Ch 5 Financial Management

Question 1

Formula inventory conversion period

Answer 1

Average inventory/ cost of goods sold per day

Question 2

Receivable collection period

Answer 2

Average receivables/ credit sales per day

Question 3

Payables deferral period

Answer 3

Average payables/ cogs/365

Question 4

Cash conversion cycle

Answer 4

Cash conversion cycle= inventory conversion + receivables conversion - payables deferral period

Question 5

Days sales outstanding

Answer 5

Receivables / sales per day

Question 6

Advantage and disadvantage of debt financing

Answer 6

Advantage 
Interest is tax deductible 
Obligation is fixed 
In periods of inflation debt is paid back with dollars worth less
Not giving up control of firm

Disadvantage
Interest and principle must be paid regardless
Debt covenants could put restrictions on firm
Excessive debt increases risk to equity holders and depressed share prices

Question 7

Capital lease and how is it recorded

Answer 7

Any one of the following requirements
1 arrangement transfers of ownership of the property to lessee by end of the lease
2 contains bargain purchase option
3 lease term is equal to 75% or more of the estimated life of leased property
4 the present value of the minimum lease payment equals 90% or more of the fv of the leased property

Firm must record an asset and liability on its balance sheet much like it purchased the asset

Question 8

Operating lease

Answer 8

Treated as rental agreements and expenses

Question 9

Capital asset pricing model method equation

Answer 9

Camp= risk free rate + (market rate - risk free rate)beta