Financial Management Flashcards
(140 cards)
1
Q
What are the effects of over/under investing in net Working Capital?
A
Over investing=lower return than earned on capital investment
Under investing=unable to meet current obligations
2
Q
What is the formula for excess Present Value Index?
A
Present value if future net cash inflows
_______________________
Initial investment
*
100
___________________________
?
3
Q
What figured is used as the denominator when creating a Common-Size Balance Sheet?
A
Total assets
4
Q
How is residual income RI calculated?
A
Imputed charges
___________________
Or
Required return
_________________
5
Q
In Machine Replacement, what factors are considered?
A
Old machine salvage value
Life if the new machine
Maintenance cost of new machine
6
Q
What factor might lead to an increase in a company’s Debt Level?
A
Increases tax rate
7
Q
What is another name for the Profitability Ratio and what is the formula?
A
Cost benefit analysis
Net present value of an investment’s cash flow
_________________________
Investment’s initial cost
(Used in capital budgeting and ranks projects by dollars returned vs dollars invested; the higher the ratio, the more attractive the investment)
8
Q
What decision making model equates the initial investment with the present value of future cash flows?
A
IRR
(Disadvantage of IRR is that it has limitation when evaluating mutually exclusive investments)
(IRR is not preset but estimated)
(IRR is a time adjusted rate of return from an investment)
(IRR assumes cash flows are reinvested at the rate earned by the investment)
9
Q
Which approach to valuing a business is best when the entity is losing money and being sold in distress?
A
Asset approach
10
Q
Which technique gives the best answer when evaluating investment projects that are mutually exclusive?
A
NPV
NPV assumes cash flows are reinvested at the minimum rate of return
11
Q
What is the Cash Conversion Cycle and the formula?
A
The time between cash paid to suppliers and cash collected from employers.
Receivables conversion cycle (AR/(sales/365)) \+ Inventory conversion cycle (Inventory/(cogs/365)) - Payables conversion cycle (AP/(cogs/365)) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
12
Q
What is a primary difference between Common and Preferred Stock?
A
Voting rights, preferred stock usually doesn’t have them.
(Preferred stock is still equity)
(Preferred stock is not required to issue a dividend)
(Preferred stock has higher priority over common stock in bankruptcy)
13
Q
What is a Corporate Treasurer’s primary concern when managing cash and short-term investments?
A
Liquidity and safety to provide funds when needed
14
Q
What is the Payback Period formula?
A
Initial cost of investment
_______________________
Annual net cash inflows
(The length of time needed for net cash flows to recover the initial cash investment in a project; depreciation expense in not included in cash outflows)
(The strength of this method is the ease of use. The weakness is that it use discounted amounts and only factor fund recovery)
15
Q
What is the formula for Assets?
A
Liability
+
Shareholder’s equity
______________________
16
Q
Why are Serial Bonds attractive?
A
Investors choose the maturity that suits their financial needs
17
Q
What is the formula for the Annual Cost of Carrying Inventory?
A
Average inventory level
(Order quantity/2)
*
Unit cost
*
cost of capital
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
?
(An assumption of EOQ is that periodic demand is known)
18
Q
How is the Effective Cost calculated?
A
Annual dollar cost
_______________________
Net useable proceeds
19
Q
What Capital Budgeting technique assumes that cash flows are reinvested at the rate earned by the investment?
A
IRR and NPV
IRR and NPV are the two methods that consider the time value of money
20
Q
What is the Profitability Index formula and how is it used?
A
NPV
_____
Cost
The expected return for each dollar invested
(The higher the result the more desirable the project)
(Should be used when comparing projects during capital rationing)
(Limitation: forecasting cash flows)
21
Q
How do Capital and Operating Leases differ?
A
The lessor finances the transaction through the leased asset under capital leasing
(Capitalization of a lease increases debt)
22
Q
What Risk is inherent in every firm?
A
Business risk
23
Q
What does a graph that plots Beta depict?
A
The relationship between asset return and benchmark return
24
Q
What amount affects a projects NPV (excluding taxes).
A
Salvage value
Proceeds from the sale of an asset to be replaced
25
What Cash Management technique focuses on disbursements?
Zero-Balance Accounts
26
What Rate of Return is required from investors for deferring current consumption when investing?
Risk-free rate
27
What is the Hedging principle of finance (also called the principle if self-liquidating debt)?
Financing short term assets with short term liabilities
| Adding seasonal inventory by increasing accounts payable
28
What is Exponential Smoothing?
A technique to reduce random fluctuations in time series data with declining weights assigned to data as it gets older
29
What type of Investment is best during periods of high inflation?
Precious metals
30
What is the affect of a firm purchasing Treasury Stock with surplus cash?
