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Flashcards in Financial Management Deck (41):
1

Managing inventory & receivables (current assets & liabilities)

Financial Management

2

NWC : Current Assets - Current Liabilities

Financial Management

3

Shorten the cash conversion cycle

Don't negatively impact operations

Financial Management

4

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

Financial Management

5

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

Financial Management

6

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)

Financial Management

7

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)

Financial Management

8

Liquid

Safe

Financial Management

9

Used for importing goods.

Issued by importer's bank.

Financial Management

10

No interest cost if paid timely.

Financial Management

11

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)

Financial Management

12

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

Financial Management

13

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

Financial Management

14

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

Financial Management

15

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

Financial Management

16

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.

Financial Management

17

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory

Financial Management

18

The cost of keeping inventory.

Financial Management

19

Cost of executing an order and starting product production.

Financial Management

20

How low inventory should get before it should be re-ordered.

IOP : Average Daily Demand x Average Lead Time

Financial Management

21

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

Financial Management

22

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

Financial Management

23

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

Financial Management

24

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

Financial Management

25

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

Financial Management

26

Interest rate stated on the face of a bond.

Financial Management

27

CY : Interest Payment / Bond Price

Financial Management

28

PV of Principle + Interest : Bond Price

Financial Management

29

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

Financial Management

30

High interest rate

High default risk

Financial Management

31

Bonds unsecured by collateral

Financial Management

32

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

Financial Management

33

Provision in Bond contract allows demand of Bond payment under certain circumstances

Financial Management

34

Borrower can pay off debt early

Financial Management

35

Lender can demand payment via company stock instead of money

Financial Management

36

Borrower deposits regular sums into an account that will eventually pay off the debt

Financial Management

37

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

Financial Management

38

Hold dividend priority over common stock

Financial Management

39

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%

Financial Management

40

A stock's expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.

Financial Management

41

(Interest Expense - Tax Benefit) / Carrying Value of Debt

Financial Management