Exam 4

Question 1

Operating Cycle

Answer 1

Time from when firm buys raw materials to when it receives cash for collecting receivables

Question 2

Cash Conversion Collection Equation

Answer 2

AAI + ACP - APP

Question 3

Net Working Capital Equation

Answer 3

A/R + Inventory + A/P

Question 4

Average Payment Period (APP) Equation

Answer 4

Accounts Payable / Average Daily Purchases

Question 5

Average Age of Inventory (AAI) Equation

Answer 5

Inventory / Average Daily Purchases

Question 6

Spontaneous Liabilites

Answer 6

Arise from normal course of business

Question 6

3 Ways To Manage Cash Conversion Cycle

Answer 6

1. Turn over inventory as quick as possible
2. Collect A/R faster
3. Manage mail, processing, clearing

Question 7

Two Sources of Spontaneous Liabilities

Answer 7

Accounts Payable, Accruals

Question 8

Two Major Sources of Unsecured Short-Term Loans

Answer 8

Banks, Sales of Commercial Paper

Question 9

Prime Rate

Answer 9

Interest rate used to lend to banks in good standing

Question 10

Discount Loan

Answer 10

Pay interest in advance by being deducted from amount borrowed

Question 11

Single Payment Loan

Answer 11

Made to a borrower who needs funds for a special purpose for a short period of time

Question 12

Line of Credit

Answer 12

Flexible loan from a bank or financial institution; can withdraw at any time and pay back; bank can reduce limit or demand payment immediately whenever they want

Question 13

Revolving Line of Credit

Answer 13

Guaranteed loan where commercial bank promises to make a certain amount available

Question 14

Conversion Ratio for Convertible Bond

Answer 14

Par Value of Convertible Bond / Price

Question 15

Motives for Using a Convertible Bond

Answer 15

Raise cheap funds temporarily, minimize restrictive covenants, “sweetener” for financing

Question 16

Straight Bond Value

Answer 16

What convertible bond would sell for without convertible feature

Question 17

What is strike price

Answer 17

Exercise Price

Question 18

Merger

Answer 18

Identity of one of the firms is kept, usually the larger

Question 19

Consolidation

Answer 19

Forms a completely new corporation

Question 20

Reasons Companies Merge

Answer 20

Growth, Synergies, Fundraising, Increased Skill, Tax Considerations, Defense Against Takeover

Question 21

Synergy

Answer 21

Economy of scale is improved from merged firm’s lower overhead or increased power in the marketplace

Question 22

Leveraged Buyout (LBO)

Answer 22

Acquisition technique involving the use of a large amount of debt to purchase a firm

Question 23

Tender Offers

Answer 23

Given directly to target firm’s stakeholders; usually a hostile takeover is initiated via this

Question 24

Three Attributes of a An LBO Candidate

Answer 24

Good position in the industry, low debt, stable cash flows

Question 25

Insolvency

Answer 25

Financial state of not having enough money to meet obligations

Question 26

Bankruptcy

Answer 26

Legal process that happens when a person declares he or she can no longer his or her debts to creditors

Question 27

Voluntary Settlement

Answer 27

Arrangement between insolvent or bankrupt firm and it’s creditors, enabling it to bypass many costs

Question 28

Debtor In Possession

Answer 28

Has filed for bankruptcy but still has legal claim to assets under a lien or other security interest