Flashcards in Financial Management Deck (41):
Managing inventory & receivables (current assets & liabilities)
NWC : Current Assets - Current Liabilities
Shorten the cash conversion cycle
Don't negatively impact operations
Average time needed to convert materials into finished goods and sell them
Average Inventory : (BI + E) / 2
Inventory Conversion Period : Average Inventory / Sales Per Day
Average time needed to collect A/R
RCP : Average Receivables / Credit Sales Per Day
Average time between materials and labor purchase and their A/P payment
Average Payables : (BP + EP) / 2
Payables Deferral Period : Average Payables / (COGS/365)
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)
Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle
(Inventory Really (-Pays) Cash)
Used for importing goods.
Issued by importer's bank.
No interest cost if paid timely.
Customer Payments are sent to a bank-managed PO box.
Employees don't have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)
Time it takes to mail a payment and have it clear your bank account
Maximize float on cash payments
Minimize float on cash receipts
Regional bank sends enough cash to cover daily checks
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances
Treasury Bills: Short term (less than one year) Think: $1 Bill
Treasury Notes: Medium term (less than 10 years- more than 1)
Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Issued by large firms
Advantages: Financing at less than Prime. No compensating balances required.
Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren't lending.
The order quantity that minimizes inventory costs.
EOQ : Square Root of (2DO/C)
D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory
The cost of keeping inventory.
Cost of executing an order and starting product production.
How low inventory should get before it should be re-ordered.
IOP : Average Daily Demand x Average Lead Time
Orders inventory so that you get it just in time for when it's needed
JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
Buyer saves if paid early
Example: 1/10 Net 30
1% Discount if paid within 10 days
If not- bill is still due in 30 days
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
A benchmark used for lending only to the best customers
Most customers will be charged Prime + 3%- for example
If the lending institution and the customer are not in the same country- the LIBOR rate is often used
Interest rate stated on the face of a bond.
CY : Interest Payment / Bond Price
PV of Principle + Interest : Bond Price
No interest payments made
Bond sold at a discount
Interest reflected when Bond matures
High interest rate
High default risk
Bonds unsecured by collateral
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
Provision in Bond contract allows demand of Bond payment under certain circumstances
Borrower can pay off debt early
Lender can demand payment via company stock instead of money
Borrower deposits regular sums into an account that will eventually pay off the debt
Common Stock is more expensive to issue than debt.
Why? Investors demand a greater ROI than debtors (bondholders)
Hold dividend priority over common stock
A company uses this to determine the true cost of their capital
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%
A stock's expected performance is based on its beta (risk) compared to that of the stock market.
More risk : more expected return.