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BEC for OCT > 3. Financial Mgmt > Flashcards

3. Financial Mgmt Flashcards

1
Q

Working Capital

A

CA - CL

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2
Q

Current Ratio

A

CA / CL

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3
Q

Quick (acid test) ratio

A

($ + mktable securities + A/R) / CL

[not inventory]

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4
Q

Cash Conversion Cycle

A 
1 Receive materials on credit
2 Pay suppliers
3 Sell finished product on credit
4 Collect Receivable
Sec 2-4
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5
Q

Cash Conversion Cycle calculations

A 
[2-4] Cash conv cycle (pay $ to profits)
EQUALS (want as LOW as possible)
[1-3] Inv conv period (receive to sell)
[3-4] A/R Collections
[1-2] LESS: A/P deferral
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6
Q

Inventory Conversion Period ($ conv cycle)

A

Sec 1-3 (positive)
Receive goods to selling goods
Calc: Avg inv / COGS per day

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7
Q

Receivable Collections Period ($ conv cycle)

A

Sec 3-4 (positive)
From setting up receivable to it being paid
Calc: Avg Rec / Credit sales per day

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8
Q

Accounts Payable Deferral Period ($ conv cycle)

A

Sec 1-2 (negative)
Time it takes to pay for purchases
Want to have as high as possible
Calc: Avg Payables / Purchases per day

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9
Q

2 / 10 net 30

A

[2 / 98] x [360 / 20]

2 x 18 = 36% int

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10
Q

When dealing with cash mgmt, the time from when goods are paid for and A/R is collected is:

  • A/R collection period
  • Inventory conversion period
  • A/P deferral period
  • Cash conversion cycle
A

-Cash conversion cycle

Sec 2-4

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11
Q

If Inventory conversion period is 60 days, A/R collection period is 25 days, A/P deferral period is 29 days, how long is the cash conversion cycle?

A

56 Days

60 + 25 - 29 = 56

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12
Q

Which is not included in the Cash conversion cycle?

  • Inventory conversion period
  • A/R collection period
  • Payables deferral period
  • Cash discount period
A

Cash discount period

This is included as part of Average collection period but not as a separate entity

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13
Q

Lock-box system

A

Customers send payments directly to bank to speed up deposits and increase internal control over cash (reduces check processing float)

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14
Q

Concentration Banking

A

Customers pay local branches instead of main office so the busin gets funds more quickly reducing float

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15
Q

2 / 10 net 30 breakdown

A

2% discount if you pay within 10 days

30 days to pay otherwise

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16
Q

What do do with A/R?

A

Pledging: pledge as collateral for loan
Assignment: payer pays 3rd party, not you, for $ upfront
Factor: w/ recourse: contingent liab, have risk of loss if consumer doesn’t pay
w/o recourse: outright sale, get less $, but no risk of loss

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17
Q

A/R Turnover

A

Net credit sales / Avg AR

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18
Q

Avg A/R

A

(Beg + End A/R) / 2

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19
Q

days sales in avg A/R

A

360 / A/R turnover

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20
Q

Inventory should be at (cost)

A

Lower of cost or market

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21
Q

Economic Order Quantity

A 
Decides appropriate quantity to order per order:
SQRT[(2 x A x P) / S]
A=annual usage of inv [annual demand]
P=cost of placing order
S=cost of storing a single unit for a yr
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22
Q

Reorder Point

A 
# w/o safety stock = Avg Daily Demand x Avg Lead time (order to rec time)
Just add safety stock to end amount if you want total
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23
Q

Just in time (JIT)

A
  • Order as needed for production
  • To lower nonvalue-added costs
  • should have low lead times, so many small orders that are received quickly
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24
Q

Backflush approach

A
  • Lower tracking of goods (no WIP/FG, immediately expense as COGS)
  • Expect little to no ending inventory
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25
Q

Inventory Turnover

A

COGS / Avg inv

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26
Q

of days supply in avg inv

A

360 / Inv Turnover

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27
Q

Which effect would a lockbox system have on receivables management?

  • Minimize collection float
  • Maximize collection float
  • Minimize disbursement float
  • Maximize disbursement float
A

-Minimize collection float

Reduces float = makes collection faster

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28
Q 
Which is used in computing reorder point for inventory?
(pick 2)
I. Cost
II. Usage per day
III. Lead time
A

II. Usage per day AND III. Lead time

(Avg daily demand x lead time) = Reorder point w/o safety stock

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29
Q

To determine inventory reorder point calculations normally include:

  • Ordering cost
  • Carrying cost
  • Avg daily use
  • Economic order quantity
A

Avg daily use

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30
Q

Sell 45,000 units in a year, safety stock desired is 1,250 units, avg cost per order $24, cost of carrying a unit is $6. What is the economic order quantity?

