L10-12 Leasing and working capita management

Question 1

What shall be specified in a leasing contract

Answer 1

The leasing perid, payment terms, maintenance terms, insurance terms and ownership at the end of the term

Question 2

Name some characteristics of a financial lease

Answer 2

It is fully amortized, the lessee bears the entire cost risk by being responsible for service and maintenance costs as well as the asset’s depreciation, the lessor is often a finance company, the lessee has right to renew lease at expiration and often it cannot be cancelled

Question 3

Name some characteristics of an operating lease

Answer 3

It is not fully amortized, the lessor takes the cost risk and is responsible for service and maintenance of the asset, there is often a cancellation option

Question 4

Financial companies can engague in operating leases

Answer 4

True

Question 5

What are some good reasons for leasing

Answer 5

Leasors have expertise regarding their assets and their maintanence and it can spread risks thinner. If you are only going to use an asset for a limited time it also makes sense to lease

Question 6

Leasing does not effect equity

Answer 6

False

Question 7

How is a long term lease accounted

Answer 7

The asset is depreciated as normal but is also a financial liability with payments counted as debt payments

Question 8

How is a short term lease accounted

Answer 8

As an expense

Question 9

In a financial lease the leasee takes all cost risk

Answer 9

true, they are responsibel for servive and maintanence

Question 10

Leese fees are payed in advance in operational leases

Answer 10

False, in financial leases

Question 11

What is the concrete difference between taking a loan to buy and asset and to lease an asset through a financial lease in a world without taxes

Answer 11

None

Question 12

How sould futere cashflows be discounted when comparing leasing and buying

Answer 12

at the market lending rate

Question 13

What is the diference between renting and leasing

Answer 13

Leases can have less than full cost risk and renting is usually for a shorter period with an exception of buildings.

Question 14

Taking out a long terme loan increases net working capital

Answer 14

Yes becouse cash increases and long term liability does not count to working capital

Question 15

What is the operationg cycle

Answer 15

the period from the arival of stock to the recival of cash. Inventory period + account receivable period

Question 16

what is the cash cycle

Answer 16

operating cycle - account payable period. Minimize this is good

Question 17

What is the difference between a flexible and restrictive financial policy

Answer 17

Flexible holds more current assets on hand while a restrictive financial policy tries to mimimize idle cash

Question 18

What is the difference between a flexible and restrictive financing policy

Answer 18

When it is flexible debt is more long term while restrictive has more short term debt

Question 19

A restrictive financial policy has few to no credit sales and small investments into inventory

Answer 19

True

Question 20

If carrying costs are high and shortage costs are low the optimal financial policy calls for substantial current assets

Answer 20

False, carrying costs are the costs of holding current assets (maintanence and opertunity) and shortage costs are the cost of trading marketable securities.

Question 21

In an ideal economy, short-term assets can always be financed with short-term debt, and long-term assets can be financed with long-term debt and equity.

Answer 21

True so the optimal level of current liabilities is in line with current assets in theory which would make net working capital always zero

Question 22

Why engague in cash budgeting

Answer 22

To have a plan for when cash will needed in the near future

Question 23

Name four financing options for a temporary cash shortfall

Answer 23

Unsecured bank borrowing, secured loans, commerial papers and bankers apraisals

Question 24

Commericial papers are like verry short term corporate bonds

Answer 24

True

Question 25

Why hold cash

Answer 25

The transaction motive is that current assets and liabilities are not syncronised and it can also be a compensating balance for banks

Question 26

What are the three inputs of the Baumol model

Answer 26

F (the fixed cost of replenishing cash), T(cash needed in period) and R(the opportunity cost of holding cash)

Question 27

What are the limitations of the Baumol model

Answer 27

It assumes a constant disbursment rate, it assumes no cash reviepts durring planning phase and it assumes no safety sock which is quite unrealistic

Question 28

What are the inputs of the Miller Orr model

Answer 28

Lower controll limit for cash, stdev of daily flows, the interest rate and the trading cost of marketable securities

Question 29

Float is still verry important becouse payments can be slow and it is not harmonized arround the world

Answer 29

Flase, it is now electornic and harmonized at least in the EU with SEPA

Question 30

What are sweep accounts

Answer 30

A bank account where banks automatically invest excess cash

Question 31

Why do firms a temporary cash surplus

Answer 31

if they save up for planned expenses, if there are seasonal differences or they may have contingency buffers

Question 32

What is the default risk of marketable securities

Answer 32

Extermely low

Question 33

Is evaluating the creditwothyness of a customer free

Answer 33

usually not

Question 34

What are the five C's of credit scoring

Answer 34

Character (willingness to meet obligation), Capacity (ability to meet obligations), Capital (financial reserves), Collateral (pledged assets) and Conditions (general economic)