chapter 6/7/8

Question 1

net income x rention rate increases or decreases retained earnings

Answer 1

increases

Question 2

internal growth rate tells us

Answer 2

how much the firm can grow assets using retained earnings as the only source of financing

no external financing

Question 3

sustainable growth rate tells us

Answer 3

how much the firm can grow by using internally generated funds
(retained earnings) AND by issuing new debt to maintain a constant debt/equity ratio

Question 4

financial policy

Answer 4

choice of optimal debt/ equity ratio

Question 5

dividend policy

Answer 5

choice of how much to pay shareholders vs reinvesting in firm

Question 6

sales forecast

Answer 6

Estimate monthly quantity and price to forecast revenue.

Question 7

what equation would you use to Determine relationship between sales revenue
and cash receipts

Answer 7

accounts recievable turniver

Question 8

equation used to Determine relationship between purchases and cash disbursements

Answer 8

AP turnover

Question 9

liquidity of an asset

Answer 9

Refers to how quickly an asset can be converted into cash, without giving up value

Question 10

permanent working capital

Answer 10

minimum level of
current assets and liabilities, which tend to
grow over time

Question 11

temp working capital

Answer 11

Short-term working capital balances that exceed
typical minimum levels

Question 12

2 factors that can influence working
capital balances and firm liquidity

Answer 12

Asset Growth
* Sales vs Production Schedules

Question 13

Bootstrapping

Answer 13

– not relying on others peoples help

Question 14

operating cycle

Answer 14

time between purchasing
the inventory and collecting the cash

Question 15

cash cycle

Answer 15

Time period for which we need to finance our inventory
* Difference between when we receive cash from the
sale and when we have to pay for the inventory

Question 16

What makes the cash cycle longer?

Answer 16

Higher inventory and/or higher receivables (both
current assets)
* Lower payables (a current liability)

Question 17

cash budget

Answer 17

cash inflows (receipts) and outflows
(disbursements) over short-term planning period

ton plan ahead, search for financing before the money is actually needed

Question 18

3 reasons for holding cash

Answer 18

speculative motive
precautionary motive
trasaction motive

Question 19

speculative motive

Answer 19

– hold cash to take
advantage of unexpected opportunities

Question 20

precautionary motive

Answer 20

– hold cash in case of
emergencies

Question 20

transaction motive

Answer 20

hold cash to pay the dayto-day bills

Question 21

float

Answer 21

difference between the
balance recorded for the bank
account on the books (on accounting
software) and the balance recorded at
the bank

Question 22

Disbursement float

Answer 22

Generated when a firm writes cheques

greater than 0

Question 23

Collection float

Answer 23

Cheques received increase book
balance before the bank credits the
account

less than 0

Question 24

net float equation

Answer 24

disbursement + collection

Question 25

collection float is neg or pos?

Answer 25

neg

Question 26

ways to reduce float time

Answer 26

credit cards, preauthorized payments, debit cards

Question 27

what can increase disbursement floats

Answer 27

Slowing down payments

Question 28

alternatives to holding cash

Answer 28

Savings Accounts * Term Deposits * Money Market Securities

Question 29

3 components of credit policy

Answer 29

terms of sale credit analysis collection policy

Question 30

terms of sale

Answer 30

credit period cash discount period

Question 31

credit analysis

Answer 31

distinguishing between “good” customers that will pay and “bad” customers that will default

Question 32

collection policy

Answer 32

effort expended on collecting on receivables

Question 33

lenght of credit period factors

Answer 33

consumer demand cost and profitability credit risk size of account competition customer type

Question 34

issue in carrying too much inventory

Answer 34

high carrying costs

Question 35

too little invenotry issue

Answer 35

potential lost revenue and/or high ordering costs

Question 36

carrying costs include

Answer 36

stoarge insurance damages write offs

Question 37

order costs include

Answer 37

purchasing receiv ing processing