Final Note (MCQs) Flashcards
Characteristics of Operating Leases (op - cancer - maintain - not amen)
- Usually “not fully amortized” (trả dần)
- Usually require the “lessor to maintain and insure the asset”
- Lessee enjoys a “cancellation option”
Characteristics of Financial Leases (fin (vây cá) - not maintain - not cancer - renew - amor)
(Essentially opposite of an operating lease.)
- Financial leases “are fully amortized”.
- Do “not provide for maintenance or service by the lessor”.
- Generally, financial leases “cannot be cancelled”.
- The lessee usually “has a right to renew the lease at expiry”.
Sale and Lease-Back
- A particular type of “financial lease”
- Occurs when a company “sells an asset it already owns to another firm and immediately leases it from them.”
- “Two sets of cash flows” occur:
+ The lessee “receives cash today from the sale”.
+ The lessee agrees to make “periodic lease payments, thereby retaining the use of the asset”.
Lessor, Lessee?
Lessor: own assets, not use assets
Lessee: not own assets, use assets
Capital Lease
A lease must be capitalized if any one of the following is met:
The present value of the lease payments is at least 90 percent of the fair market value of the asset at the start of the lease.
The lease transfers ownership of the property to the lessee by the end of the term of the lease.
The lease term is 75 percent or more of the estimated economic life of the asset.
The lessee can buy the asset at a bargain price at expiry.
Current Assets
- cash and other assets
- expected to be converted to cash within the year
- (Cash, “Marketable securities”, Accounts receivable, Inventory)
Inventory period
Raw materials -> Finished goods
Accounts “payable” period
Firm receives invoice -> Cash “paid” for materials
Account “Receivable” period
Finished goods -> Cash “received”
Cash cycle =
Operating cycle - Accounts payable period (CO-Ap)
Operating cycle =
Inventory period + Accounts receivable period (OI+Ar)
Components of Credit Policy (3) (terms, analysis, collection)
- Terms of sale: Credit period, Cash discount and discount period, Type of credit instrument
- Credit analysis – distinguishing between “good” customers that will pay and “bad” customers that will default
3, Collection policy – effort expended on collecting receivables
Carrying costs (receivables, bad debts, managing)
1/ Required return on receivables
2/ Losses from bad debts
3/ Costs of managing credit and collections
Shortage costs (Lost sales)
Lost sales due to a restrictive credit policy
Credit analysis (which customers receive credit)
- Process of deciding which customers receive credit
- Gathering information
- Determining Creditworthiness (5 Cs of Credit, Credit Scoring)
The EOQ model
minimizes the total inventory cost
Sale and Lease-Back
sells an asset it already owns to another firm and immediately leases it from them
Costs of Financial Distress
Bankruptcy risk versus bankruptcy cost
(However, it is not the risk of bankruptcy itself that lowers value. Rather, it is the costs associated with bankruptcy.
It is the stockholders who bear these costs.)
Description of Financial Distress Costs (direct, indirect, agency)
- Direct Costs
Legal and administrative costs (pay for the lawyers) - Indirect Costs
Impaired ability to conduct business (e.g., lost sales) ((difficult in financial stress -> they not want to work with you) - Agency Costs (management and BOD have incentives to do something)
- Selfish Strategy 1: Incentive to take large risks (được ăn cả, ngã về 0)
- Selfish Strategy 2: Incentive toward underinvestment (không còn đầu óc để đầu tư)
- Selfish Strategy 3: Milking the property (còn nhiêu tiền tranh thủ trả hết cho cổ đông (shareholder) để chủ nợ (stockholder) mất mọi thứ rồi phá sản)
explicit cost
It has a clear monetary amount which can be seen in the firm’s financial balance sheet.
Implicit costs
The value by which is not necessarily monetarily quantifiable, but is still considered as a cost.
interest tax shield
vay -> interest nhiều -> taxable income/EBITDA thấp -> tax thấp (tax = tax rate x EBITDA)
Interest tax shields refer to the “reduction in the tax liability due to the interest expenses”. Companies pay taxes on the income they generate. Interest expenses (via loan and mortgages) are tax deductible, meaning they lower the taxable income. Thus, interest expenses act as a ‘shield’ against the tax obligations.
More debt
more company’s value
RF: the risk-free rate of return
RM: market return, the expected return on the market portfolio nếu cho market return thì phải lấy beta x (market return – risk free rate)
(RM - RF): market risk premium (MRP)
𝛽: Sensitivity of a stock’s return to the return on the market portfolio.
Rs = Rf + beta(Rm - Rf)
