Financial Management 2 Flashcards
What is Economic Order Quantity?
The order quantity that minimizes inventory costs.
EOQ : Square Root of (2DO/C)
D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory
What is Carrying Cost?
The cost of keeping inventory.
What is Order Cost?
Cost of executing an order and starting product production.
What is inventory reorder point?
How low inventory should get before it should be re-ordered.
IOP : Average Daily Demand x Average Lead Time
What is a Just In Time (JIT) system?
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
What is Factoring of receivables?
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
What is a Trade Discount?
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
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
What is the Prime Rate?
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
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
How is Current Yield calculated?
CY : Interest Payment / Bond Price
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
What is a Zero Coupon Bond?
No interest payments made
Bond sold at a discount
Interest reflected when Bond matures
