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Business Environment and Concepts > Financial Management > Flashcards

Financial Management Flashcards

1
Q

Financial Management

Describe the payables deferral period

A

Financial Management

Payables Deferral Period = Avg. payables
______________
Purchases per day

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2
Q

Financial Management

What is the Order Point?

A

Financial Management

Order Point = Daily Demand x (Lead time in days + Safety stock)

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3
Q

Financial Management

Describe the Inventory Conversion Period

A

Financial Management

ICP = Average Inventory
______________
Cost of sales per day

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4
Q

Financial Management

What is the interest cost of not taking a trade discount formula?

A

Financial Management

Interest cost of not taking a trade discount formula

= Discount % x 365 Days
__________ ____________________
100%- Disc % Total pay pd- discount pd

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5
Q

Financial Management

Describe the Economic Order Quantity

A

Financial Management

Economic Order Quantity- Represents the optimal quantity of inventory to be ordered based on demand and various inventory costs.

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6
Q

Financial Management

What is the Economic Order Quantity (EOQ) formula?

A

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
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7
Q

Financial Management

What is the Dividend- yield- plus- growth- ratio approach?

A

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
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8
Q

Financial Management

What is the Degree of Operating Leverage?

A

Financial Management

DOL= % change in operating income
________________________
% change in unit volume

OU

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9
Q

Financial Management

What is the degree of financial leverage?

A

Financial Management

DFL= % change in EPS
______________
% change in EBIT

Do not include interest or taxes in denominator!

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10
Q

Financial Management

What is Days Sales Outstanding?

A

Financial Management

DSO = Receivables balance
_________________
Sales per day

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11
Q

Financial Management

How is the cost of New Common stock calculated?

A

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
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12
Q

Financial Management

What is the formula for calculating the Cost of Existing Common Equity?

A

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
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13
Q

Financial Management

What is the formula for calculating the Cash Conversion Cycle?

A

Financial Management

Cash Conversion Cycle

CCC = Inventory Conversion Period + Receivable Conversion Period - Payables Deferral Period

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14
Q

Financial Management

What is the formula for calculating the Weighted Average Cost of Capital?

A

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
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15
Q

Financial Management

Calculate the Annual Cost of Carrying Inventory

A

Financial Management

Annual Cost of Carrying Inventory

ACCI = Avg Inventory Level x Unit Cost x Cost of Capital

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16
Q

Financial Management

What are the characteristics of a Sale and Leaseback?

A

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.

17
Q

Financial Management

What are the characteristics of Bonds?

A

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

18
Q

Financial Management

What are the advantages of going public?

A

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

19
Q

Financial Management

What are the disadvantages of going public?

A

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

20
Q

Financial Management

What are the dividend policy considerations in Financial Management?

A

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.

21
Q

Financial Management

What are the advantages/ disadvantages of issuing common stock?

A

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.

22
Q

Financial Management

Advantages/ Disadvantage of issuing preferred stock

A

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

23
Q

Financial Management

What are the benefits of hedging?

A

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

Business Environment and Concepts (10 decks)

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