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Fiscal Management > 2013-09-24 CPA, BEC, Financial Management - CPA, BEC, Financial Management (1) > Flashcards

2013-09-24 CPA, BEC, Financial Management - CPA, BEC, Financial Management (1) Flashcards

1
Q

Function of Financial management

A
  1. Capital budgeting
  2. Corporate Governance
  3. Risk management
  4. Financing funcition
  5. Financial Managment functions
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2
Q

Cash conversion cycle

A

The length of time its takes from purchasing product, converting and finally paying for it.

Inventory conversion cycle + Receivable conversion cycle -Payables deffaral peirod

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3
Q

Inventory conversion peirod

A

Average Inventory/ Cogs per day

Ave time require to convert materials into goods and sell those goods

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4
Q

Days sales outstanding or Receivable Conversion cycle

A

Average receivable / Credit sales per day

Average time to collect AR

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5
Q

Payable Deferral period

A

Average payable/ Cogs per day

Length of time between purchase of materials, labor and payment of cash

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6
Q

Why Cash management is necessary?

A
  1. To take advantage of trade discount
  2. Maintain credit rating
  3. Meet unexpected needs
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7
Q

Why do we need to hold cash

A

Transaction need

Compensating financial institution

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8
Q

Purpose of cash budget

A
  1. To take advantage of trade discount
  2. Maintain credit rating
  3. Meet unexpected needs (precautionary balances)
  4. take advantage of business opportunites (Speculative balance)
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9
Q

What is Float

A

Tme that elapses relating to mailing, processing and clearing chck

the goal is to extend payable float and minimize receivable float

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10
Q

What is Zero Balance Accounts

A

Receives daily fund drawn on customers acount from reverse bank. Regional bank then notify custoemr how much needed to clear all checks for the day

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11
Q

Advantages of Zero Balance Accounts

A

checks take longer to clear, longer disbursement float

extra cash doesnt have to be deposited for contengencies

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12
Q

Advantages of lockbox

A

Internal control
more timely deposites for receipts
reduces business risk

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13
Q

Concentration banking

A

Another way to shorten receivalbe float
customers pay at local bank
additional $ is then transferred to regional bank

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14
Q

Which system take float out of the process

A

EFT

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15
Q

Compensating balance

A

required minium level of deposit required by a loan agreement

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16
Q

Marketable securities factors

A 
minimum investment
security
liqudity
maturity
yield
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17
Q

Most important consideration for investing in marketable securities

A

Safety and liquidity

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18
Q

Who issues commercial paper

A

issued to the large credit worthy corportation

2 - 9 months

no active secondary market

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19
Q

Banker’s acceptance

A

A draft dwarn on bank for payment when presented to the bank. Generally arises from payment for foods by corp in foreign countries
30 to 90 days wait period
secondary market is available
slightly higher risk

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20
Q

Goals of inventory managment

A

Ensure adequet inventory to sustain operation

To minimize invenotry costs including carrying cost, ordering cost, receiving cost, cost of running out of stock

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21
Q

Economic order quantity

A

Square root of (2X ave order cost X annual deman in unit / carrying cost per unit)

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22
Q

Order Point

A

(Daily Deman X Leadtime) + safety stock

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23
Q

Safety stock vs carrying cost

A

Safety stock reduces stock out cost but increases carrying cost

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24
Q

Carrying costs

A 
Storage
Interest
Insurance
property tax
spoilage/obsolence
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25
Q

Stock out costs

A

Profit lost on sales
customer ill will
idle equipment
work stoppage

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26
Q

What is MRP

A

Material Requirement planning
Manufectures finishes good based on demand forecast
production planning drices master schedule which drives material plans

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27
Q

Charateristics of JIT

A

Most important is relationship with suppliers

Suppliers must inspect their own product

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28
Q

To accomplish JIT, Mgmt must do what:

A
  1. Emphesize reducing production cycle and set up time
  2. Emphasize production flexibility
  3. Emphasize solving production problems immidiately
  4. Focus on simplyfying production activity
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29
Q

