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Intermediate Finance > Chapter 21 > Flashcards

Chapter 21 Flashcards

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1
Q

What are the three current asset investment policies

A
  • relaxed policy
    -moderate policy
    -restricted policy
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1
Q

What are the two basic questions in working capital management?

A
  1. What is the appropriate amount of working capital?
  2. How should working capital be financed
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2
Q

What is the relaxed policy?

A

CA investment policy that means a company holds onto a lot of cash, receivables and inventory relative to it’s sales

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3
Q

What is a moderate policy

A

CA investment policy in between relaxed and restricted

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4
Q

What is a restricted policy

A

CA investment policy that holds current assets to a minimum… exposes firm to risks

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5
Q

What is the optimal CA investment policy?

A

one that will maximize the firms long-run free cash flow

-changing technologies can lead to optimal changes

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6
Q

What are the primary sources of funds for operating current assets?

A

-Bank loans
-credit from supplies
-accrued liabilities
-long term debt
-common equity

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7
Q

What are permanent operating CA

A

The operating assets needed at low point of the buisness cycle

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8
Q

What are temporary operating CA

A

the extra CA due to sales increase during a cyclical upswing

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9
Q

What is the definition of operating CA financing policy

A

The way permanent and temporary assets are financed

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10
Q

Maturity Matching or “Self-Liquidating “ Approach

A

moderate CA approach

matches assets and liabilities maturities

-temporary assets financed with short term debt

-long term assets financed with long-term capital

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11
Q

What are the two issues with the maturity matching approach?

A

-The lives of assets are uncertain (can’t always perfectly match up)

  • Some common equity must be used
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12
Q

Agressive Approach

A

-some of the permanent CA is financed with short-term debt b/c short term interest rates are lower

-keep getting new short-term loans

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13
Q

What are the risks of aggressive approach

A

dangers of loan renewals and rising interest rate problem

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14
Q

What is the conservative approach

A
  • long term capital is used to finance all permanent assets and also to meet some seasonal needs

“storing liquidity” in the form of marketable security

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15
Q

Is the cost of short term or long-term debt more expensive

A

long term

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16
Q

why is short term debt riskier

A
  • interest expense can fluctuate widely
    -temporary recession may adversely affect its financial ratios
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17
Q

What are the advantages of short term debt:

A
  • easy to arrange quickly
    -increased flexibility
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18
Q

What is the Cash Conversion Cycle (CCC)

A

The length of time between the firm’s actual cash expenditure and its cash receipt from the sale of the product

-how long it takes to collect the cash from a sale

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18
Q

What are spontaneous sources of funding

A

AP and Accrual

19
Q

What are the three parts of the CCC cycle

A

Inventory conversion period: how long it takes to sell something

Average Collection period: how long it takes to collect cash payment

Payable deferral period: the length of time supplier give to pay for purchase

20
Q

Is a short or long CCC good

A

short - collect cash quicker

21
Q

What are the benefits of reducing CCC

A

strong relationship between stock performance and low CCC

22
Q

What are the goals when it comes to inventory management

A

Ensure inventory needed to sustain operation is available but carry the lowest level of inventory possible

23
Q

What is the Just in time inventory system

A

receive goods only as they are needed

“remember from supply chain”

24
Q

What is receivable management

A

when a firm sells good to a customer on credit

25
Q

what does receivable management include:

A

-credit policy
-monitoring system

26
Q

what is a credit policy

A

2/10, net 30

27
Q

what are credit standards

A

how much financial strength a customer must have to qualify for credit

28
Q

What is the accumulation of receivables

A

the total amount of AR outstanding at any given time

29
Q

What are the two was to monitor receivable position

A

-DSO
-Aging Schedule

30
Q

What is trade credit (AP)

A

when a firm makes a purchase on credit

31
Q

what is the true price of trade credit

A

100% - the discount X the listed price… the price you’d actually pay

32
Q

what is the finance charge of credit

A

the discount percentage X fixed price

33
Q

What two can trade credit be broken down into

A

free trade credit and costly trade credit

34
Q

what is free trade credit?

A

credit received during the discount period

35
Q

what is costly trade credit

A

credit in excess of the free trade credit and whose cost is an implicit one based on the forgone discount

36
Q

what is a transaction balance

A

balance that is used for routine payments

topic: cash management and target cash balance

37
Q

what is a precautionary balance

A

needed for unforeseen fluctuations

topic: cash management and target cash balance

38
Q

what is a compensating balance

A

amount needed to stay in bank… learned in acct.

39
Q

What are the two cash management techniques

A

synchronizing cash flows and using float

40
Q

What is synchromizing cash flows

A

A cash management technique that times cash receipts with cash outlays

41
Q

What is using float

A

A cash management technique that is the difference between the balance shown in the firm checkbook and the balance on the bank record

-

42
Q

what is a collection float?

A

don’t have revenue collection yet

43
Q

what is disbursement float

A

dont have the money on the checkbook … bank hasn’t cleared the check yet so firm has less on books

44
Q

which float do you not want

A

collection float - want to collect the money quickly

45
Q

what are the techniques to speed up collections - Cash managment

A

lockbox system and electronic payments

46
Q

Short term marketable securities are held for what three reasons

A
  • liquidation just prior to scheduled transaction
    -unexpected opportunities
    -reduce company’s risk

Intermediate Finance (10 decks)

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