Working Capital management

Question 1

What are current liabilities

Answer 1

Debts to be payed in less than one year

Question 2

What is net working capital

Answer 2

Cash + current assets - current liabilities

Question 3

increasing non current liabilities and equity while decreasing non current assets as well as current assets - liabilities will increase the amount of cash in the firm

Answer 3

True

Question 4

What is the inventory duration period

Answer 4

The time from a good is ordered by the firm to that it is sold

Question 5

Name some flexible short term financial policies

Answer 5

Keeping large reserves of cash and marketable securities, making large investments in inventory and granting liberal credit terms which results in a lot of accounts recivables. The oposit of this is to have restrictive short term fiancial policies

Question 6

What are carrying costs

Answer 6

Costs that rise with investment into current assets f.ex opertunity cost of having account recivables instead of cash and the warehousing cost of housing inventory

Question 7

What are shortage costs

Answer 7

Costs that decrease with investment into current assets

Question 8

Large firms with limited growth opertunities, low risk investments and great access to credit tend to hold less liquid assets

Answer 8

True

Question 9

Small firms with large growth opurtunities and high risk invesmtnets and that lack access to credit tend to have more liquid assets

Answer 9

True

Question 10

Name the two general kinds of shortage costs

Answer 10

Trading or order costs f.ex brokarage costs of getting more cash or inventory and costs related to safety reserves f.ex disrupted schedules, lost customer goodwill and lost sales

Question 11

What determines the financial policy of a firm

Answer 11

Where shotage costs + carrying costs are the lowest. As shortage costs decrease carrying costs increase so there is an optimum points where the sum is as low as possible

Question 12

What is the difference between non comited and comited lines of credit

Answer 12

non comitted lines of credit are agreements between a firm and a bank to let the firm borrow up to an amount at standard interest without paperwork. Commited lines are a formal arangement which require a fee and often also compensation balances aka cash in a bank account.

Question 13

How does compensation balances work

Answer 13

A firm keeps money in a bank account with zero interest but recives the money they would have recived as intest as a line of credit instead.

Question 14

What are secured loans

Answer 14

When the bank requires security for a loan f.ex lien on accounts recivables or inventory in the case that a firm fails to pay inters.

Question 15

Treasury bills, certificates of deposits and repurchase agreements are cash equivalents

Answer 15

True

Question 16

The decision to allow purchase on credit and at what time is verry similar regardless of industries

Answer 16

False, retail often has very short account revivavles an example is 5 days while mining firms can have as long as 65 day recivables.

Question 17

Why do firms hold cash

Answer 17

As compensating balances for credit, to make up the difference between unsyncronized cash inflows (collections) and cash outflows (disbursments).

Question 18

What information must be known to determine the optimal cash balance policy according to the baumol model

Answer 18

The fixed cost of selling securities to replenish cash, the total amount of new cash needed over the planing period and the opertunity cost for holding cash which is the interest rate on marketable securities.

Question 19

How is the short term opertunity cost calculated in the baumol model

Answer 19

Average cash balance times the interest rate

Question 20

What are the three limitations of the baumol model

Answer 20

it assumes a constant disbursment rate, It assumes no cash reciepts durring the period and it does not count safety stock buffers which are often present in acutal firms.

Question 21

What 4 things must management do to use the Miller Orr model to determine the optimal cash position

Answer 21

Set a minimum cash limit, Estimate the standard deviation of daily cash inflows, determine the interest rate and estimate the trading costs of buying/selling marketable securities

Question 22

According to the Miller Orr model firms that have more uncertainty in their cashflows should have greater cash reserves

Answer 22

True

Question 23

Borrowing tends to be more expensive than selling marketable securities

Answer 23

Yes because the interest rate tends to be higher

Question 24

Why do firms leave cash in bank accounts instead of moving it to marketable securities

Answer 24

As a compensating balance with banks and becouse the cost of micromanaging is higher than the gain from keeping current assets in more lucurative forms

Question 25

What is collection float

Answer 25

A bank check that is recognized as cash but does not apear in the account imediately. Dispersion float is the oposite

Question 26

What is net float

Answer 26

disbursment folat + collection float

Question 27

What are the three parts of collection float

Answer 27

Mail float (when checks are trapped in the postal system), In house processing float (the time it takes for the reciver to deposit the check in a bank for collection) and availability float (the time it takes for the bank to use the clearing system to transfer the payment)

Question 28

What are lock boxes

Answer 28

A way to speed up the cash collection process, basically a speedyer mail box operated by banks popular in the US

Question 29

What is concentration banking

Answer 29

A way to speed up the cash collection process basically have an office near the customers handle the payments to reduce the time checks spend in the mail and the clearing system if it is the same bank as the customers use.

Question 30

What is wire transfer

Answer 30

The fastest way to speed up the cash collection time, basically electronic payment, the most popular is the SWIFT system

Question 31

Give an example of how you can delay payments

Answer 31

By writing checks through a geografically distant bank

Question 32

What is zero balance accounting

Answer 32

To have a payment account wicith is to have zero content, when you use it to pay it becomes negative and you have to transfer money to it from a master account in the same bank. I did not realy understand why but by the context it may be a way to slow down payments with useless bloat.

Question 33

What is the diference between drafts and cheques

Answer 33

The draft is a commitment to make a payment while a cheque is an order to the bank to make the payment. Drafts involves more burocracy and slows down the payment.

Question 34

Can uncollected funds be used to make investments

Answer 34

Yes but banks usually charge a fee for that but sometimes they dont have good enough accounting and controle fearures for that.

Question 35

What makes a security marketable

Answer 35

It can be sold in large quantities without changing the market price and it can be sold quickly.

Question 36

What does it mean if the terms of trade are 2/10 net 30

Answer 36

That from the invoicing the customer has 30 days to pay but if they pay withing 10 days they get a 2% cash discount

Question 37

What are credit instruments

Answer 37

Some proof of the grant of credit such as an IOU signed upon delivery, a draft sent before goods are delivered or a bankers acceptance to transfer from the customers account.

Question 38

What may motivate a firm to grant credit

Answer 38

if it has a cost advantage over other lenders, if it can engage in price discrimination, if it can obtain favorable tax treatments, if they have no established reputation for quality, if they want a long term relatinship and if products are differentiated

Question 39

How can you assess a firms credit worthyness

Answer 39

Through banks credit score, therough their financial statements, credit reports and your history with them

Question 40

What is a factor

Answer 40

A financial institution that takes on the risk of credit for a fee.

Question 41

What is a captive finance company

Answer 41

A subsidiary used as colateral