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2014 BEC > (6) Financial Management > Flashcards

(6) Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

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2
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

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3
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

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4
Q

What is the Inventory Conversion Period?

A

Average time needed to convert materials into finished goods and sell them

Inventory Conversion Period : 365 / Inv Turnover

Inv Turnover: COGS / Avg Inv
Average Inventory : (BI + EI) / 2

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5
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : 365 / AR Turnover

AR Turnover: Sales / Avg AR

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6
Q

What is the Payables Deferral Period?

A

Average time between materials and labor purchase and their A/P payment

Payables Deferral Period : COGS / Avg APayable

Average Payables : (BP + EP) / 2

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7
Q

What is the Cash Conversion Cycle?

A

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle

(Inventory Really (-Pays) Cash)

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8
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

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9
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

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10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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11
Q

What is a Lockbox System? What are the advantages?

A

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

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12
Q

What is float?

A

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

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13
Q

What are Zero Balance Accounts?

A

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

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14
Q

What is the difference between Treasury Bills- Notes and Bonds?

A

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

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15
Q

What is commercial paper?

A

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

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16
Q

What are the advantages and disadvantages of Commercial Paper?

A

Advantages: Financing at less than Prime. No compensating balances required.

Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.

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17
Q

What is Economic Order Quantity?

A

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2SO/C)

When I say 2, you say SOC!
S : Unit Sales (Annual)
O : Order Cost
C : Carrying Cost per unit of Inventory

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18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

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19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

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20
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered or mfg to avoid stockout costs.

IOP : Safety Stock + (Lead Time x Sales during lead time)

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21
Q

What is a Just In Time (JIT) system?

A

Orders inventory so that you get it just in time for when it’s needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

22
Q

What is Factoring of receivables?

A

Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection

23
Q

What is a Trade Discount?

A

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

24
Q

What is the cost of forgoing a discount? (APR of payment disc)

A

[360 / (Pay Pd - Disc Pd)] x [Disc / (100 - Disc %)]

25
Q

What is the Prime Rate?

A

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%- for example

If the lending institution and the customer are not in the same country- the LIBOR rate is often used

26
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

27
Q

How is Current Yield calculated?

A

CY : Interest Payment / Bond Price

28
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle + Interest : Bond Price

29
Q

What is a Zero Coupon Bond?

A

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

30
Q

What are the characteristics of a Junk Bond?

A

High interest rate

High default risk

31
Q

What are debenture bonds?

A

Bonds unsecured by collateral

32
Q

What are subordinated debentures?

A

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

33
Q

What are Redeemable Bonds?

A

Provision in Bond contract allows demand of Bond payment under certain circumstances

34
Q

What is a Callable Bond?

A

Borrower can pay off debt early

35
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

36
Q

What is a Sinking Fund?

A

Borrower deposits regular sums into an account that will eventually pay off the debt

37
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

38
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

39
Q

What is Weighted Average Cost of Capital (WACC)?

A

A company uses this to determine the true cost of their capital

WACC: [(Cost of Equity * % Equity) + (WA Cost of Debt * % Debt)]

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%
40
Q

What is CAPM?

A

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.

CAPM = Risk-Free Rate + Risk Premium
= RFR + [beta x (Market Rate - RFR)]

41
Q

How is Cost of Debt calculated?

A

YTM (or weighted avg interest rate) * (1 - Tax Rate)

42
Q

Net Present Value (NPV)

A 
After-Tax Cash Flows (CF * (1 - Tax Rate))
\+ Depr Benefit (Depr * Tax Rate)
x Multiply Result by PV of Annuity
- Subtract Initial Cash Outflow
= NPV
43
Q

Profitability Index

A

PV Net FCF / PV of Net Initial Investment

like NPV but divide instead of subtract by initial investment.

44
Q

Payback Period & Disc Payback Period

A

Payback: Initial Outflow / annual annuity
Assumes uniform cash flows.

Disc Payback: use annual discounted cash flows

45
Q

Degree of Operating Leverage (DOL)

A

% Change in EBIT / % Change in Sales

Higher DOL means greater profitability potential and higher risk.

46
Q

Degree Financial Leverage (DFL)

A

% Change in EPS / % Change in EBIT

Higher DFL means greater profitability potential and higher risk.

47
Q

Degree of Combined Leverage (DCL)

A

% Change in EPS / % Change in Sales

48
Q

Weighted Avg Interest Rate or (Market Rate or YTM)

A

outflow / inflow

effective annual interest payments / debt cash available

49
Q

Cost of Common Stock

A

Outflow / Net Inflow

i.e. 10%, $100 par, $5 floatation cost
= $10 / ($100 - $5)
= .10526

50
Q

Cost of RE (stock kre)

A

kre = (Div1 / P0) + g

       Div1 = Div0 * (1 + g)

2014 BEC (9 decks)

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