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NINJA 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 hurt 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 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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15
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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16
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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17
Q

What is Carrying Cost?

A

The cost of keeping 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.

IOP : Average Daily Demand x Average 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”

23
Q

What is the cost of forgoing a discount?

A

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

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

“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%"
39
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.”

40
Q

How is Cost of Debt calculated?

A

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

NINJA BEC (9 decks)

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