Financial Management Flashcards
Financial mangement function that is concerned with raising capital to support hte firm’s operations and investemnt programs
Financing function
Financial management function that is concerned with selecting the best projects in which to invest firm resources, based on a consideration of risks and returns
Capital budgeting function
Financial management function concerned iwth manging the firm’s internal cash flows and its capital structure to minimize the financing costs and ensure that the firm can pay its obligations when due
Financial mangement function
Fnancial mangement function concerned with developing an ownership and corporate governance system for theifrm that will ensure htat mangers act ethically and in the best interst of stakeholders
Corporate governance function
Financial mangagement function concerned with managing the firm’s exposure to all types of risks
Risk-management function
Managing and financing the current assets and current liabilities of a firm; primarily with inventories and receivables
Working capital management
The lenght of time between when a firm makes payments and it receives cash inflows =Inventory Conversion Period + Receivables Conversion Period - Payables deferral Period
Cash conversion cycle
The average time required to convert materials into finished goods and sell those goods =Average inventory/(`COGS/day)
Inventory conversion period
The average time required to collect accounts receivable =Average receivables balance/(credit sales/day)
Receivables collection period (days sales outstanding)
The average lenght of time between the purchase of materials and labor and the payment of cash for them =Average payables /Purchases per day
Payables deferral period
Required minimum level of deposit based on a loan agreement
Compensating balances
Discounts, especially offered by suppliers, for early payment of accounts–a motivation to always have cash on hand
Cash discounts
Cash balances used to take advantage of favorable business opportunities (like business acquisitions)
Speculative balances
Cash balances used for emergencies
Precautionary balances
The time hat elaposes relating to mailing, processing, and clearing checks –want to extend for cash disbursements and shorten for cash receipts
Float
Maintaining a regional bank account to which just enough funds are bransferred daily to pay the checks presented
Zero-balance accounts
System in which customer payments are sent ot a post office box that is maintained by a bank–bank personnel retrive the payments and deposit htem into the firm’s bank account
Lockbox system
A way to speed up collection from customers (and reduce float) in which payments from customers are routed to local branch offices rather than firm headquarters
Concentration banking
A system in which funds are moved electronicaly between accounts without hte use of a check–takes the float out of both the receipts and disbursement processes
Electronic Funds Transfer (EFT)
The risk to the principal portion of a marketable security
Safety
The speed at which an investment can be liquiddated
Marketability/liquidity
Short-term obligations of hte federal government–active market ensures liquidity
Treasury bills (T-bills)
Government obligations with maturities from 1-10 years Appropriate for the investment of short-to intermediate term funds
Treasury notes
Government obligations that pay interest that equates to real rate of return specified by the US Treasur, plys principal at maturity that is adjusted for inflation Useful if a firm wants to minimize interest rate risk
Treasury Inflation Protected Securities (TIPS)
Offerings of government agencies, such as the Federal Home Loan Bank that offer security, liquidity, and pay slightly higher yields than treasury issues
Federal agency securities
Savings deposits at financial institutions
Certificates of Deposit (CD)
Large, unsecured short-term promissory notes issued to the public by large creditworthy corporations (usually held to term because no active secondary market)
Commercial paper
A draft drawn on a bank for payment when presented to the bank
Banker’s acceptance
US dollars held on deposit by foreign banks and in turn lent by the banks to anyone seeking dollars–pay higher yields than treasury bills
Eurodollar certificate of deposit
Shares in a fund that purchases higher-yielding bank CDs, commercial paper, and other large-denomination, higher-yielding securities; largely risk free
Money market funds
Similar to savings accounts, individual or business investors deposit idle funds in the accounts and the funds are used to invest in higher-yielding CDs, commerical paper, etc.
