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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 and receivables (current assets and 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

o Shorten the cash conversion cycle

o Don’t negatively impact operations

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4
Q

What is the Inventory Conversion Period?

A

Avgerage 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

o Liquid

o Safe

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9
Q

For what are Letters of Credit used?

A

o Used for importing goods

o 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.

Advantages:
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
18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

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

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

22
Q

What is Factoring of receivables?

A

o Company sells A/R to a financing company

o Financing company pays less than the value of the receivables due risk of non-collection

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

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

o Benchmark for lending only to best customers
o Most customers charged Prime + x

o If lending institution and 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

o No interest payments made
o Bond sold at a discount
o 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

BEC (9 decks)

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