Advantages if JIT production

A

Lower interest and inventory and storage space
lower inventory carrying and handling cost
Reduces risk of defective and obsolete products
Able to deal with better quality supplier
Recude manufecturing cost
Able to user simplifed costing system such as Backflush costing

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30
Q

Disadvantages of JIT

A

Suppliers do not provide timely and quanlity material

Employees are not well trainined

Technology/Equipment are not reliable

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31
Q

Credit policy should consist

A

discount
credit period
credit rating
collection policy

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32
Q

Days sales outstanding

A

total receivables/credit sales per day

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33
Q

Permanent current assets should be financed by

A

long term assets such as stocks and bonds

34
Q

What are temporary current assets

A

cash, inventory, Receivables

35
Q

Disadvantages of short term debt financing

A

Firm may not be able to pay off as it comes due

Recession may render the firm unable to meet obligation

Volatile interest rate

36
Q

Disadvantages of long term debt financing

A

more expensive
covenant may restrick firms future action
prepayment penalties can be expensive

37
Q

Maturity matching of debt

A

Also known as hedging apporach and self liquidating approach

Financing assets with same liablity maturing date

38
Q

Cost of not taking discount

A

(discount rate/100% - discount rate) / (365/payment days - discount days)

39
Q

Features of bank loans

A

short term, less than 90 days
promissory notes
Interest flactuates based on short term indexes

40
Q

Prime rate

A

the rate bank chagnes to its most credit worthy customer

41
Q

LIBOR

A

London interbank offered rate

Rate to borrow fun in the international market

42
Q

Effective interest rate on compensating balance

A

Interest payment / Available principal

43
Q

Source of Accounts receivalbe financing

A
  1. AR Pledging
  2. Factor
  3. Asset backed public offering
  4. Inventory Financing
  5. Hedging to reduce interest rate
44
Q

Types of inventory financing

A

Blanket inventory lien
trust receipt
warehousing

45
Q

Interest computation for factor

A

(Flat fee + Monthly interest rate) X 12 months = annual rate

46
Q

Securitization of assets

A

Creation of assets backed securities

47
Q

Trust receipts

A

Borrower holds inventory and proceeds from sales goes to a trust to cancel trusts receivable

aka floor planning

common in automobiel, industrial equipment

48
Q

warehousing

A

most secure souce of inventory financing

Inventory is stored in public warehouse under control of public warehouse personnel

goods can only be removed with the lenders permission

49
Q

types of private debt

A
  1. From financial institution for which rate is tied to LIBOR or prime rate
  2. Private palcement of unregistered bonds to acredited investors
50
Q

types of private debt

A
  1. From financial institution for which rate is tied to LIBOR or prime rate
  2. Private palcement of unregistered bonds to acredited investors
51
Q

Negative debt covenant

A

Restriction on

  1. sale of certain asset
  2. top employee compensaton
  3. issuance of additioanl debt
  4. payment of dividend
52
Q

Positive debt covenant

A

borrower must do:

  1. provide audited financial statements
  2. maintain a certain financial ration
  3. carry life insruance on key employees
53
Q

Debenture

A

A bond that is not secured by the pleget of a specific property

higher yeild than other secured bond

54
Q

Suordinated debenture

A

bondholder are paid after genral creditor and other senior debt holder have been paid

very high yields

55
Q

Current yield

A

Interest expense/Selling price of bond

56
Q

Yield to maturity

A

(Annual interest rate +(principal payment - bond price / # of years to maturity)) / ( .6 X price of the bond + .4 X principal payment)

57
Q

types of bond

A 
zero coupon rate
floating rate
registered 
junk
foreign
eurobonds
58
Q

Advantages of debt financing

A

Interest is tax deductible
obligatoin is generally fixed in terms of interest and pricipal payment
peirods of inflation debt is paid off with dollars that are worth less
owners dont give up control
debtor dont participate in excess earning

