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BEC NINJA Flashcards 2015 > Financial Management > Flashcards

Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

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2
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

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3
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

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4
Q

What is the Inventory Conversion Period?

A

Average time needed to convert materials into finished goods and sell them

Inventory Conversion Period : Average Inventory / Sales Per Day

Average Inventory : (BI + E) / 2

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5
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

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6
Q

What is the Payables Deferral Period?

A

Average time between materials and labor purchase and their A/P payment

Payables Deferral Period : Average Payables / (COGS/365)

Average Payables : (BP + EP) / 2

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7
Q

What is the Cash Conversion Cycle aka Net Operating Cycle?

A

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
= Cash Conversion Cycle

Minimizing “Net OC” = great way to increase LIQUIDITY

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8
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

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9
Q

For what are Letters of Credit used?

A

Help enhance credit rating so you can get a lower cost of borrowing

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10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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11
Q

What is a Lockbox System? What are the advantages?

A

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

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12
Q

What is float?

A

Occurs when there is a difference between the balance in a company’s cash accounts & the balance in the bank’s records.

Checks Outstanding
- Uncleared Deposits
= FLOAT

Good Float = Bank Bal > Book Bal.
Benefits = More cash earning interest in bank longer

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13
Q

What are Zero Balance Accounts?

A

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

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14
Q

What is the difference between Treasury Bills- Notes and Bonds?

A

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

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15
Q

What is commercial paper?

A

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

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16
Q

What are the advantages and disadvantages of Commercial Paper?

A

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.

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17
Q

What is Economic Order Quantity?

A

The order quantity that minimizes both ordering & carrying costs.
EOQ ASSUMES demand is known & constant throughout year, so stockout costs nor safety stock costs are considered.

EOQ : Square Root of (2SO/C)

S : Annual Sales
O : Order Cost
C : Cost of Inventory

18
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

19
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered to avoid stockout costs.

ROP = Safety Stock + (Lead time * Sales in lead time)

20
Q

What is a Just In Time (JIT) system?

A

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

21
Q

What is Factoring of receivables?

A

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

22
Q

What is a Trade Discount?

A

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

If given to customer = “cost”
If received from vendor & not taken advantage of = “opportunity cost”

23
Q

How is the APR of Quick Payment Discount calculated & what does is tell?

A

The cost of forgoing a discount.

[360/(Pay Period - Discount Period)] * [Discount/(100% - Discount%)]

Ex: What’s the cost of foregoing a discount of 1/10, net 30?

[360 / (30-10)] * [1% / (100%-1%)] = 18.2%

24
Q

What is the Prime Rate?

A

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

25
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

26
Q

How is Current Yield calculated?

A

CY : Interest Payment / Bond Price

27
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle + Interest : Bond Price

28
Q

What is a Zero Coupon Bond?

A

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

29
Q

What are the characteristics of a Junk Bond?

A

High interest rate

High default risk

30
Q

What are debenture bonds?

A

Bonds unsecured by collateral

31
Q

What are subordinated debentures?

A

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

32
Q

What are Redeemable Bonds?

A

Provision in Bond contract allows demand of Bond payment under certain circumstances

33
Q

What is a Callable Bond?

A

Borrower can pay off debt early

34
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

35
Q

What is a Sinking Fund?

A

Borrower deposits regular sums into an account that will eventually pay off the debt

36
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

37
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

38
Q

What is Weighted Average Cost of Capital?

A

The avg cost of debt & equity financing associated with a firm’s existing assets & operations. Determined by weighing the cost of each specific type of capital by its proportion to the org’s ttl capital structure.

WACC = [(E/V * Cost of Equity) + (D/V * Cost of Debt)(1-Tax Rate)]

V = E+D

Firm Value = Firm’s Free CF/WACC
As WACC decreases, Firm Value Increase

39
Q

What is CAPM?

A

CAPM calculates the cost of retained earnings (Kre).
A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

CAPM = RF + [b*(m-RF)

RF = risk-free rate
b = beta
m = market rate

Kre is generally > expensive($) than cost of preferred equity, which is > $ than cost of debt, bc common SH assume most risk bc they get paid out last.

40
Q

How is Cost of Debt calculated?

A

(Interest Expense - Tax Benefit) / Carrying Value of Debt

41
Q

How is the Discounted Cash Flow (DCF) calculated & what does it calculate?

A

DCF calculates the cost of retained earnings (Kre).

DCF = (D1/Po) + g

D1 = Expected Dividend = Current Div*(1+g)
Po = Current Stock Price or Mkt Value
g = constant rate of growth
42
Q

Residual Income

A

The “excess” of actual income earned by an investment over the required rate of return (target or hurdle). It is a performance measure for investment SBU’s.

RI = Net Income - Required Rate of Return
RI = NI - (Equity * Hurdle Rate)

BEC NINJA Flashcards 2015 (9 decks)

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