + Krf)...... Rp= Risk permium Krf = Risk free rate B123... Betas for individual risk factors K123... Market risk assoicated with each risk factors
73
Divident yield + groth approach
Ks = (D1/P0) + Expected growth % ``` P0= today's stock price D1 = annual divident estimate ```
74
Cost of New stock formula
``` Ks = (D1 / P0 + F) + Expected growth F= Floting cost ``` Usually higher than existing stock because of floting cost
75
Cost of new debt formula
(Annual Interest payment + (Principal payment - bond price after floting cost)/ # of years to maturity)) / .6 (bond price after floting cost) + .4(principal payment
76
Factors affecting capital structure
1. Business Risk 2. Tax position 3. Financial Flexibility 4. Mgmt conservatism vs aggressiveness
77
Factors affecting dividend policy
1. Legal requirements 2. Cash Position 3. Desire for control 4. tax position of shareholder 5. Access to capital market 6. Clientele effect 7. Investment opportunities
78
Types of mergers
1. Horizontal 2. Vertical 3. Congeneric 4. Conglomerate
79
Horizontal marger
acquiring similiar line of business
80
Vertical Merger
Combines with another firm in the same supply chain
81
Congeneric
somewhat related but not enough to be considered horizontal or vertical
82
Conglomerate
Firms are completely unrelated. Provides greatest degree of diversification

Fiscal Management (1 decks)

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