Flashcards in Financial Management Deck (58):

1

## What is the primary focus of working capital management?

### Managing inventory & receivables (current assets & liabilities)

2

## How is Net Working Capital calculated?

### NWC : Current Assets - Current Liabilities

3

## What are the characteristics of effective Working Capital Management?

###
Shorten the cash conversion cycle

Don't negatively impact operations

4

## What is the Inventory Conversion Period?

###
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

## What is the Receivables Collection Period?

###
Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

6

## What is the Payables Deferral Period?

###
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

## What is the Cash Conversion Cycle?

###
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

## What traits should Cash and Short-Term Investments have?

###
Liquid

Safe

9

## For what are Letters of Credit used?

###
Used for importing goods.

Issued by importer's bank.

10

## What is the advantage of using Trade Credit?

### No interest cost if paid timely.

11

## What is a Lockbox System? What are the advantages?

###
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

## What is float?

###
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

## What are Zero Balance Accounts?

###
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

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

###
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

## What is commercial paper?

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

Greater than 9 Months Maturity

Unsecured

Issued by large firms

16

## What are the advantages and disadvantages of Commercial Paper?

###
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

## What is Economic Order Quantity?

###
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

## What is Carrying Cost?

### The cost of keeping inventory.

19

## What is Order Cost?

### Cost of executing an order and starting product production.

20

## What is inventory reorder point?

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

IOP : Average Daily Demand x Average Lead Time

21

## What is a Just In Time (JIT) system?

###
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

## What is Factoring of receivables?

### 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

## What is a Trade Discount?

###
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

## What is the cost of forgoing a discount?

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

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

## CCC

###
ICP+RCP-PDP=ccc

ICP=Average Inventory/cogs per day or sales per day

RCP=Average accounts receivable/Average sales per day

PDP= Average payables/purchases per day

43

## EOQ

###
Squre root of 2AP/S

A- Annual Demand

p-purchase order cost

s-storage cost

44

## reorder quantity

### Avg daily demand * avg lead time

45

## Reorder point

### Reorder quantity+ safety stock

46

## Capital budgeting

###
Pay back period= Initial Investment/After tax net cash inflows

IRR= Investment/ Annual cash flows

Accounting rate of return= Accounting Income/ Avg Investment (Accounting income= Cash flows-Dep)

NPV=PV of cash inflows-PV of cash outflows

47

## Univariate forecasting

### Forecasting on the past relationship between only one variable

48

## Multivariate forecasting

### uses the past relationships between variables projected and more than one or other variables

49

## principles of momentum

### Short term trends will continue

50

## Mean revision

### Deviations from long term patterns will eventualy be corrected

51

## AFC=Annual Financing Costs

### Discount%/100%-discount x 365 or 360/ total pay period-discount period

52

## Cost of the loan

### interest paid/ Net funds available or principal-compensating balances

53

## Subordinated bonds

### Only gets money when all other creditors are paid in full

54

## When the ask about net cost of debt

### Always reduce 1- tax rate from effective interest rate

55

## Degree of Financial Leverage

### % of change in earnings per share/ % change in EBIT

56

## Capm-Capital assets pricing model

### Risk Free rate + ( Expected Market rate- Risk free rate )x beta

57

## Break even in Units

### Fixed costs+profit/SP-VC (CM)

58