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BEC > 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

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

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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

Average Payables : (BP + EP) / 2

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

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7
Q

What is the Cash Conversion 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

(Inventory Really (-Pays) Cash)

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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

Used for importing goods.

Issued by importer’s bank.

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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

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

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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 inventory costs.

EOQ : Square Root of (2DO/C)

D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory

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18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

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19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

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20
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered.

IOP : Average Daily Demand x Average Lead Time

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21
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

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22
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

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23
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

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24
Q

What is the cost of forgoing a discount?

A

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

25
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

26
Q

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

A

Interest rate stated on the face of a bond.

27
Q

How is Current Yield calculated?

A

CY : Interest Payment / Bond Price

28
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle + Interest : Bond Price

29
Q

What is a Zero Coupon Bond?

A

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

30
Q

What are the characteristics of a Junk Bond?

A

High interest rate

High default risk

31
Q

What are debenture bonds?

A

Bonds unsecured by collateral

32
Q

What are subordinated debentures?

A

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

33
Q

What are Redeemable Bonds?

A

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

34
Q

What is a Callable Bond?

A

Borrower can pay off debt early

35
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

36
Q

What is a Sinking Fund?

A

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

37
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)

38
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

39
Q

What is Weighted Average Cost of Capital?

A

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%
40
Q

What is CAPM?

A

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.

41
Q

How is Cost of Debt calculated?

A

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

42
Q

CCC

A

ICP+RCP-PDP=ccc

ICP=Average Inventory/cogs per day or sales per day
RCP=Average accounts receivable/Average sales per day
PDP= Average payables/purchases per day

43
Q

EOQ

A

Squre root of 2AP/S
A- Annual Demand
p-purchase order cost
s-storage cost

44
Q

reorder quantity

A

Avg daily demand * avg lead time

45
Q

Reorder point

A

Reorder quantity+ safety stock

46
Q

Capital budgeting

A

Pay back period= Initial Investment/After tax net cash inflows
IRR= Investment/ Annual cash flows
Accounting rate of return= Accounting Income/ Avg Investment (Accounting income= Cash flows-Dep)
NPV=PV of cash inflows-PV of cash outflows

47
Q

Univariate forecasting

A

Forecasting on the past relationship between only one variable

48
Q

Multivariate forecasting

A

uses the past relationships between variables projected and more than one or other variables

49
Q

principles of momentum

A

Short term trends will continue

50
Q

Mean revision

A

Deviations from long term patterns will eventualy be corrected

51
Q

AFC=Annual Financing Costs

A

Discount%/100%-discount x 365 or 360/ total pay period-discount period

52
Q

Cost of the loan

A

interest paid/ Net funds available or principal-compensating balances

53
Q

Subordinated bonds

A

Only gets money when all other creditors are paid in full

54
Q

When the ask about net cost of debt

A

Always reduce 1- tax rate from effective interest rate

55
Q

Degree of Financial Leverage

A

% of change in earnings per share/ % change in EBIT

56
Q

Capm-Capital assets pricing model

A

Risk Free rate + ( Expected Market rate- Risk free rate )x beta

57
Q

Break even in Units

A

Fixed costs+profit/SP-VC (CM)

58
Q

Break even in dollars

A

Fixed costs +profits-loss/CM Ratio

BEC (36 decks)

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