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BEC > Financial Management > Flashcards

Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables

Managing and financing CA & CL

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2
Q

Sources of ST funds

Hedging may occur

A
  • A/P trade credit
  • ST bank loan (annualize the rate)
    • Informal line of credit
    • Revolving credit
    • Letter of credit
  • Commercial paper (unsecured)
  • A/R (pledging, factoring, securitization)
  • Inventory (lien, warehouse)
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3
Q

How is Net Working Capital calculated?

A

NWC = Current Assets - Current Liabilities

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4
Q

Cash Management 3 goals

A

Sufficient amount to:

  1. take purchase discounts
  2. maintain credit rating
  3. meet unexpected needs
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5
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

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6
Q

What is the Inventory Conversion Period?

A

Average time needed to convert materials into finished goods and sell them

Inv Conv Pd = Avg Inv / COGS Per Day

sometimes Sales/Day

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7
Q

What is the Receivables Collection Period?

DSO

A

Average time needed to collect A/R

RCP = Average Receivables / Credit Sales Per Day

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8
Q

What is the Payables Deferral Period?

A

Average time between materials and labor purchase and their cash pmt

Payables Deferral Period = Avg Payable/COGS per day

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9
Q

What is the Cash Conversion Cycle?

The longer the cycle, the more financing required

A

Amount of time between cash outflow (vendor) and cash inflow (customers)

= Inv Conv Pd + Rcbl Collec Pd – Pbl Deferral Pd

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10
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

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11
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

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12
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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13
Q

What is a Lockbox System?

What are the advantages?

A

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.

Cash Conversion sped up

Interest income from deposits should pay for the Lockbox fee

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14
Q

What is float?

A

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

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15
Q

What are Zero Balance Accounts?

A

Regional bank informs of cash to cover daily checks

Deposit that amount only, daily

Advantages: float period

No cash tied up for compensating (minimum) balances

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16
Q

What is the difference between Treasury Bills- Notes and Bonds?

A

Treasury Bills: Short term (less than one year) Think: $1 Bill Treasury

Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

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17
Q

What is commercial paper?

A

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured Issued by large firms

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18
Q

What are the advantages and disadvantages of Commercial Paper?

A

Advantages: Financing at less than Prime.

No compensating balances required.

Disadvantages: No secondary market

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19
Q

What is Economic Order Quantity?

A

The order quantity that minimizes ordering and carrying costs

EOQ = Sq Root of (2DO/C)

D = Unit Demand/yr

O = Unit Order Cost

C = Unit Carrying Cost/yr

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20
Q

What is Carrying Cost?

A
  1. Storage
  2. Interest
  3. Spoilage
  4. Insurance
  5. Property Tax
21
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

22
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered.

IOP = Avg Daily Demand x Avg Lead Time

23
Q

MRP

Material Requirements Planning

A

Manufacture based on FORECASTS

weakness: “push-through” system

24
Q

What is a Just In Time (JIT) system?

A

Demand-pull system

JIT is valuable when:

  • Order Cost is low
  • Cost of Carrying Inventory is high
  • Good supplier relationships
25
Q

Receivables Management

A

Establish credit policy:

  • Credit period
  • Discounts
  • Credit criteria
  • Collection policy
26
Q

What is Factoring of receivables?

A

Receivables are sold to a financing company at less than the value of the receivables due to a discount related to risk of non-collection

27
Q

What is a Trade Discount?

A

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

28
Q

What is the cost of forgoing a discount?

A

Discount/(100% - disc) x 365/(pay period - discount period)

29
Q

What is the Prime Rate?

A

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%

If the lending institution and the customer are not in the same country the LIBOR rate is often used

30
Q

Foreign v Eurobond

A

Foreign is denominate in the currency of the nation

Eurobond is sold internationally and denominated in US dollars

31
Q

LT Debt Covenants

Secured, Unsecured

A

Covenenants:

Neg: restrict assets, addl debt, div pmt, mgt comp

Pos (must do):

  • audit f/s
  • minimum ratios
  • life ins
32
Q

Debt financing

Advantages/Disadvantages

A

Interest tax-deductible, obligation fixed, no equity participation, less costly

Must be paid, debt covenants, risk in excess

33
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

34
Q

How is Current Yield calculated?

A

CY = Interest Payment / Bond Price

35
Q

What is the Effective (YTM- Market) Rate?

A

Rate that equates PV of Principle + Interest = Current Bond Price

36
Q

What is a Zero Coupon Bond?

A

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

37
Q

What are the characteristics of a Junk Bond?

A

High interest rate High default risk

38
Q

What are debenture bonds?

A

Bonds unsecured by collateral

39
Q

What are subordinated debentures?

A

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

40
Q

What are Redeemable Bonds?

A

Provision in Bond contract allows demand of Bond payment under certain circumstances

41
Q

What is a Callable Bond?

A

Borrower can pay off debt early

42
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

43
Q

What is a Sinking Fund?

A

Borrower deposits regular sums into an account that will eventually pay off the debt

44
Q

How is Cost of Debt calculated?

A

(Interest Expense - Tax Benefit) / Carrying Value of Debt

45
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

46
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

47
Q

What is Weighted Average Cost of Capital?

A

A company uses this to determine the true cost of their capital

Example:

AFTER TAX Debt costs 5%; 40% of Cap.

Equity costs 12%; 60% of Cap.

(5%x40%)+(12%x60%) = WACC = 9.2%

48
Q

What is CAPM?

A

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk = more expected return.

49
Q

Capital Lease

A

Trx at end

BPO

Term 75% of est life

PV of lease pmts 90% of Fair Value

BEC (9 decks)

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