B3 - Capital Management, Including Working Capital cont'd Flashcards
A working capital technique, which delays the outflow of cash, is:
A draft
How can a company increase working capital?
Working Capital increases only if current assets are increased or current liabilities are decreased.
What steps should a company take to be more CONSERVATIVE with its working capital policy
A company should increase the ratio of their current assets to non-current assets.
In inventory management, the safety stock will tend to increase if the:
Variability of lead-time increases
Which method of inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost
Economic order quantity
What is one thing that a lockbox most likely provide for receivables management
Minimized collection float.
A lockbox system expedites cash inflows (minimizes collection float) by having a bank receive payments from a company’s customers directly, via mailboxes to which the bank has access. Payments that arrive in these mailboxes are deposited into the company’s account immediately.
CAPM Formula
C = R + B(M-R) C = Cost of equity capital R = Risk free rate (treasury bond rate) B = Beta coefficient of comparable publicly traded stock M = Market rate of return
The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm’s maturing obligations is the policy that finances:
Permanent current assets with short term debt.
A firm is seeking to establish better controls over its cash receipts. As part of its strategy, the company establishes a single bank as its central depository. This technique is known as:
Concentration banking
Inventory Turnover Ratio
Cost of Goods Sold/Average Inventory
Accounts Receivable turnover
Sales/Average Accounts Receivable
What factor might cause a firm to increase the debt in its financial structure?
An increase in the corporate income tax. Because interest is tax deductible.
The overall cost of capital is the:
Rate of return on assets that covers the costs associated with the funds employed.
Financial leverage increases when:
The debt to equity ratio increases. Using a higher percentage of debt (bonds) for future investments would increase financial leverage.
Return on Investment (ROI)
ROI = Income/(Average Assets)
Average Assets = Avg. PP&E + Avg Working Capital
