Financial Management Flashcards
Managing inventory & receivables (current assets & liabilities)
Financial Management
NWC : Current Assets - Current Liabilities
Financial Management
Shorten the cash conversion cycle
Don’t negatively impact operations
Financial Management
Average time needed to convert materials into finished goods and sell them
Average Inventory : (BI + E) / 2
Inventory Conversion Period : Average Inventory / Sales Per Day
Financial Management
Average time needed to collect A/R
RCP : Average Receivables / Credit Sales Per Day
Financial Management
Average time between materials and labor purchase and their A/P payment
Average Payables : (BP + EP) / 2
Payables Deferral Period : Average Payables / (COGS/365)
Financial Management
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)
Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle
(Inventory Really (-Pays) Cash)
Financial Management
Liquid
Safe
Financial Management
Used for importing goods.
Issued by importer’s bank.
Financial Management
No interest cost if paid timely.
Financial Management
Customer Payments are sent to a bank-managed PO box.
Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)
Financial Management
Time it takes to mail a payment and have it clear your bank account
Maximize float on cash payments
Minimize float on cash receipts
Financial Management
Regional bank sends enough cash to cover daily checks
Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances
Financial Management
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
Financial Management
Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Unsecured
Issued by large firms
Financial Management
Advantages: Financing at less than Prime. No compensating balances required.
Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
Financial Management
The order quantity that minimizes inventory costs.
EOQ : Square Root of (2DO/C)
D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory
Financial Management
The cost of keeping inventory.
Financial Management
Cost of executing an order and starting product production.
Financial Management
How low inventory should get before it should be re-ordered.
IOP : Average Daily Demand x Average Lead Time
Financial Management
Orders inventory so that you get it just in time for when it’s needed
JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
Financial Management
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
Financial Management
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
Financial Management
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
Financial Management
A benchmark used for lending only to the best customers
Most customers will be charged Prime + 3%- for example
If the lending institution and the customer are not in the same country- the LIBOR rate is often used
Financial Management
Interest rate stated on the face of a bond.
Financial Management
CY : Interest Payment / Bond Price
Financial Management
PV of Principle + Interest : Bond Price
Financial Management
No interest payments made
Bond sold at a discount
Interest reflected when Bond matures
Financial Management
High interest rate
High default risk
Financial Management
Bonds unsecured by collateral
Financial Management
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
Financial Management
Provision in Bond contract allows demand of Bond payment under certain circumstances
Financial Management
Borrower can pay off debt early
Financial Management
Lender can demand payment via company stock instead of money
Financial Management
Borrower deposits regular sums into an account that will eventually pay off the debt
Financial Management
Common Stock is more expensive to issue than debt.
Why? Investors demand a greater ROI than debtors (bondholders)
Financial Management
Hold dividend priority over common stock
Financial Management
A company uses this to determine the true cost of their capital
Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC : 9.2%
Financial Management
A stock’s expected performance is based on its beta (risk) compared to that of the stock market.
More risk : more expected return.
Financial Management
(Interest Expense - Tax Benefit) / Carrying Value of Debt
Financial Management
