Financial Management Flashcards

(67 cards)

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

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2
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

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3
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

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4
Q

What is the Inventory Conversion Period?

A

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

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5
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

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6
Q

What is the Payables Deferral Period?

A

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

Average Payables : (BP + EP) / 2

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

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7
Q

What is the Cash Conversion Cycle?

A

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)

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8
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

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9
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

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10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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11
Q

What is a Lockbox System? What are the advantages?

A

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)

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12
Q

What is float?

A

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

Maximize float on cash payments

Minimize float on cash receipts

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13
Q

What are Zero Balance Accounts?

A

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

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14
Q

What is the difference between Treasury Bills- Notes and Bonds?

A

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

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15
Q

What is commercial paper?

A

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

Greater than 9 Months Maturity

Unsecured

Issued by large firms

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16
Q

What are the advantages and disadvantages of Commercial Paper?

A

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.

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17
Q

What is Economic Order Quantity?

A

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

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

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18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

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19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

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20
Q

What is inventory reorder point?

A

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

IOP : Average Daily Demand x Average Lead Time

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21
Q

What is a Just In Time (JIT) system?

A

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

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22
Q

What is Factoring of receivables?

A

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

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23
Q

What is a Trade Discount?

A

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

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24
Q

What is the cost of forgoing a discount?

A

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

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25
What is the Prime Rate?
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
26
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
27
How is Current Yield calculated?
CY : Interest Payment / Bond Price
28
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
29
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
30
What are the characteristics of a Junk Bond?
High interest rate High default risk
31
What are debenture bonds?
Bonds unsecured by collateral
32
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
33
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
34
What is a Callable Bond?
Borrower can pay off debt early
35
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
36
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
37
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
38
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
39
What is Weighted Average Cost of Capital?
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% ```
40
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
41
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
42
Degree of Operating Leverage
Change in EBIT/Change in Sales Higher DOL=Higher Profits
43
Degree of FInancial Leverage
Change in EPS/Chnage in EBIT Higher DOF=Higher Profts
44
Degree of Combined Leverage
Change in EPS/Change in Sales Higher DCL=Higher Profts
45
What is the optimal capital structure?
Ratio of debt to equity that produces lowest WACC
46
The higher the tax rate the more likely to use ____ financing
debt
47
Cost of Debt
Fixed Return | Tax Benefit
48
Cost of Equity (Pref Stock)
Fixed Return | No tax benefit
49
ROI
Net Income/Investment
50
ROA
NI/Avg Assets
51
Residual Income
Ni-Required Return* *Return= NBV*Hurdle Rate
52
Advantages of RI
Realistic targets | Encourage managers to invest in projects that generate income
53
Aggressive NWC
Increase ratio of CL to NCL
54
Conservative NWC
Increase ratio of CA to NCA
55
Disadvantage if High Cash
Increased attractiveness for takeover | Lower returns
56
How to expedite deposits?
EFT | Lockbox Systems
57
Methods to delay disbursements
Draft Zero Balnce Account Defer paymnts Lines of credit
58
Zeero Growth Stock Price Formula
Fixed div/r r=return
59
Constant Growth Model
Div* (1+G)/R-g R=return g=growth
60
What type of loans create the greatest int rate risk?
LT
61
Times Int Earned
Ni BEFORE tax+Int Exp/Int Exp
62
What kind of system is JIT?
Demand pull
63
What is a poison put clause?
Convenant that makes borrower repay bonds if a large quantity of cs held by investor
64
Limitation of Profitability Index
Requires detailed LT forecasts
65
What is an affirmative covenant?
Requires corp to maintain minimum level of NWC
66
Is IRR a time adjusted rate?
YES
67
Economic Profit
Revenues-implicit costs-explicit costs