Financial Management

Question 1

Arbitrage pricing model

Answer 1

uses a series of systematic risk factors to develop a value that reflects the multiple dimensions of systematic risk

Question 2

cash discounts

Answer 2

discounts for early payment of accounts

Question 3

compensating balance

Answer 3

required minimum level of deposit based on loan agreement

Question 4

concentration banking

Answer 4

payments from customers are routed to local branch offices rather than firm headquarters. reduces collection time

Question 5

cost of capital

Answer 5

the weighted-average cost of a firm’s debt and equity financing components

Question 6

debenture

Answer 6

a bond that is not secured by the pledge of specific property

Question 7

economic order quanity

Answer 7

an inventory technique that minimizes the sum of inventory ordering and carrying costs

= √ (2 x ordering costs x unit demand) / unit carrying cost

Assumes:

1. demand occurs at a constant rate throughout the year and is known
2. lead-time on the receipt of orders is constant
3. entire quantity ordered is received at one time
4. unit costs of the items ordered are constant (no quantity discounts)
5. no limitations on the size of the inventory

Question 8

electronic funds transfer

Answer 8

the movement of funds electronically without the use of a check

Question 9

factoring

Answer 9

the sale of receivables to a finance company

Question 10

financial leverage

Answer 10

measures the extent to which the firm uses debt financing

Degree of Financial Leverage = (percent change in EPS) / (percent change in EBIT)

Higher DOL means hire risk (higher standard deviation of returns)

Question 11

float

Answer 11

the time that elapses relating to mailing, processing and clearing checks

Question 12

inventory conversion period

Answer 12

the average length of time required to convert materials into finished goods and sell the goods

Question 13

Just-in-time production

Answer 13

a demand-pull system in which each component of a finished good is produced when needed by the next stage of production

Question 14

Just-in-time purchasing

Answer 14

a demand-pull inventory system in which raw materials arrive just as they are needed for production. it minimizes inventory holding costs

Question 15

Lockbox system

Answer 15

a system in which customer payments are sent to a post office box that is maintained by the company’s bank. this reduces collection time and improves controls

Question 16

mortgage bond

Answer 16

a bond secured with the pledge of specific property

Question 17

operating leverage

Answer 17

measures the degree to which a firm builds fixed costs into its operations

Degree of Operating Leverage = (percent change in income) / (percent change in unit volume)

Question 18

payables deferral period

Answer 18

the average length of time between the purchase of materials and labor and the payment of cash for them

Question 19

precautionary blances

Answer 19

cash available for ermergencies

Question 20

receivables collection period

Answer 20

the average length of time required to collect accounts receivable

Question 21

speculative balances

Answer 21

cash available to take advantage of favorable business opportunities

Question 22

subordinated debenture

Answer 22

a bond with claims subordinated to other general creditors

Question 23

supply chain

Answer 23

describes the processes involved in a good’s production and distribution

Question 24

warehousing

Answer 24

inventory financing in which the inventory is held in a public warehouse under the lender’s control

Question 25

Order Point

Answer 25

daily demand x lead timing in days + safety stock

Question 26

Days’ sales in accounts receivable

Answer 26

provides an overall measure of the accumulation of receivables

= balance of receivables / sales per day

Question 27

Cost of not taking a discount

Answer 27

(discount % / 100%-discount%) x (365/total period-discount period)

Question 28

Eurobond

Answer 28

• always sold in some country other than the one in whose currency the bond issue is denominated
• less regulated than other bonds and the transaction costs are lower

Question 29

cost of debt

Answer 29

interest payment / funds received

-or-

(Risk Free Rate + Base Points) x 1 - tax rate

Question 30

CAPM

Answer 30

Capital Asset Pricing Model

Risk Free Rate + (Expected Market Rate - Risk Free Rate)xbeta

Question 31

Dividend-yield-plus-growth-rate

Answer 31

(net expected dividend / current stock price) + expected growth rate

Question 32

Bond Yeild

Answer 32

[annual interest payment + (principle-bond price/# of years)] / (.6 x bond price) + (.4 x principle)