Increases a firm's financial leverage
31
What is a Field Warehouse Agreement?
An arrangement where the inventory remains with the borrower but is placed under the control of a third party
(In a terminal warehouse agreement inventory is moved to a public warehouse controlled by a third party)
32
What factors affect Risk Premium?
Length of maturity
Relative liquidity
Relative seniority
33
How is return on assets ROA/ equity ROE/ or investments ROI calculated?
Net income/Net Operating Profit
______________________
Average Total Assets/Equity/Investments
(Begin+Ending/2)
Or
```
Capital turnover
(Sales/investment)
*
Return on sales
(Net income/sales)
_________________
```
34
What is the cost of capital difference between Retained Earnings and external common Equity?
Retained earnings cost should be less because floatations costs aren't needed
35
What rate is equivalent to a one year U.S. Treasury bill?
Risk-free rate of interest
+
Inflation premium
___________________
36
Does business Forecasting use qualitative and/or quantitative techniques?
Both
37
What are the after tax Cash Flow factors?
Revenue, taxes, and depreciation benefit
38
What is the WACC?
```
Percent of debt * rate
+
Percent of equity * rate
+
Percent of mixed vehicle * rate
____________________________
?
```
(Optimal capital structure= minimum WACC)
39
What is the objective of AR management?
Maximize profits
| AR policies are concerned with recognition and collection
40
How is the Cost of Debt calculated?
The effective interest rate
-
Tax advantage
___________________________
41
What is the relationship between Capital Structure and Financial Structure?
Financial structure includes capital structure
(Financial structure includes all liabilities and equity used to finance assets=right hand side of balance sheet=total assets)
(Capital structure only includes long term liabilities and shareholder equity)
42
What is the difference between a Simple Moving Average and a Weighted Moving Average times series models for forecasting?
The simple moving average uses unadjusted raw prior period values. Under the weighted moving average, values are adjusted by assigning different weights to some or all values
43
What factors are considered in valuing a Stock Option?
Time until expiration date
Risk-free rate of return
Exercise price
(Industry classification of the stock is not relevant)
44
How is CAPM calculated?
```
(Market rate-Risk-free rate)
*
Beta
_____
?
+
Risk-free rate
_______________
```
45
How is Total Equity calculated?
Capital stock
+
Retained earnings
___________________
46
How is Total Liability calculated?
Assets
-
Total equity
____________
47
How is Times Interest Earned calculated?
Income before income taxes and interest expense
_______________________
Interest expense
48
What is a Bond backed by fixed assets?
Mortgage bond
49
What reason would a company agree to a Debt Covenant limiting the percentage of it's long-term debt?
To reduce the interest rate on the bonds being sold
50
How do NPV and IRR differ?
NPV assumes reinvestment at the cost of capital while IRR assumes reinvestment at the IRR
51
Is the WACC determined by short-term and/or long-term financing?
Long-term financing. WACC consists of common stock, preferred stock, and long term debt
(WACC is the minimum a firm must earn on its investments. A lower WACC means the lower revenue needed to make a profit and the easier to increase shareholder's wealth, it's the optimum capital structure)
52
How is ROA calculated?
Net income
_____________________
Average total assets
Or
```
Asset turnover
*
Profit margin on sales
_______________________
(Convert answer to percent)
```
53
What does the DuPont return on assets consist of?
The return on assets formula separated into two components:
```
Net profit margin ratio
(Net income/net sales)
*
Average total asset turnover ratio
(Net sales/ average total assets)
__________________________________
___________________________________
```
54
What does investment Beta measure?
The investment's systematic risk
55
What kind of Risk is company specific risk?
Unsystematic risk
56
Why is depreciation relevant in NPV?
Depreciation increases cash flow by reducing income taxes
57
What affect could JIT inventory have on costs?
Increase stockout costs
and
Decrease carrying costs
58
What are the limitations of CAPM?
```
It assumes no restrictions on borrowing at the risk free rate
It assumes no external costs are associated with the investment
It fails to consider risk outside of asset class benchmark variances
```
59
What are the characteristics of the Discounted Payback Method?
It evaluates the liquidity of a project
It results in a longer payback period than the undiscounted method
60
What Data pattern reflects an upward or downward movement over a long period of time?
A trend
61
How is RI-Residual Income calculated?
Actual income
-
Required return on investment
____________________
62
How is P/E ratio calculated?
Market price of the stock dividend
_________
EPS
63
What are the major Cost Approaches to assigning value to an ongoing business?
Asset approach
Income approach
Market approach
64
How is Financial Leverage determined?
