Financial Management Flashcards
Financial Management
Describe the payables deferral period
Financial Management
Payables Deferral Period = Avg. payables
______________
Purchases per day
Financial Management
What is the Order Point?
Financial Management
Order Point = Daily Demand x (Lead time in days + Safety stock)
Financial Management
Describe the Inventory Conversion Period
Financial Management
ICP = Average Inventory
______________
Cost of sales per day
Financial Management
What is the interest cost of not taking a trade discount formula?
Financial Management
Interest cost of not taking a trade discount formula
= Discount % x 365 Days
__________ ____________________
100%- Disc % Total pay pd- discount pd
Financial Management
Describe the Economic Order Quantity
Financial Management
Economic Order Quantity- Represents the optimal quantity of inventory to be ordered based on demand and various inventory costs.
Financial Management
What is the Economic Order Quantity (EOQ) formula?
Financial Management
EOQ = SQRT((2 x a x D/ k))
Carrying costs= Restocking costs in order to minimize total investment.
a = cost of placing one order D = annual demand in units k = cost of carrying one unit of inventory for one year
Financial Management
What is the Dividend- yield- plus- growth- ratio approach?
Financial Management
Dividend- yield- plus- growth- ratio approach
Ks = D1 + Expected g
__
Po
D1 = next expected dividend Po = Current stock price g = growth rate in earnings
Financial Management
What is the Degree of Operating Leverage?
Financial Management
DOL= % change in operating income
________________________
% change in unit volume
OU
Financial Management
What is the degree of financial leverage?
Financial Management
DFL= % change in EPS
______________
% change in EBIT
Do not include interest or taxes in denominator!
Financial Management
What is Days Sales Outstanding?
Financial Management
DSO = Receivables balance
_________________
Sales per day
Financial Management
How is the cost of New Common stock calculated?
Financial Management
Cost of New Common Stock
Ks = D1
______________ + Expected G
(Po - F)
D1 = Next expected dividend Po = Current Stock Price G = Growth rate in Earnings F = Flotation cost per share
Financial Management
What is the formula for calculating the Cost of Existing Common Equity?
Financial Management
Cost of Existing Common Equity
Ks(CAPM) = Krf + (Km - Krf) x bi
Krf = Risk- free interest rate Km = Expected market rate of interest bi = beta coefficient
Financial Management
What is the formula for calculating the Cash Conversion Cycle?
Financial Management
Cash Conversion Cycle
CCC = Inventory Conversion Period + Receivable Conversion Period - Payables Deferral Period
Financial Management
What is the formula for calculating the Weighted Average Cost of Capital?
Financial Management
Weighted Average Cost of Capital
WACC = WE x CE x ((WD x (Before Tax Cost of Debt) x 1-TR))
WE = Weight of Equity CE = Cost of Equity WD = Weight of Debt TR = Tax Rate
Financial Management
Calculate the Annual Cost of Carrying Inventory
Financial Management
Annual Cost of Carrying Inventory
ACCI = Avg Inventory Level x Unit Cost x Cost of Capital
Financial Management
What are the characteristics of a Sale and Leaseback?
Financial Management
Sale and Leaseback
1) Sell to another party, then lease back
2) Tax benefits in agreement
3) Financing easier to obtain than bonds
4) Lease agreement contain fewer restrictions than bond agreement.
Financial Management
What are the characteristics of Bonds?
Financial Management
Bonds
1) Finance Long Term Assets
2) Semiannual interest payments
3) Liability on Balance Sheet
4) Interest on Bonds = Tax Deductible
5) Restrictions on flexibility
Financial Management
What are the advantages of going public?
Financial Management
Advantages of going public
1) Much larger access pool to equity capital
2) Can easily issue additional stock
3) Stock can be used for business acquisitions
4) Stock- based compensation
5) Owners investments become liquid
Financial Management
What are the disadvantages of going public?
Financial Management
Disadvantages of going public
1) Costs in IPO
2) Costs of compliance with SEC, Sarbanes- Oxley
3) Management focus on maximizing stock price which may not be in the best long term interest.
4) Disclosure of significant amounts of information
Financial Management
What are the dividend policy considerations in Financial Management?
Financial Management
Dividend policy considerations in Financial Management?
1) Life cycle stage (no longer in need of significant additional financing) (expansion, maturity)
2) Cash generally should be retained if the company can earn a return that exceeds the investor.
3) Tax status of shareholders.
Financial Management
What are the advantages/ disadvantages of issuing common stock?
Financial Management
Advantages/ Disadvantages of issuing common stock?
1) Issuance of additional common stock dilutes ownership and control of existing shareholders.
2) Issuance of too much common stock my increase the firm’s overall cost of capital.
Financial Management
Advantages/ Disadvantage of issuing preferred stock
Financial Management
Advantages/ Disadvantage of issuing preferred stock
1) Carries a fixed dividend rate that must be paid before Common Stock receives dividends
2) Commons Stock do not give up control of the firm
Financial Management
What are the benefits of hedging?
Financial Management
Benefits of hedging
1) Risk of price volatility shared with another party
2) Forecast raw materials needs and purchase forwards or futures to lock in the raw materials price.
3) Can fix the price it will pay for a commodity for an extended period of time.
4) Mitigate risk if significant flux
5) Ensures sufficient availability
