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Flashcards in Financial Mgmt Deck (41):
1

What is the primary focus

of working capital management?

Managing inventory & receivables (CA + CL)

2

How is Net Working Capital calculated?

NWC = CA - CL

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?

Avg Inventory

Sales Per Day

Avg time needed to convert DM to FG & sell them

5

What is the Receivables Collection Period?

         Avg AR         

Daily Credit Sales

Avg time needed to collect AR

6

What is the Payables Deferral Period?

Avg Payables / (COGS/365)

Avg time b/t materials and labor purchase and their AP payment

 

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 Paymts sent to a bank-managed PO box
  • Employees don't see cash
  • Deposits more timely
  • Interest income from deposits pays for Lockbox fees

12

What is float?

  • Time it takes to mail payment & clear bank acct
  • Maximize float on cash payments
  • Minimize float on cash receipts

13

What are Zero Balance Accounts?

What are the advantages?

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, tNotes and tBonds?

Treasury Bills: Short term (< 1 yr) i.e. $1 Bill

Treasury Notes: Med term (1 - 10 yrs)

Treasury Bonds: LT (10+ yrs)

Govt in long-term bondage to you; they owe you money

15

What is commercial paper?

  • Similar to T-Bill- but issued by corps
  • 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 ins/investmt 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?

Avg Daily Demand x Avg Lead Time

 

Minimum inventory before re-ordering.

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 = low

and Cost of Carrying Inventory = high

22

What is Factoring of receivables?

Receivables are sold to a financing company that pays 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

  • Ex: 1/10 Net 30
  • 1% Discount if paid in 10 days
  • Reg price 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%

Ex: If the lending institution & customer are not in the same country, the LIBOR rate 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?

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

Ex:    Debt costs 5%; 40% of Cap.

Equity costs 12%; 60% of Cap.

(5% x 40) + (12% x 60)

=     2       +       7.2  

WACC     =       9.2

40

What is CAPM?

  • A stock's expected performance
  • 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