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Financial Management Flashcards

1
Q
A
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2
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

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3
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

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4
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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5
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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6
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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7
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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8
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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9
Q

What traits should Cash and Short-Term Investments have?

A

Liquid Safe

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10
Q

For what are Letters of Credit used?

A

Used for importing goods. Issued by importer’s bank.

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11
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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12
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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13
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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14
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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15
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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16
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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17
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.

18
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

19
Q

What is Carrying Cost?

A

The cost of keeping inventory.

20
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

21
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

22
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

23
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

24
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

25
Q

What is the cost of forgoing a discount?

A

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

26
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

27
Q

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

A

Interest rate stated on the face of a bond.

28
Q

How is Current Yield calculated?

A

CY : Interest Payment / Bond Price

29
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle + Interest : Bond Price

30
Q

What is a Zero Coupon Bond?

A

No interest payments made Bond sold at a discount Interest reflected when Bond matures

31
Q

What are the characteristics of a Junk Bond?

A

High interest rate High default risk

32
Q

What are debenture bonds?

A

Bonds unsecured by collateral

33
Q

What are subordinated debentures?

A

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

34
Q

What are Redeemable Bonds?

A

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

35
Q

What is a Callable Bond?

A

Borrower can pay off debt early

36
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

37
Q

What is a Sinking Fund?

A

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

38
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)

39
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

40
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%

41
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.

42
Q

How is Cost of Debt calculated?

A

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

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