A

600 units
SQRT[2 x 45000 x 24) / 6]
SQRT[36000] = 600

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31
Q

Ordinary Annuity

A

Due in arrears. O = A vowels

Get at end of month, year, etc

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32
Q

Annuity due

A

“in advance”. D = B consonants

Due at beginning, ex rent (due on first)

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33
Q

Ordinary annuity to annuity due

A

Add $1 and 1 year (or reverse for opposite)
EX) Ordinary: 2yr, 6% = 1.833
Due: 3yr, 6% = 2.833

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34
Q

Payback Period

A

[Initial investment / after tax inflows] = # years
Time to recover investment
Pro: easy, shows $ flow, year limit
Con: no TVMoney, no profitability

35
Q

Internal Rate of Return (IRR)

A

[Investment / annual $ flows] = PV Factor
Find % rate that corresponds to it
Sames as Payback period formula
The disc rate when NPV=0
Pro: easy, TVM; Con: no unique IRR, estimated

36
Q

Accounting Rate of Return (ROI)

A

[Increase in Acct income ($ flow less depr) / Avg investment] = ROI
Appx rate of return, net of acct exps
Pro: uses acct income
Con: no TVM, no $ flows

37
Q

Net present value (NPV)

A

PV of inflows - PV of outflows [aka investment]
+ is good, - is bad
Excess of net PV over/under hurdle rate
Pro: TVM, risk, profitability
Con: may not actually follow investments, difficult

38
Q

3.09 end of lesson for PV calc examples

A

3.09 end of lesson for PV calc examples

39
Q

Which is correct about the payback method as a capital budgeting technique?

  • It considers time value of money
  • It indicates if a project will be profitable
  • It indicates the years needed to recoup an investment
  • It is calculated by dividing annual inflows by the net investment
A

-It indicates the years needed to recoup an investment

Investment / cash flows

40
Q

Annual financing costs (aka 2/10 net 30)

A

[Discount % / (100% - disc %)] x [360 / (total pay period - disc period)]
ex) 2/98 x 360/20 = 36.7%

41
Q

Annual financing costs for 3/15 net 45

A

3/97 x 360/30 = 37.1%

42
Q

Compensating Balance

A

Effective rate = [int paid / (principal - compensating bal)]

43
Q

Company has a 1-year bank loan of $500k @ 8% interest, but requires a 20% compensating balance. What is the effective interest rate?

A

10%
(500k*8%) / (500k - 100k)
40k / 400k = 10%

44
Q

Client is taking terms of: 3/10 net 30, on a purchase. What would not taking the discount cost them? (as a percent)

A

55.67%

3/97 x 360/20 = 55.67%

45
Q

A Co. offers “2/10 net 30” to its customers. 60% take the discount and pay early, the remainder pay within 30 days. How many days’ sales are in their A/R account?

  • 6
  • 12
  • 18
  • 20
A 
18
Basically avg time to collect receivables
60% x 10 = 6
40% x 30 = 12
6 +12 =18
46
Q

Prime Rate, ex prime plus 2%

A

Variable rate that is an index for what the bank charges their best customers

47
Q

LIBOR (int rate)

A

For US to abroad or “abroad to abroad” loans

48
Q

Public vs Private Debt

A

Public debt - fixed int, resold in public mkts (bonds)

Private debt- var int, loans from banks

49
Q

Bonds: stated vs effective rate

A

Stated effective = premium

50
Q

Debenture bond

A

No security, no collateral

51
Q

Term vs Serial bonds

A

Term (normal bond) pays lump sum owed at maturity

Serial fraction of face is paid in installments throughout life

52
Q

Redeemable vs Callable Bonds

A

Redeemable- you can return them if company does something risky that was discussed in the contract (buyout of another firm)
Callable- company can take them back at any time

53
Q

Stated interest rate synonyms

A

Stated, face, nominal, coupon

54
Q

Current yield

A

Annual int paid / issue price of bond
ex) $1k bond, 12% int, issued for $900
(1k x 12%) -> 120 / 900 = 13.33%

55
Q

Debt Financing

A

Pro: Tax deductible, fixed obligation, no loss of control
Con: must be paid, covenants, how debt makes company look, increases cost of borrowing (credit score)

56
Q

Leases

A

Lessor: operating “true rental”, non-operating
Lessee: operating lease, capital lease (looks like a rental but end result is purchase)

57
Q

What is the primary reason a company would agree to a debt covenant limiting the percent of their LT debt?

  • To cause the company’s stock to rise
  • To lower the bond rating
  • To lower risk for current bondholders
  • To reduce the interest rate on the bond being sold
A

-To reduce the interest rate on the bond being sold
MAIN REASON
You’re lowering the risk so: Less risk = less interest

58
Q

The benefit of debt financing over equity financing is highest in:

  • High marginal tax rate, few non-interest benefits
  • Low marginal tax rate, few non-interest benefits
  • High marginal tax rate, many non-interest benefits
  • Low marginal tax rate, many non-interest benefits
A

-High marginal tax rate, few non-interest benefits
Debt is tax deductible, higher rate = bigger deduction. And if there are fewer other benefits, interest would be more beneficial

59
Q

The capital structure of a firm includes bonds with: coupon rate of 12%, effective int 14%, corp tax 30%. What is the net cost of debt?

