Financial Management Flashcards
1
Q
Net working capital formula
A
CA - CL
2
Q
What is the most effective way to manage working capital?
A
Shorten the cash conversion cycle
3
Q
Cash conversion cycle formula
A
(IR-P) Inventory CP + Receivables CP - Payables DP
4
Q
Cash conversion cycle definition
A
Time from cash outflow to cash inflow
5
Q
Inventory conversion period definition
A
Time to convert materials into goods and sell
6
Q
Inventory conversion period formula
A
Average inventory / (COGS/365)
7
Q
Receivables collection period formula
A
Avg Rec / (COGS/365)
8
Q
Payables deferral period definition
A
Time from purchase to A/P payment
9
Q
Payables deferral period formula
A
Avg payables / (COGS/365)
10
Q
Who would be less willing to take on high risk ventures for a company, the shareholders or the managers?
A
The shareholders because their portfolios are more diversified and managers want to keep their jobs
11
Q
Autonomy
A
The right or condition of self governance
12
Q
The infancy stage of a product is also called
A
The experimentation stage
13
Q
The growth stage of a product is also called
A
The exploitation stage
14
Q
Financial assets
A
Claims on assets, stocks, bonds, warrants options, futures, notes, mortgages
15
Q
Spot markets
A
Delivery within days
16
Q
Futures markets
A
Delivery at a future date
17
Q
Money market
A
exchanges for short term debt securities (< 1 yr)
18
Q
Capital markets
A
Exchange long term debt and equity
19
Q
Debt market
A
Exchange binds, notes, loans
20
Q
Equity markets
A
exchange stock and ownership
21
Q
Cash and short term investments must be
A
liquid
22
Q
Letter of credit
A
used for importing goods
23
Q
Who issues the letter of credit
A
Importers bank
24
Q
What is the advantage of a trade credit
A
No interest cost if paid timely
25
What is a lockbox system
payments sent to bank managed po box
26
Advantages of a lockbox system
Employees don't have access, timeline of deposits, interest income pays for lockbox fees
27
What is float time
time it takes to mail a payment and have it clear your bank account
28
You want to minimize float time on
Cash receipts
29
You want to maximize float time on
Cash payments
30
How could you increase float time for payments?
create a zero balance account
31
Zero balance accounts
Regional bank sends enough cash to cover each transaction
32
Treasury Bills Lifespan
Short term (\<1 year) Think $1 bill
33
Treasury Notes Lifespan
Medium term (\< 10 years)
34
Treasury Bonds lifespan
Long term (\> 10 years)
35
Commercial paper
Short term unsecured promissory note issued by a company
36
Lifespan of commercial paper
\< 9 months
37
What is the advantage of issuing commercial paper
Financing for company at less than prime
38
Disadvantage of commercial paper
unpredictability of markets, if a credit crisis emerges, large investment firms wont be lending
39
Economic order quantity (EOQ)
The purchase order size that minimizes the total of inventory order cost and inventory carrying cost
40
How could the formula for EOQ be used by a manufacturer
They use it to determine optimum size for a production run by using start up costs as their numerator
41
How do LIFO and FIFO affect EOQ
they do not affect it
42
What is carrying cost?
The cost of keeping inventory on your shelves
43
What is order cost
cost of executing an order and starting product production for that order
44
What is the economic order quantity formula?
EOQ = √(2\*(Order cost \* Annual Unit demand))/Inventory carrying cost
45
The economic order quantity formula spits out what
the optimal production run
46
In order to get the number of production runs that should be made annually, you should divide the annual units produced by
The optimal production run
47
Lead time is the time between placing an order and the
receipt of goods
48
Inventory re-order point is computed as the
amount of inventory demand during the lead time
49
What is safety stock
Extra inventory kept on hand to avoid the possibility of a stock out because demand is unknown
50
Inventory re-order point formula
Average daily demand(sales) \* Average lead time(wait for inv shipment)
51
Just in time (JIT)
Order inventory
52
Why would a company use just in time manufacturing
When carrying cost is high and price of inventory is low
53
What is factoring
Company sells AR to a financing company
54
What is a trade discount
It is when the buyer is given a discount if they pay early
55
Example of trade discount
1/10 net 30
56
What is the 1/10 in 1/10 net 30
1% discount if paid within 10 days
57
What is the 30 in 1/10 net 30
The balance is still due within 30 days even if you don't get the discount
58
Cost of forgoing discount formula
(disc % \* 365)/((100%-disc%)\*(pay pd. - disc pd))
59
Forgoing discount for 1/10 net 30
.1843%
60
Determine number of production runs that should be made annually - 10K blades to be manufactured, set up cost for each is $80, cost to carry a blade for the year is $40.
5 production runs (see p 27)
61
Determine reorder point and level of safety stock - 7200 annual usage, 240 working days per year, 20 days normal lead time, 45 max lead time.
