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Flashcards in Test 2 Deck (28):
0

Why is working capital management so important to businesses?

Bills/expenses need to be paid before you can plan for the future

1

What is the major reason small businesses fail I the first 3-5 years?

They fail at managing their working capital.

2

What percentage of time do managers spend on working capital management?

80%

3

What info does EFN provide?

External financing need: amount of funds needed to increase sales

4

As sales increases, what account also needs to increase in order to support the added sales?

Assets

5

What is the payout ratio?

The amount of net income you pay to stockholder

6

What info does break even analysis provide?

Where revenue and expenses meet.

7

What does the contribution margin represent?

Price and variable cost

8

Why are fixed cost so important?

They can't be changed. You have to pay them not matter what.

9

What is the plow back ratio?

The amount of net income you put back into the company.

10

What does DOL represent?

How sensitive your operating income is to change in sales.

11

Operating income is more or less sensitive to sales volume?

More sensitive.

12

What info does the operating cycle provide?

The time between ordering raw materials and when they get paid.

13

What info does the cash conversion cycle provide?

Number of days you need to finance cash flows.

14

What info does the average payment period provide?

How long you get credit from your suppliers.

15

What is advantageous about a longer average payment period?

Longer free money

16

Define time value of money.

A dollar today is worth more than a dollar tomorrow because I can invest it and earn interest.

17

What is one of the most important concepts in finance?

Time value money

18

Would you rather have a dollar today or tomorrow?

Today, so I can invest it.

19

Define compounding.

Earning interest on interest

20

As interest rates increase, future value will?

Increase

21

When would the future value interest factor equal 1?

When there is no interest rate.

22

Define discounting.

Bringing future dollars back to today

23

Present value is the what of future value?

Inverse

24

What three characteristics are necessary to have an annuity?

Exact same amount, due at the same time, for a set period of time.

25

What is the difference between an ordinary annuity and an annuity due?

Annuity due = beginning of period, ordinary = end

26

What change is made in the calculation of an annuity due compared to ordinary?

Annuity due has an extra compounding or discount period.

27

Which type of annuity would you prefer?

Annuity due.