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Uni Final > Brief CFS > Flashcards

Brief CFS Flashcards

1
Q

Working Capital Management

A

Balancing assets and liabilities for optimal liquidity

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2
Q

Relaxed Working Capital Strategy

A

Larger cash balance (High CA)
Lower return on capital employed
Quick liquidity
Generous credit terms
Invest heavily in inventory
Lower profitability (Capital tied up in low return assets)
Lower risk

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3
Q

Consequences of poor working capital

A

Failure to invest in expanding production and lose orders/profits
Affects liquidity, damage credit ratings and increase borrowing
Result in overtrading problems

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3
Q

Key costs for optimal WC

A

Carrying cost - increase with WC, Higher in relaxed with more assets

Shortage cost - decrease with more investment, More in aggressive policy due to low level of resources

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4
Q

Overtrading

A

Cause: Poor WC management, over expansion, and initial under-capitalisation
Solutions: reduce business activity, increase capital base, tight control on WC

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5
Q

Trade Credit management

A

Benefits: Reduce bad debts, Improve cash flow, Customer relationships Competitive advantage
Challenges: Risk of default, Economic conditions, Administrative burden.

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6
Q

Expected profit on initial order via credit decision

A

p x PV(REV-COST) - (1-p) x PV(COST)

p is chance of recovery (customer pays)

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7
Q

Trade credit: Factoring

A

Often bank subsidiaries, handle sales administration, Credit protection, Provision of finance

Advantages: Immediate cash flow, Outsources admin, Credit protection, support for growth, efficient debt management.

Disadvantages: Cost, Customer relationship risk, Perception issues, Selective acceptance

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8
Q

Trade Credit: Invoice discounting

A

Factor purchases selected invoices without debt collection or admin

Advantages: Immediate cash access. confidentiality, control over receivables, flexible financing option

Disadvantages: Admin responsibility, Selective financing, eligibility criteria, high interest rates

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9
Q

Approaches to Inventory management

A
  • Broad-base approach (high-value=more monitoring)
  • Economic order quantity model
  • Computer-based material requirements and just-in-time methods
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10
Q

Miller-Orr Model

A

Range between upper and lower limits = 3x(3/4x(transactioncostsccashflow varience)/Interest rate)^1/3

Return point = Lower limit +range/3

Upper limit = lower limit + range

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11
Q

Forward-forward loans

A

Want to borrow 5m in 1 month for 3 month. Borrow 5m for 4 months and lend for 1 month.

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12
Q

Forward rate agreement (FRA)

A

Fix interest rate on certain principal during specified future time period. principal is notional.
Uncertainty eliminated

Cheaper than forward forward

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13
Q

Interest rate future (ST3)/RIF

A

ST3 contracts, exchange traded
1 contract= 500,000/1,000,000
Tick size = 1basis point = £12.50/£25
Quotation of price = F=100-r

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14
Q

Internal mechanisms for FX risk

A

Pricing (increase price to allow for adverse changes)
Invoicing (different currencies)
Leading and lagging (adjust credit terms)
Netting (net out payment obligations)
Matching (like netting but match with 3rd party)
Asset and liability management (aggressive vs defensive)

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15
Q

Asset / Liability
Home currency = GBP
Inflow currency EUR
Inflow currency match base? Yes
Action?

A

Asset: Buy put option to sell base currency

Liability: Buy Call options to buy base currency

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16
Q

EUR/GBP contract spec

A

Value = EUR 125,000
Quote = EUR/GBP
Tick size = 0.00005 = £6.25

17
Q

GBP/USD Contract Specs

A

Value = GBP 62.500
Quote = GBP/USD
Tick Size = 0.0001 = $6.25

17
Q

M&A takeovers

A

Purchase of one firm by another (large firm makes cash bid for smaller firm)
Requires share holder approval (Agency problems)
Hostile takeovers (Cadbury)
Management buy out
Leveraged buy out

17
Q

Merger examples

A

Good - Disney x Pixar. Increased rate of production, ‘Up” and “WALL-E” highlight success

Bad - Diamler and Chrysler. Cultural clash and leadership issues. From 35 to 7.4 bln in 9 years

18
Q

Merger process (5 steps)

A
  1. Identify target
  2. Decide to merge (motives, benefits, costs)
  3. Financing (shares, cash(70%), hybrid)
  4. What price to pay? (valuation of target)
  5. Formulation of proposal (friendly or hostile)
19
Q