It is calculated using debt with a fixed cost or determinable costs for capital financing. Greater debt financing equals greater financial leverage
(Using a variable rate is possible but the fixed rate is better since the cost would not change over the life of the financing and the leverage would be more certain over the life of the debt)
65
What is the Debt Ratio and how is it calculated?
Total debt
____________
Total assets
A measure of a company's percentage of assets that are financed by total debt (short and long term)
66
What is the Debt to Asset Ratio and how is it calculated?
Total debt
____________________
Total owners equity
Measures the extent to which a company's assets are financed by debt (the reciprocal percent would show assets financed by owner's equity)
67
How is the Real Interest Rate calculated?
The stated (nominal) interest rate for the period
-
Inflation rate for the period
____________________________
68
Does Idle space have an Opportunity Cost?
No, the cost is only measured by the benefits lost from choosing another opportunity
69
What is the accounting rate of return ARR and it's characteristics?
[accounting net income/book value]
Expected annual incremental accounting income (accrual based which includes deduction of depreciation expense from revenues)
_______________________________
Initial (or average) investment
It considers the entire life of the project. It assumes that the incremental income is the same each year (difference between annual income and investment)
70
What is a Simple Moving Average?
The average of actual values of a specific number of most recent periods without adjustment used to forecast a future period
71
What is the Derivative Risk related to the possibility of loss from regulatory action?
Legal risk
72
What could be used to assure a foreign supplier of Payment?
A letter of credit, which is a conditional payment to pay a third party in accordance with specified terms
73
What kind of Risk does the variance of an individual investment capture?
Both systematic and unsystematic
74
How is the Economic Rate of Return on stock calculated?
```
Dividends
+
Change in price
_________________
Beginning price
```
75
Does a change in safety stock affect the EOQ?
No
| EOQ minimizes the sum of ordering and carrying costs
76
What are the limitations of the Black-Scholes option pricing model?
It assumes the stock does not pay dividend
It assumes the risk free rate remains constant throughout the option period
It assumes the option can only be exercised at the expiration date
77
What method is best for short-term Forecasting and long term Forecasting?
Time series models are best for short-term forecasting
Delphi method is best for long-term forecasting
78
What Capital Budgeting techniques assumes that cash inflows are reinvested?
NVP
| IRR
79
What are some Qualitative Forecasting methods?
Delphi method
Executive opinion
Market research surveys
80
What financing is good for growth and maximizing EPS?
Debt because it has low interest rate (after taxes) and it keeps the denominator the same when calculating the EPS
81
How is Inventory Turnover calculated (average says sales in inventory)
Cost of goods sold
____________________
Average inventory
COSG=purchases+(begin-end inv)
Avg inv=(begin+end)/2
82
How is additional investment in Working Capital treated?
As an additional initial investment that will be recovered at the end of the investment's life
83
What's the most expensive form of additional Capital?
New common stock
| Common stock is the most basic form of long term financing for a corporation
84
Which Credit option is a formal legal commitment to extend credit up to a maximum amount over a stated period?
Revolving credit agreement
85
How is Average Collection Period calculated?
Percent * days to collect
+
Percent * days to collect
__________________________
86
How is the Inventory Reorder Point calculated?
```
Inventory usage (daily)
*
Number of days of safety stock
*
Number of days to get new inv
(Acquisition lead time)
________________________
```
87
How is the average AR balance calculated?
Credit sales per day
*
Average collection period
___________________________
88
What is Solvency?
A firm's ability to pay debt
89
How is accounts receivable turnover (ART) calculated?
Credit sales/Net Sales
_____________
Average AR
90
What is Working Capital and it's components?
Current assets and liabilities (AR, AP, and inv)
| Net working capital is the difference between current assets and current liabilities
91
Are receivables held in reserve for contingencies during Factoring charged a fee?
No, any remaining balance is fully refunded
(Reversed receivables are subtracted from reserve receivables and difference is returned to the business at the end of the period)
92
How are serial Bonds different from term Bonds?
Serial bonds mature in installments (the same date each year over a period of years) but term bonds mature on a single date
93
Can AR-accounts receivables (pledging and factoring), AP-accounts payable, and/or inventory provide short term Financing?
Yes, all three
94
What does the Operating Cycle Measure?
The average length of time to invest cash in inventory, convert the inventory to accounts receivables, and collect the receivables
(Number of days sales in inventory + number of days sales in trade accounts receivables)
95
What are the advantages of a company using Commercial Paper?
More funds at lower rates
Avoiding compensating balances
Market has a broad distribution for borrowing
96
What costs does the Cost of Capital pertain to?
Existing long term financing and new long term financing
97
What is a Banker's Acceptance?
A time draft payable on a specified date and guaranteed by a bank
98
What are Debenture Bonds?
Unsecured bonds
| Their coupon rate is higher than secured bonds
99
What type of Bond is likely to maintain a constant market value?
