W6

Question 1

What is working capital?

Answer 1

The difference between current assets and current liabilities. It reflects short-term financial health and operating efficiency.

Question 2

What is net working capital?

Answer 2

Net Working Capital = Current Assets − Current Liabilities. Represents the short-term funds needed to run a business.

Question 3

What is the operating cycle?

Answer 3

The average time between when inventory is purchased and when cash is collected from sales.

Question 4

What is the cash conversion cycle (CCC)?

Answer 4

CCC = Accounts Receivable Days + Inventory Days − Accounts Payable Days. Measures how long cash is tied up in the production and sales process.

Question 5

What is trade credit?

Answer 5

Short-term credit extended by suppliers, allowing the buyer to delay payment.

Question 6

What is short-term financial planning?

Answer 6

The process of forecasting future cash flows to determine short-term funding needs.

Question 7

What are the main sources of equity financing for private companies?

Answer 7

Angel investors, venture capital firms, institutional investors, and corporate investors.

Question 8

What is crowdfunding?

Answer 8

Raising small amounts of capital from a large number of people, often online.

Question 9

What is a convertible note?

Answer 9

A form of financing that converts into equity at a later financing round, typically at a discount.

Question 10

What is the difference between pre-money and post-money valuation?

Answer 10

Pre-money is the value of the firm before new capital is raised; post-money is after the investment is added.

Question 11

What is an IPO?

Answer 11

The first time a company sells its shares to the public.

Question 12

What is a firm commitment IPO?

Answer 12

An underwriter buys the entire issue and resells it to the public.

Question 13

What is a best-efforts IPO?

Answer 13

An underwriter sells as much as possible but doesn’t guarantee the sale of all shares.

Question 14

What is a Dutch auction IPO?

Answer 14

Investors bid for shares, and the price is set where demand meets supply.

Question 15

What are the common types of corporate debt?

Answer 15

Notes, debentures (unsecured), mortgage bonds (secured by real estate), and asset-backed bonds.

Question 16

What is a leveraged buyout (LBO)?

Answer 16

When a firm is purchased primarily with debt and taken private.

Question 17

What is a callable bond?

Answer 17

A bond that can be repaid early by the issuer at a specified call price.

Question 18

What is a junk bond?

Answer 18

A high-yield bond rated below investment grade, carrying higher risk.

Question 19

What is a lease?

Answer 19

A contract where one party pays to use an asset owned by another.

Question 20

What is the difference between a direct lease and a sales-type lease?

Answer 20

In a sales-type lease, the lessor is the manufacturer; in a direct lease, the lessor is an independent financier.

Question 21

What is a sale and leaseback?

Answer 21

A transaction where a firm sells an asset and leases it back to retain use.

Question 22

What is the formula for the NPV of a lease in a perfect market?

Answer 22

NPV = PV(Lease Payments) − Purchase Price + PV(Residual Value), which should equal zero in a perfect market.

Question 23

What are common short-term financing instruments?

Answer 23

Bank loans, lines of credit, commercial paper, and secured borrowing.

Question 24

What is commercial paper?

Answer 24

An unsecured short-term debt issued by corporations, typically for working capital.

Question 25

What is the difference between seasonal and permanent working capital needs?

Answer 25

Seasonal needs fluctuate within a year; permanent needs are consistent over time.

Question 26

What is IPO underpricing?

Answer 26

The tendency for IPOs to be priced below their market value, resulting in a first-day return for investors.

Question 27

What are reasons for IPO underpricing?

Answer 27

Information asymmetry, winner’s curse, and to ensure successful sale by rewarding initial investors.

Question 28

What is a lockup period?

Answer 28

A restriction period (typically 180 days) during which insiders cannot sell their shares post-IPO.

Question 29

What is a greenshoe option?

Answer 29

An option allowing underwriters to buy additional shares to stabilize the share price after the IPO.

Question 30

What are flotation costs?

Answer 30

The direct and indirect costs of issuing new securities, including legal, administrative, and underwriting fees.

Question 31

What is an asset-backed security (ABS)?

Answer 31

A bond backed by a pool of assets such as loans or receivables.

Question 32

What is a mortgage-backed security (MBS)?

Answer 32

A type of ABS backed by a pool of mortgage loans.

Question 33

What is prepayment risk?

Answer 33

The risk that borrowers will repay loans earlier than expected, affecting MBS cash flows.

Question 34

What is a convertible bond?

Answer 34

A bond that gives the holder the right to convert it into a fixed number of shares.

Question 35

What is yield to call (YTC)?

Answer 35

The return on a callable bond if it is called at the earliest date.

Question 36

What is a true tax lease?

Answer 36

A lease where the lessor is the owner for tax purposes and claims depreciation benefits.

Question 37

What is the difference between an operating lease and a capital (finance) lease?

Answer 37

Operating leases are off-balance-sheet and short-term; finance leases transfer ownership-like risks.

Question 38

What are the accounting implications of leasing?

Answer 38

Finance leases are capitalized on the balance sheet; operating leases are treated as expenses.

Question 39

What is the cost of trade credit formula?

Answer 39

Cost = (1 + discount / (1 − discount))^(365 / days past discount) − 1

Question 40

What is float in cash management?

Answer 40

The delay between when payment is initiated and when funds become available. Includes mail, processing, and disbursement float.

Question 41

What is the trade-off in cash management?

Answer 41

Balancing liquidity for payments vs. maximizing interest earnings from excess cash.

Question 42

What is the matching principle in short-term finance?

Answer 42

Firms should match the maturity of assets and liabilities; short-term needs with short-term financing.

Question 43

What is a merchant cash advance (MCA)?

Answer 43

A loan repaid from a percentage of future sales revenue, often with high implied interest.

Question 44

What is a trust receipt?

Answer 44

A document allowing a borrower to take possession of goods in a secured borrowing agreement.

Question 45

What is a blanket lien?

Answer 45

A lender's claim on all current and future firm assets to secure a loan.

Question 46

How can you estimate the implied interest rate from a merchant cash advance?

Answer 46

Use the internal rate of return (IRR) based on the stream of future payments to solve for the effective cost of financing.