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Flashcards in Financial Management Deck (41)
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1
Q
What is the primary focus of working capital management?
A
Managing inventory & receivables (current assets & liabilities)
2
Q
How is Net Working Capital calculated?
A
NWC : Current Assets - Current Liabilities
3
Q
What are the characteristics of effective Working Capital Management?
A
Shorten the cash conversion cycle

Don't negatively impact operations
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
5
Q
What is the Receivables Collection Period?
A
Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day
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)
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)
8
Q
What traits should Cash and Short-Term Investments have?
A
Liquid

Safe
9
Q
For what are Letters of Credit used?
A
Used for importing goods.

Issued by importer's bank.
10
Q
What is the advantage of using Trade Credit?
A
No interest cost if paid timely.
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)

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
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
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
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
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.
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
18
Q
What is Carrying Cost?
A
The cost of keeping inventory.
19
Q
What is Order Cost?
A
Cost of executing an order and starting product production.
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
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
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
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
24
Q
What is the cost of forgoing a discount?
A
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
25
Q
What is the Prime Rate?
A
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
Q
What is the Nominal (Face- Coupon- Stated) Rate?
A
Interest rate stated on the face of a bond.
27
Q
How is Current Yield calculated?
A
CY : Interest Payment / Bond Price
28
Q
What is the Effective (YTM- Market) Rate?
A
PV of Principle + Interest : Bond Price
29
Q
What is a Zero Coupon Bond?
A
No interest payments made

Bond sold at a discount

Interest reflected when Bond matures
30
Q
What are the characteristics of a Junk Bond?
A
High interest rate

High default risk
31
Q
What are debenture bonds?
A
Bonds unsecured by collateral
32
Q
What are subordinated debentures?
A
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
33
Q
What are Redeemable Bonds?
A
Provision in Bond contract allows demand of Bond payment under certain circumstances
34
Q
What is a Callable Bond?
A
Borrower can pay off debt early
35
Q
What is a Convertible Bond?
A
Lender can demand payment via company stock instead of money
36
Q
What is a Sinking Fund?
A
Borrower deposits regular sums into an account that will eventually pay off the debt
37
Q
What is the disadvantage of Common Stock in comparison to bonds?
A
Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)
38
Q
What is the advantage of Preferred Stock?
A
Hold dividend priority over common stock
39
Q
What is Weighted Average Cost of Capital?
A
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
Q
What is CAPM?
A
A stock's expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.
41
Q
How is Cost of Debt calculated?
A
(Interest Expense - Tax Benefit) / Carrying Value of Debt