A

9.8%
Use 14% to figure out what its costing me, true int exp (cuz of discount plus int)
14(1 - .3) = 9.8%

60
Q

Equity Financing

A

Pro: Dividends not liab until declared, no obligation to pay, higher equity = lower risk, makes investors happy when company does well
Con: costly to put out, lose ownership/control, not tax deductible, shares profits

61
Q

Preferred vs Common

A

Cumulative dividends, liquidation value, redeemablility/ callablility, doesn’t vote

62
Q

Operating Leverage

A

How fixed costs affects performance with changes in revenue
DOL = (% change in EBIT) / (% change in sales volume)
High DOL = high fixed costs, but higher proportionary increase in profitability

63
Q

Financial Leverage

A

How much a corp relies on debt financing, looks at interest cost
High debt = higher int = higher risk = HIGH COST
DFL = (% change in EPShare) / (% change in EBIT)

64
Q

Cost of Debt

A

[Yield aka Effective rate] x (1 - tax rate)

65
Q

Cost of Preferred Stock

A

[Dividend aka par x # shares] / [Net issue price] = %

66
Q

Cost of Existing Common Stock: CAPM

A

CAPM, measures volatility of stock relative to avg stocks
CAPM = Risk free rate + [(expect mkt rate - risk free) x Beta]
Beta is avg=1, low risk= 1

67
Q

Cost of Existing C/S: Dividend Yield plus growth

A

(Next expected divid / current stock price) + expected growth in earnings [%]

68
Q

Cost of NEW C/S

A

(Next expected divid / current stock price - flotation costs) + expected growth in earnings [%]

69
Q

Weighted Avg Cost of Capital (WACC)

A

Cost to issue equity/debt, want to keep low
(% of total capital x effective cost % [less tax rate for debt])
Do this formula for each piece and sum

70
Q

B Co. needs funds without fixed charges, fixed maturity date, and an increase in the credit-worthiness of the company. Which should B Co use?

  • Bonds
  • Common Stock
  • LT Debt
  • ST Debt
A

-Common Stock

C/S is not fixed and helps credit-worthiness (lowers risk)

71
Q

Which is correct about WACC?

  • A co. should try to reduce WACC
  • A co. with a high WACC is attractive
  • An increase in WACC increases value
  • WACC equals the borrowing rate
A

-A co. should try to reduce WACC

Lower WACC equals lower costs

72
Q 
30% tax rate with the following capital structure:
40% weight, bond, 10% cost
50% weight, C/S, 10% cost
10% weight, P/S, 20% cost
WACC after tax?
A 
9.8%
40 x 10 x .7 = .028
50 x 10 = .05
10 x 20 = .02
Sum = 9.8%
73
Q

Sold 9% preferred stock, for $40 a share, with a par of $20, cost of issuing was $5. What is the cost of preferred stock?

A

5.1%
(9% x 20) / (40 - 5)
1.8 / 35 = 5.1%

74
Q

Stock is selling for $85 per share, next expected dividend $4.25, expected growth of 7%, corp tax of 30%. What % represents the cost of common stock?

A

12%
(4.25 / 85) + 7%
5% + 7% = 12%

75
Q

Asset and Liability Valuation

A

Actual Price- compare $ to identical assets recently sold
Similar price- comparable asset, base on sq foot etc but not everything is matched/the same
Valuation model- not comparable, base on future cash flows, use equations to see growth

76
Q

Vertical vs Horizontal Merger

A

Vertical - same supply chain, supplier and customer
Horizontal - same line of business (competitor)
Conglomerate- 2 random businesses

77
Q

Gross Margin

A

Gross profit / Net sales

78
Q

DuPont ROI

A

ROI = Return on sales x Asset Turnover
RoS = NI / Sales
Asset Turnover = Sales / Avg assets

79
Q

3.19 lots of ratios

A

3.19 has ratios

80
Q

What would increase a quick ratio?

  • Purchase inventory with a long term note
  • Implement procedures to collect A/R faster
  • Pay an existing A/P
  • Sell obsolete inventory at a loss
A

Sell obsolete inventory at a loss

Inventory isn’t included in the quick ratio, but you receive cash so it improves it

81
Q

Beg Inv: 17k, Purchases: 56k, End inv: 13k

What is inventory turnover?

A 
4.0
COGS / Avg Inv
17 + 56 = 73 Goods avail for sale
73 - 13 = 60 COGS
60 / (17+13 /2) = 4.0
82
Q

Cash 5k, A/R 10k, Inv 20k, A/P 15k, Short term note 5k, LT note 35k. What is the acid test ratio?

A

.75
Cash, AR, AP, ST note
(5 + 10) / (15 + 5) = 15 /20 = .75

83
Q

Inventory Turnover

A

COGS / Avg Inv

COGS = Beg + Purch - End

BEC for OCT (7 decks)

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