Capital Structure Flashcards

Question

What is the cash conversion cycle

Answer 1

Days inventory outstanding + Days sales outstanding + Days payable outstanding It measures how long it takes cash invested in inventory to return as cash received from customers days inventory outstanding - # of days it takes to sell a batch of inventory days sales outstanding - # of days needed to collect account receivable days payable outstanding - # of days before the business needs to pay its own bills

Answer 2

The longer you wait - the longer you can hold and invest cash

Answer 3

COGS / Avg Inventory Inventory turnover measures how many times inventory is cycled through in a period It can help identify over and under stocking inventory, obsolete, or slow moving inventory

Answer 4

net credit sales / Avg receivables This measures how many times receivables are earned and collected in a period. It indicates the effectiveness of the collections policies

Answer 5

It is to determine ad maintain optimal amounts of all inventories

Answer 6

The cost of inventory is directly related to how much inventory a company should keep on hand. if the costs of carrying inventory are rising - should keep as little as possible If the costs of carrying inventory are falling then you should carry more inventory

Answer 7

It reduces inventory on hand - thus reducing unnecessary costs JIT depends on the following: - more frequent deliveries by suppliers - vendor's will guarantee their products are free from defects - so do not need to be inspected by you when they are delivered - It reduces inventory in hand and therefore is a higher risk of running out of inventory - carrying costs are lower

Answer 8

The most important thing is that businesses pay their bills on time - improves relationship with vendors and suppliers - Will get better discounts and credit terms - These better discounts will boost profitability - Cashflow is essentail because you need enough of it on hand to take advantage of discounts

Answer 9

LOC - nothing is owed until you charge against it Debt convenants - these are with long term debt - - They usually include stipulations on maintaining a certain level of working capital or staying above a working capital ratio

Answer 10

- This is trying to make sure a firm doesn't have too much cash or not enough cash

Answer 11

- This is an inefficient use of resources | - Too little causes problems of liquidity

Answer 12

- Customer spay directly to the bank in a lock box - bank employees are the only ones who deal with the cash lots of key controls here - very safe

Answer 13

- This a cash management tool that removes any excess cash at the end of each day - This is used for special purposes like paying payroll checks

Answer 14

- The goal here is to maximize profits - If you grant credit too easily ( loosely) then you run the risk of increasing your bad debt because too many people are not credit worthy - If your policies are too tight - you might turn down customer that would actually pay

Answer 15

- You want to turnover receivables as many times as possible during a year - the more you do it - it shows you are efficient you are at collecting cash on credit sales - This way fewer credit sales are written off - a lower number is best

Answer 16

Sell to a third party at a discount in order to get cash sooner than waiting for the customers to pay Accepting credit cards is an example of factoring. you get cash from the credit card company in exchange for a fee - this way the risk that the customer does not pay is transferred to Visa - its their problem

Answer 17

This is the process of assigning value to assets an liabilities

Answer 18

I - highest and most reliable - - observable quoted market prices for identical assets/liabilities in an active market. II - observable quotes for SIMILAR assets liabilities in an active market III - These are unobservable - estimates based on judgements

Answer 19

Market - uses prices etc. generated by market transactions that are identical or comparable to those being valued Income - converts future amounts to PV to see what the future amounts are worth Cost approach - what would it cost to construct a replacement item

Answer 20

It is based on exit price ( not replacement cost) It is the amount you would receive to sell an asset or be paid to transfer a liability arms length transactions BOTH location and conditions are taken into account when determining price

Answer 21

There are advantages and disadvantages to the Black Scholes model: Limitations - It assumes the stock does not pay dividends - It assumes the risk-free rate of return for discounting remains constant - It assumes the option can be exercised only at the expiration date Advantages - It discounts the exercise price - It uses the probability that the option will be exercised - It uses the probability that the price of the stock will pay off within the time of expiration

Answer 22

This is a pricing method for options where a price tree and probable values are calculated based on volatility,expiration dates, and probabilities

Answer 23

This is a model that evaluates the relationship between risk and expected return for assets, but usually stocks it uses: 1) the risk-free rate of return 2) Beta

Answer 24

Thi sis the hypothetical rate for return for "no-risk" and is based on the rate for a 3-month US treasury Bill

Answer 25

This is a measure of how volatile an investment is compared to the rest of the market Beta of 1 = means its equal Beta of .5 means its half as volatile as comparable items Beta of 1.5 = means it is 1/2 MORE volatile than comparable items

Answer 26

RRR - RFR = B (Err - RFR) RRR - required rate of return RFR - risk free rate of return Beta - a measure of volatility ERR - Expected rate of return

Answer 27

This model uses the predicted dividends of a company and discounts them back to PV If the PV of the dividend of a per share basis > current share price = stock is undervalued and a good investment If PV of dividend per share < current share price = stock is overvalued and is a bad investment

Answer 28

Market approach - Your business is compared to other similar businesses with similar characteristics in the same market Income Approach - A fair value is derived from the businesses's income streams - use net PV or a discount cash flow Asset Approach - The fair values of the individual assets of the business are added up and equal the value of the business - used when a business is liquidated to pay its debts

Answer 29

The payback period approach determines how many years it will take to recover the initial investment cost You take the upfront projected cost and divide it bytes expected annual cashflows Its easy to use and understand disadvantage - it ignores the time value of money, it ignores cashflow you will get after the payback period, and it doesn't measure total project profitability

Answer 30

It compares the present value of expected cash flows of the project to the initial cash investment in the project If net present value is zero or positive - then the project is considered economically feasible

Answer 31

This is a metric to measure economic profit It also is a form of measuring residual income EVA = Net Operating Profit After Tax ( NOPAT) - (Invested Capital * Weighted average)

Answer 32

DCF is a method of discounting future cash flows of a business to present value on a per-share basis to compare to the current share price to see if a potential investment is under valued or overvalued by the market

Answer 33

This method determines the discount rate that would make the net present value of after-tax cashflows equal to zero . Then any potential investment or project that returns an IRR greater than zero would have a value