Final Note (MCQs)

Question 1

Characteristics of Operating Leases (op - cancer - maintain - not amen)

Answer 1

1. Usually “not fully amortized” (trả dần)
2. Usually require the “lessor to maintain and insure the asset”
3. Lessee enjoys a “cancellation option”

Question 2

Characteristics of Financial Leases (fin (vây cá) - not maintain - not cancer - renew - amor)

Answer 2

(Essentially opposite of an operating lease.)

1. Financial leases “are fully amortized”.
2. Do “not provide for maintenance or service by the lessor”.
3. Generally, financial leases “cannot be cancelled”.
4. The lessee usually “has a right to renew the lease at expiry”.

Question 3

Sale and Lease-Back

Answer 3

• A particular type of “financial lease”
• Occurs when a company “sells an asset it already owns to another firm and immediately leases it from them.”
• “Two sets of cash flows” occur:
  + The lessee “receives cash today from the sale”.
  + The lessee agrees to make “periodic lease payments, thereby retaining the use of the asset”.

Question 4

Lessor, Lessee?

Answer 4

Lessor: own assets, not use assets
Lessee: not own assets, use assets

Question 5

Capital Lease

Answer 5

A lease must be capitalized if any one of the following is met:
The present value of the lease payments is at least 90 percent of the fair market value of the asset at the start of the lease.
The lease transfers ownership of the property to the lessee by the end of the term of the lease.
The lease term is 75 percent or more of the estimated economic life of the asset.
The lessee can buy the asset at a bargain price at expiry.

Question 6

Current Assets

Answer 6

• cash and other assets
• expected to be converted to cash within the year
• (Cash, “Marketable securities”, Accounts receivable, Inventory)

Question 7

Inventory period

Answer 7

Raw materials -> Finished goods

Question 8

Accounts “payable” period

Answer 8

Firm receives invoice -> Cash “paid” for materials

Question 9

Account “Receivable” period

Answer 9

Finished goods -> Cash “received”

Question 10

Cash cycle =

Answer 10

Operating cycle - Accounts payable period (CO-Ap)

Question 11

Operating cycle =

Answer 11

Inventory period + Accounts receivable period (OI+Ar)

Question 12

Components of Credit Policy (3) (terms, analysis, collection)

Answer 12

1. Terms of sale: Credit period, Cash discount and discount period, Type of credit instrument
2. Credit analysis – distinguishing between “good” customers that will pay and “bad” customers that will default
   3, Collection policy – effort expended on collecting receivables

Question 13

Carrying costs (receivables, bad debts, managing)

Answer 13

1/ Required return on receivables
2/ Losses from bad debts
3/ Costs of managing credit and collections

Question 14

Shortage costs (Lost sales)

Answer 14

Lost sales due to a restrictive credit policy

Question 15

Credit analysis (which customers receive credit)

Answer 15

• Process of deciding which customers receive credit
• Gathering information
• Determining Creditworthiness (5 Cs of Credit, Credit Scoring)

Question 16

The EOQ model

Answer 16

minimizes the total inventory cost

Question 17

Sale and Lease-Back

Answer 17

sells an asset it already owns to another firm and immediately leases it from them

Question 18

Costs of Financial Distress

Answer 18

Bankruptcy risk versus bankruptcy cost
(However, it is not the risk of bankruptcy itself that lowers value. Rather, it is the costs associated with bankruptcy.
It is the stockholders who bear these costs.)

Question 19

Description of Financial Distress Costs (direct, indirect, agency)

Answer 19

1. Direct Costs
   Legal and administrative costs (pay for the lawyers)
2. Indirect Costs
   Impaired ability to conduct business (e.g., lost sales) ((difficult in financial stress -> they not want to work with you)
3. Agency Costs (management and BOD have incentives to do something)
   - Selfish Strategy 1: Incentive to take large risks (được ăn cả, ngã về 0)
   - Selfish Strategy 2: Incentive toward underinvestment (không còn đầu óc để đầu tư)
   - Selfish Strategy 3: Milking the property (còn nhiêu tiền tranh thủ trả hết cho cổ đông (shareholder) để chủ nợ (stockholder) mất mọi thứ rồi phá sản)

Question 20

explicit cost

Answer 20

It has a clear monetary amount which can be seen in the firm’s financial balance sheet.

Question 21

Implicit costs

Answer 21

The value by which is not necessarily monetarily quantifiable, but is still considered as a cost.

Question 22

interest tax shield

Answer 22

vay -> interest nhiều -> taxable income/EBITDA thấp -> tax thấp (tax = tax rate x EBITDA)

Interest tax shields refer to the “reduction in the tax liability due to the interest expenses”. Companies pay taxes on the income they generate. Interest expenses (via loan and mortgages) are tax deductible, meaning they lower the taxable income. Thus, interest expenses act as a ‘shield’ against the tax obligations.

Question 23

More debt

Answer 23

more company’s value

Question 24

RF: the risk-free rate of return
RM: market return, the expected return on the market portfolio nếu cho market return thì phải lấy beta x (market return – risk free rate)
(RM - RF): market risk premium (MRP)
𝛽: Sensitivity of a stock’s return to the return on the market portfolio.

Answer 24

Rs = Rf + beta(Rm - Rf)