59
Q

Disadvantages of debt financing

A

Interest and principal msut be paid regardless of economic position
Interest rates are fixed
covenants can make firm less flexible
can increse risk of equity holder

60
Q

Capital lease criterial

A

bargain purchase price
transfer of ownership
75% of life should be leased
PV of lease payment should be 90% of the fair value of the property

61
Q

Advantages of lease

A
  1. Can lease when unable to uy
  2. provisions are less stringent than a bond indenture
  3. may not have downpayment requirement
  4. creditor claim on lease is restricted
  5. operating lease is not considered a liability, so has tax advantage
62
Q

Advantages of issuing common stock

A
  1. Firm has no obligation to pay
  2. Reduces cost of capital
  3. More attractive because of profit potential
63
Q

Disadvantages of issuing common stock

A
  1. ownership right given up
  2. Issurance cost is greater than debot
  3. Dividends are not tax deductible
  4. Shareholder require higher rate of return than lender
  5. Issurance of too much common stock may increase the cost of capital
64
Q

Advantages of issuing Preferred stock

A
  1. No obligation to pay dividend
  2. Reduces cost of capital
  3. Common Shareholder do not give up control
  4. Do not participate in superior earnings
65
Q

Disadvantages of issuing Preferred stock

A
  1. Cost of issurance
  2. Dividend not tax deductible
  3. Too much dividend in arrears can cause financial pproblems
66
Q

Operating leverage formula

A

% change in operating income / % Change in unit volumn

Measure the degree of which fixed cotst are part of operation.

Lower sales period, high fixed cost can cause financial problems

67
Q

Financial Leverage Formula

A

% change in EPS/ % change in EBIT

to which extent firm uses debt financing

68
Q

2 ways common equity can be raised

A
  1. Retained earnings

2. Issuing common stock

69
Q

Methods of estimating cost of existing common equity (4)

A
  1. CAPM
  2. Arbitrage
  3. Bond yield plus
  4. Divident yield growth
70
Q

CAPM - Capital Asset Pricing Model

A

Ks = Krf + Km X beta coefficient

Krf = Risk free rate
Km = expected rate of return
bi- Beta, votalitity of the firm stock

71
Q

Arbitrade Pricing Model

A

Uses a series of systematic risk factors to develop a valoue that reflects the multiple dimentsions of systematic risk

72
Q

Arbitrade Pricing Model Formula

A

Rp = bi (K1 = Krf) + b2 (K2 + Krf)……

Rp= Risk permium
Krf = Risk free rate
B123… Betas for individual risk factors
K123… Market risk assoicated with each risk factors

73
Q

Divident yield + groth approach

A

Ks = (D1/P0) + Expected growth %

P0= today's stock price
D1 = annual divident estimate
74
Q

Cost of New stock formula

A 
Ks = (D1 / P0 + F) + Expected growth
F= Floting cost

Usually higher than existing stock because of floting cost

75
Q

Cost of new debt formula

A

(Annual Interest payment + (Principal payment - bond price after floting cost)/ # of years to maturity)) / .6 (bond price after floting cost) + .4(principal payment

76
Q

Factors affecting capital structure

A
  1. Business Risk
  2. Tax position
  3. Financial Flexibility
  4. Mgmt conservatism vs aggressiveness
77
Q

Factors affecting dividend policy

A
  1. Legal requirements
  2. Cash Position
  3. Desire for control
  4. tax position of shareholder
  5. Access to capital market
  6. Clientele effect
  7. Investment opportunities
78
Q

Types of mergers

A
  1. Horizontal
  2. Vertical
  3. Congeneric
  4. Conglomerate
79
Q

Horizontal marger

A

acquiring similiar line of business

80
Q

Vertical Merger

A

Combines with another firm in the same supply chain

81
Q

Congeneric

A

somewhat related but not enough to be considered horizontal or vertical

82
Q

Conglomerate

A

Firms are completely unrelated. Provides greatest degree of diversification

Fiscal Management (1 decks)

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