Financial Management Flashcards
For what are Letters of Credit used?
Used for importing goods.
Issued by importer’s bank.
What is the advantage of using Trade Credit?
No interest cost if paid timely.
What are Zero Balance Accounts?
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
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Unsecured
Issued by large firms
What are the advantages and disadvantages of Commercial Paper?
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.
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 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 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
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 CAPM?
A stock’s expected performance is based on its beta (risk) compared to that of the stock market.
More risk : more expected return.
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