Motives for mergers (4)

A
  • Synergy( Market power (increase market share…), Economies of scale, Internalising transactions, Tax, Risk diversification)
  • Bargain buying (buy undervalued)
  • Managerial motives (Remuneration, strategy, status, survival)
  • Third party motives (Pressure from investment banks, lawyers, accountants, suppliers, customers….)
20
Q

Economic costs - cash payment
M&A

A

Cost = cash payment - firm B’s separate value

NPV = Gain - Cost
if +ve then merge

21
Q

Economic costs - share exchange

A

More complicated than cash
cost = value of new shares issued - PVb
Value = No. new shares*new price of shares
New share price = PVab / Total no. shares

then use cash method

22
Q

Semi strong market efficiency tests

A

Anticipation
Slow learning
Overreaction/correction
Persistent inefficiency

23
Q

Evidence of levels of efficiency -EMH

A

Weak form
- no serial correlation, no predictability
- no consistent profits from technical analysis
- momentum

Semi-strong
- evidence of under/overreactions to public info

Strong
- Insider trading happens and is profitable (illegal)
- professional funds do not always beat market

24
Q

Valuation techniques M&A

A
  • Discounted cash flows
  • Maintainable earnings (earnings /return)
  • Dividends (Dividend/DY)
  • Net asset value (assets - liabilities)
  • Super profits (NAV +5yr super prof)
  • Berliner method (maintainable earnings + NAV)/2
25
Q

Defence bidding tactics

A

Pre-Bid:
- External vigilance = Aggressive publicity/Improve image
- Forewarned = watch share register for potential bidder
-Placing shares in friendly hands
- Strategic defensive investment
Post bid:
- Attack logic and quality of bidders management. Encourage community to lobby against bid
- Pac-man (try to take over bidder)
- increase share price

offer company to more friendly firm
sell off high value (to buyer) assets

26
Q

Post-merger activities

A

Challenging to integrate. Complexities depend on type of merger.
Conglomerate difficult as no functions overlap

27
Q

Drucker 1981

A

5 golden rules for successful integration:
1. share common core of unity
2. consider what skills and benefits acquirer can bring
3. crucial for acquirer to value assets of firm
4. Acquirer responsible for putting top management in company quickly
5. Acquirer should facilitate cross boarder promotions to encourage integration and collaboration

28
Q

Jones 1986

A

Align corporate goals and strategic plan that include acquisition
Quickly gain control

29
Q

Why businesses fail

A

External:
- Macroeconomic factors (inflation, market volatility…)
- Changes on technology and consumer demands (Blockbuster)
Internal Factors:
- Financial factors
- Experience
- Neglect
- Fraud
- Disaster
- Strategy Factors

30
Q

Sequence leading to typical failure

A
  • Bad management (Weak finance function, bad CEO or lack of depth in management team
  • Inadequate information systems
  • Mistakes
  • Financial Accounts
31
Q

Beavers Univariate model (1996)

A

Straightforward but imperfect model, looking at financial status, one ratio at a time

32
Q

X1, X2 and X3 for Z-score model

A

X1 = WC/TA (Liquid assets relative to size)
X2 = Cum RE/TA (Profitability)
X3 = EBIT/TA (Operating efficiency)

33
Q

X4, X5 in Z-score model

A

X4 = MV of equity /BV of debt
(BV of equity for Private firms)
X5 = Sales/TA
(No X5 for non-manufacturing firms)

34
Q

Why use Ohlson’s O-score?

A

Predicts one-year bankruptcy risk and applies across all industries

35
Q

Market measures of distress

A

Equity volatility
Short interest
Bond spreads (widening)
Risk premium (Higher=likely to default, liquidity risk…)
Yield curve analysis
Text mining

36
Q

Advantages and disadvantages of Quantitative prediction models

A

A: (Access to data, objective, Z-score is easy, Cover many companies, Warning signal)

D: (Inputs may not be reliable, Limited inputs, Confirming failure)

37
Q

Advantages and disadvantages of Qualitative prediction models

A

A: (Immediate knowledge, Diagnosis, Detect distress earlier, Save the firm)

D: (Subjective, Difficult access, Early does not mean more accurate, Reliability of info?)

Uni Final (12 decks)

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