Money market accounts
Investments in publicly traded stocks and bonds of corporations; can reduce risk by diversifying away unsystematic risk in portfolios
Equity and debt securities
An inventory technique that minimizes the sum of inventory ordering and carrying costs
Economic Order Quanitity (EOQ)
A computerized system that manufactures finished goods based ondemand forecasts which are used to develop bills of materials and a master production schedule
Materials Requirement Planning (MRP)
The amont of current assets required to operate the business in even the slowest periods of hte year; should be financed iwth long-term financing such as stock s or bonds
Permanent current assets
Current assets accumulated during periods of high production and sales–appropriately financed with short-term financing
Temporary current assets
An approach to finaniing assets that involves matching asset and laibility matruities–a headging approach that minimizes the risk that the firm will be unable to pay its maturing obligations
Maturity matching approach
The rate a bank charges its most creditworthy customers–increases if a customer is more risky
Prime rate
A line of credit in which the bank is formally committed to lend the firm a specified maximum amount
Revolving Credit agreements
The sale of receivables to a finance company
Factoring
Floating public offerings of debt collateralized by the firm’s accounts receivables
Asset-backed public offerings
Financing by using inventory as collateral
Inventory financing
Inventory financing in whi8ch the inventory is held in a public warehouse under the lendor’s control
Warehousing
Long-term debt; either in the form of loans from ifnancial institutions or private placement of unregistered bonds sold directly to accredited investors; less expensive to issue than public debt
Private debt
Long-term debt that invovles selling SEC registered bonds idrectly to investors–the bond agreement specifies the par value, coupon rate, and maturity date
Public long-term debt
restrictions on private and public debt agreements aht allow investors to monitor and contorl the activities of hte firm
Debt convenants
A bond secured with the pledge of specific property
Mortgage bond
A bond secured by financial assets of the firm
Collateral trust bond
A bond that is not secured by the pledge of specific property, but is a general obl.igaition of the firm –can only be issued by firms with the highest credit rating and typically have higher yields because of the default risk
Debenture
A bond with claims subordinated to other general creditors in the event of bankruptcy of hte firm –Bondholders receive distributions only after general creditors and senior debt holders have been paid–so offer higher yields
subordinated debenture
A bond with interest payments that are contingent on the firm’s earnings–high yields because of high degree of risk –often associated with firms undergoing restructuring
Income bond
bonds paid off in installments over hte life of the issue–desirable b/c bondholders can choose their maturity date
Serial payments/serial bonds
Bonds in which the firm makes payments into a sinking fund which is used ot retire bonds by purchase
Sinking fund provisions
Bonds that may be convertible into common stock
Convertible bonds
Bonds in which the bondholder may have hte right to redeem the bonds for cash under certain circumstances
Redeemable bonds
Bonds that may have a call provision allowing hte firm to force the bondholders to redeem the bonds before maturity for some premium
Call provisions
Bonds that do not pay interest, but sell at a deep discount from theface or maturity value, and the return to hte investor is the difference between the cost and the bond’s maturity value
Zero-coupon rate bonds
Bonds where the rate of interest paid floats with changes in the market rate—Therefore, the market price of hte bond does not fluctuate as widely
Floating rate bonds
Bonds whose rates pay a higher rate of interest when other interest rates fall and a lower rate when other rates rise –riskier than normal bonds
Reverse floaters
Bonds registered in the name of hte bondholder, and interest payments are sent directly to the registered owners
Registered bonds
Bonds that carry very high-risk premiums, usually as a result of leveraged buyouts or firms in trouble
Junk bonds
International bonds that are denominated in the currency of hte nation which they are sold (Diff. from Eurobonds which are denominated in US $)–can sure as an effective hedge for a firm that is heavily invested in assets in the foreign country
Foreign bonds
A transaction in which the owner of he property sells the property to another and simultaneously leases it back
Sale-leaseback
an option to buy common stock at a fixed price for some period of time—increases the marketability of bonds issued
Stock Warrants
A hybrid securities in which the shareholders are entitled ot receive a stimupulated dividend and have priority over common stockholders in the event of liquidation of the firm
Preferred Stock
A bond/share of preferred stock that can be converted, at the option of the holder, into common stock Attractive b/c investors require lower yield b/c of potential prospects of conversion But, dilutes the ownership of other common shareholders
Convertible security
Occurs wehn a public diversified firm separates one of its subsidiaries, distributing hte shares on a pro rata basis to hte existing shareholders
Spin-offs
A specialized equity offering that is based on the operations and cash flows of a wholly owned subsidiary of a diversified firm
Tracking Stocks
A pool of funds that is used to make actively managed direct eequity investments in rapidly growing private companiese
Venture capital
plans designed to motivate management to focus on shareholder value by rewarding management and key employees with stock or stock options as part of their compensation
Employee Stock Ownership Plans (ESOPs)
Measures the degree to which a firm builds fixed costs into its operations
Operating leverage
Measures the extent to which the firm uses debt financing
Financial leverage
The weighted-average cost of its debt and equity financing components
Cost of capital
= the interest rate of the loan adjusted for the fact that interest is deductible =i x (1-marginal tax rate)
Cost of debt
Measures the correlation between the price volatility of the stock market and the price volatility of an individual firm’s stock higher= more volatility and more risk
beta coefficient
The avilibty of a firm to raise capital on reasonable terms under adverse conditions
financial flexibility
payments to existing stockholders of a dividend in the form of the ifrm’s own stock
stock dividneds
Similar to stock dividends, but are generally designed to reduce the stock’s price to a target level that will attract more investors
Stock splits
Markets in which newly issued securities are sold
Primary markets
Markets in which previously issued securities are sold
Secondary markets
A rising market
Bull market
A declining/lethargic market
Bear market
commissioned agents of buyers/sellers
Brokers
Take positions in assets and buy and sell their own inventory –similar to brokers in that they match buyers and sellers
Dealers
Banks that assist in the initial sale of newly issued securities by providing advice, underwrting, and sales assitance
Investment banks
Financial instituions htat borrow one form of finanicla asset and distribute hte asset in another form
Financial Intermediaries
When a firm combines with another in the same line of business
Horizontal merge
When a firm combines with another firm in the supply chain
Vertical merger
When the merging firms are somewhat related but not enough ti make it a vertical or horizontal merger
Congeneric merger
When the firms are completely unrelated; provicdes the greatest degree of diversification
Conglomerate merger
