Chapter 13

Question 1

5 key areas to consider in a financial analysis

Answer 1

1) revenue model
2) cost structure and cost drivers
3) margin requirements
4) cash operating cycle (COC)
5) capitalization requirements (ROIC)

Question 2

total costs associated w/ delivering the organization’s products or services to the marketplace (procurement of parts, manufacturing, distribution, marketing and sales, administration, post-purchase service and support
= direct/variable costs + indirect/fixed costs

Answer 2

cost base

Question 3

costs that are directly tied to the manufacturing of a product or the delivery of a service depending on the type of business being assessed

Answer 3

Variable (direct) Costs

Question 4

costs that, are not directly tied to the manufacturing of a specific product or the delivery of a specific service, but exist as a result of conducting our business and operating our company

Answer 4

Fixed (indirect) Costs

Question 5

costs the organization commits itself to w/I an operating year, often spent in advance or at the front end of a man

Answer 5

committed costs

Question 6

the level of sales revenue or volume that is required for the organization to cover all of its costs
○ Considered to be the minimum acceptable position for the business in the short term
○ = total fixed costs / (selling price per unit - variable costs per unit)
○ OR = fixed costs / (1 - VC%)

Answer 6

breakeven point

Question 7

represents the portion of an organization’s revenue that is left over after paying for an identified level of costs
○ Key indicator of the overall operating efficiency of an organization

Answer 7

margin

Question 8

refers to the amount of time it takes for an organization to recover the cash (product is sold and money is received) it has paid out for the development, production, and distribution of products

Answer 8

Cash Operating Cycle (COC)

Question 9

refers to an organization’s mixture (use) of debt, internal cash reserves, and external equity-based investments in financial support of operational activities

Answer 9

Capital Structure

Question 10

equal total revenue minus operating expenses

Answer 10

operating profits

Question 11

refers to the dollar amount of net earnings accumulated over the history of an organization that it has chosen to hold within the organization

Answer 11

Retained Earnings

Question 12

Refers to debt that an organization has taken on in support of its business activities

Answer 12

Credit Facilities (debt financing)

Question 13

refers to debt obligations that an organization takes on for a short period of time (less than 1 yr.), key factor in assessing liquidity of a company

Answer 13

Short-term credit facilities

Question 14

money owed by an organization to its suppliers and other short-term service providers

Answer 14

Accounts Payable

Question 15

money owed by customers of the organization for products or services that the organization has delivered to such customers, but has not yet received payment for

Answer 15

Accounts receivable

Question 16

an arrangement with a lending institution that provides an organization w/ a pre-arranged borrowing ceiling (max) that the org can draw on at any time, and in any amount up to the agreed limit

Answer 16

Line of credit

Question 17

refers to capital assets or monetary assets used to secure a credit facility, would be used to pay off lender in event that the organization cannot meet the credit facility repayment obligations

Answer 17

Collateral

Question 18

represent debt that an organization obligates itself to repay over a time frame that exceeds one year

Answer 18

Long-Term Credit facilities

Question 19

total sum of money over and above the principal borrowed paid by an organization as a result of incurring and repaying a debt obligation. This would include interest paid as well as costs incurred in setting up the credit facility.

Answer 19

Cost of Borrowing

Question 20

a credit facility with which an organization borrows money for a stipulated period of time. In return for the use of these funds, the organization promises to pay the holder of the bond an agreed-upon amount of interest at regular intervals (generally, semi-annually) during the period of time for which the funds are borrowed

Answer 20

bond

Question 21

a credit facility that is backed by real estate collateral, and that sets forth a defined schedule of periodic payments for the full repayment of the debt owed, plus interest, over a defined period of time

Answer 21

mortgage

Question 22

a credit facility under which an organization borrows a stipulated amount of money of a defined period of time (exceeding 1 yr.), and w/ a defined interest rate schedule (fixed or variable)

Answer 22

long-term note

Question 23

represent a legal obligation to pay a service provider w/ an agreed-upon amount of money, via a defined periodic payment schedule over an identified period, in return for the use of property, equipment, or some other service

Answer 23

lease obligations

Question 24

equity capital that is obtained by an organization from private sources (not a public exchange)

Answer 24

private equity

Question 25

a security that represents a percentage of ownership in a corporation’s assets, and entitlement to a pro-rata claim on earnings when released

Answer 25

stock

Question 26

equity investments in an organization, by investors, as a result of the purchase of publicly traded shares (stock) due to an IPO or an APO (secondary offering)

Answer 26

public equity

Question 27

an additional public offering of an organization’s stock for the purpose of raising new capital

Answer 27

Secondary Offering

Question 28

means the price of existing shared of stock will decline due to the act that a larger number of shares now exist

Answer 28

price dilution

Question 29

the current market value of an organization - calculated by taking the number of shares outstanding multiplied by the current value of its shares

Answer 29

Market Capitalization Value

Question 30

the receipt of funds from another person or organization for the purpose of using them to enhance the well-being of others

Answer 30

Philanthropy

Question 31

refers to the addition to the manufacturer’s price that distributors add to the price of a product to ensure that their own direct and indirect costs are covered and that their profit margin is achieved

Answer 31

Mark-up Pricing

Question 32

eduction in the price of the product with the intent to stimulate the sale of the product over a defined period of time

Answer 32

price discounting

Question 33

utilization of a premium price strategy in order to maximize margin return on the sale of each individual unit of a product

Answer 33

price skimming

Question 34

utilization of pricing tactic that are designed to respond to the psychological tendencies of purchasers (i.e. pricing at $33.99 versus $34.00)

Answer 34

Psychological Pricing

Question 35

a temporary price reduction offered on a product or service in order to stimulate sales, can be offered at POS or on a deferred basis (i.e. mail-in)

Answer 35

Rebates