Floating rate bond
100
How do Deep Discount and Zero Coupon bonds work?
They increase in value each year as they reach maturity, providing the owner with total payoff at maturity
101
Is a Bond Call Provision considered detrimental to an investor?
Yes
102
Would longer or shorter term Bonds have a higher interest rate risk?
Longer term bonds
103
How are the NVP and profitability ratio similar?
The profitability index is the ratio of the NVP of the project to it's initial cost
104
What is the EOQ formula?
```
_____________________
/2 * Annual Demand
/ * Cost Per Order
/________________________
\/ Inventory carrying cost
```
(Assumes periodic demand is known)
105
What are the benefits of JIT?
Inventory reduction
Simplifying activities
Sharing sales forecasts with vendors
106
What is considered long term Financing?
1 yr or greater
| Short term is 1 yr or less
107
What is an efficient Portfolio?
One that meets the investor's risk preference function which is their trade off between risk and return
108
What factors affect the variance of a Portfolio?
The percentage of the portfolio invested in each asset.
The variance of the returns on each individual asset
The covariance among the returns of assets in the portfolio
109
What is the difference between the Stated Rate and the Effective Rate?
The frequency of compounding
110
What is the difference between a net Lease and a net-net Lease?
Under a net lease the lessee assumes the executory costs during the lease such as maintenance, taxes, and insurance. Under a net-net lease the lessee assumes the executory costs during the lease as well as the residual value at the end of the lease
111
What types of Ratios or measures are used in financial ratios?
Solvency, operational activity, and liquidity
112
How is the average gross Receivables balance calculated?
Average daily sales
*
Average collection period
___________________________
113
What is a Call Provision?
A bond feature that allows a corporation to call the bond even if the holder does not want to dispose of the investment
114
What term is used to describe NPV for investment decision making?
Cash flow
115
What is a Compensating Balance?
Compensation for the financial institution for services
116
What method evaluates the performance of Capital in any year?
Economic value added
117
How is Gross Profit and Gross Profit Margin calculated?
```
Net sales
-
Cost of good sold
___________________
Gross profit
```
And
Gross profit
____________=gross pm ratio
Net sales
118
What Risk is inherent in a firm with equity only financing?
Business risk
119
What are the benefits of short term Financing?
Greater financial flexibility
Lower interest rates
(Con: greater chance of no liquidity due to repayment and frequent refinancing)
120
What is the market price of a Bond issued at par, premium, or discount?
The present value of the principal amount plus the present value of future interest payments, all at the market effective rate of interest
121
What is the basic component of Interest?
The real risk free rate
122
What is the advantage of a Zero Balance Account?
It maximizes the float of cash disbursement
123
What is the benefit of IRR over ARR?
IRR emphasizes cash flows and recognizes the time value of money
124
Are shareholders better off with more or less Financial Leverage when taking a lose?
Less financial leverage
125
What is degree of operating leverage DOL?
Percent change in operating income
___________________
Percent change in sales volume
A measure of change in earnings available to shareholders related to a change in sales volume
126
What is a Floating Lien agreement?
An agreement where the borrower gives the lender a lien against the inventory but retains control and can sell and replace the inventory
127
What is the slope of a normal Yield Curve?
Upward sloping
| Short term rates are lower than long term rates
128
Why do corporations issue Eurobonds over domestic bonds?
Eurobonds are a less expensive form of financing because of the absence of government regulation
129
What is the Cost of Debt before tax?
The bond yield to maturity
130
What are some short term Financing methods?
Accounts Payables
Accounts Receivables
Inventory
131
Does Times Interest Earned Ratio bring use before or after tax figures?
Before tax figures
132
What impact does Return on Equity have on the value of outstanding common shares?
Lower return on equity=higher outstanding share value
Higher return on equity=lower outstanding share value
133
Is the cost of retained earnings (RE) higher or lower than external common stock?
Lower then external common equity because floatations costs are not included
134
What is the disadvantage of ROI vs RI?
ROI could lead to rejecting options that meet required return needs because they are less than what other or current investments render
135
How is Operating Profit Margin calculated?
EBIT
______
Sales
(EBIT=Net income+Taxes+Interest)
136
How is the Interest Rate of forgone discounts calculated?
Discount %
________________
100-discount %
*
360
________________________________
Credit period-Discount period
137
What transfer price policy is best for evaluating whether each division met their goals?
Standard variable cost
138
What is expected value?
A statistical analysis method that uses probabilities as it's weight for a weighted average
139
When should a direct labor overtime premium be charged to a specific job?
A customer requires early completion of the job
140
Are Total Costs linear or non-linear over a relevant range in breakeven analysis?
Linear