Reorder point with safety stock = 1350, Safety stock = 750 (see p 28)
62
Prime rate
The best loan rate available to anyone except other banks. It is the baseline rate
63
What rate is used if a lender and customer are not in the same country?
LIBOR
64
Other names for nominal rate
Stated rate/Face rate/coupon rate
65
What is the nominal rate
the interest rate on the face of a bond. before inflation
66
Current yield formula
Interest payment / Bond price
67
Other names for effective Rate
Market rate, YTM
68
Effective rate formula
PV of principal + Interest = Bond Price
69
What amount of interest is paid on a zero coupon bond?
None until maturity
70
A zero coupon bond is a bond sold at a
discount
71
Interest on a zero coupon bond is paid
when the bond matures
72
What is a junk bond
Has high interest rate and high risk
73
Why would a company issue junk bonds
They are trying to finance quickly in order to finance a takeover
74
Debenture bonds
Unsecured with no collateral or physical assets. Usually longer than 10 years
75
Subordinated debentures
Paid only if there are assets left after the liquidation of a company
76
Redeemable bond
provision in bond contract allows demand of bond payment at a specified price at the bondholders option
77
Convertible bond
a bond that can be paid in common stock instead of money
78
Callable bond
Borrower can pay off debt early, and it is callable at a specified price at the issuers option. Usually at a premium
79
Sinking fund
Borrower deposits funds into an account that will be used to pay off debt
80
Common stock is more expensive than
Debt
81
Would an investor or debtor demand more return on investment?
Investors (Common stock holders)
82
Preferred stockholders hold what kind of priority over common stockholders?
Dividends are paid first
83
What is the disadvantage of preferred stock
no voting rights
84
Weighted average cost of capital
weighted average of a company's costs of debt and equity
85
Weighted average cost of capital formula
WACC = (E/V \* Re) + (D/V \* Rd \* (1-T)
86
The E in WACC formula is
Market Value of total equity
87
D in WACC formula is
Market value of Debt
88
V in WACC formula is
Equity + Debt
89
Re in WACC formula is
Total cost of equity
90
Rd in WACC is
Total cost of debt
91
What is CAPM
Stock's expected performance based on its Beta(Risk) compared to that of the stock market
92
More risk =
Higher return
93
Cost of Debt
(Interest expense - Tax Benefit) / Carrying value of debt
94
Earnings dilution
When a company issues additional stock and the earnings per share decreases, the original shareholders have suffered from this
95
A primary market exchanges
Newly issued securities
96
A secondary market exchanges
securities that were previously issued
97
What is a DRIP
Dividend reimbursement plan
98
What is a DRIP - definition
A plan that involves a company providing more shares of its stock (treasury stock) to its shareholders rather than cash
99
Facilitated transfer involves a
middleman for transactions (mortgage broker, investment bank)
100
Repackaged transfers
Trading the corporations stock through a corp intermediary and the individuals intermediary
101
Credit union
An association which cooperates with members. They typically only take deposits from members and loans are only made to members
102
Mutual funds
Pool money from investors and invest in debt and equity securities
103
Market capitalization
Total dollar market value of a company's outstanding shares
104
When would a company prefer debt financing over equity financing
When tax rates are high
105
Investors are willing to pay a premium for a bond when its stated (coupon) rate is higher or lower than prevailing market rates?
Higher
106
What type of bonds dont have collateral
Debenture bonds
107
What type of bonds are rated less than investment grade and higher potential for becoming worthless?
Junk bonds
108
Payback period
Time required to earn back investment
109
Main advantage of zero coupon bond
No cash outflow - they dont pay the face value or interest until maturity
110
A company has 5000 shares of 7% cumulative preferred stock with a $1000 par value. What amount is required to be paid annually?
$350,000
111
Operating leverage
Present when a small change in sales causes a large change in earnings before interest & tax
112
What is a put option?
Option that gives the owner the right to sell a security at a specific price and time
113
What is a warrant?
The right to purchase common stock at a specified price. They are typically attached to long term debt or preferred stock.
114
What do companies use warrants for
To reduce the cost of debt
115
What is capital structure
The long term debt and equity of an entity
116
A floating rate bond has what type of interest rate
variable
117
For a floating rate bond, the interest rate is considered floating because it
Is reset to match the current market interest rate
118
WHat is a debt convenant
A promise to debt holders. Promises that there will be sufficient resources to make interest payments. Basically insurance against default
119
A callable bond can be redeemed by who before maturity
The issuer
120
A convertible bond gives who the option to call the bond
the bondholder
121
A serial bond
A set of bonds which are structured so that a portion of the bonds mature at regular intervals until all of the bonds mature
122
What is a trade credit
Spontaneous Financing source that originates from purchasing transactions
123
Who usually issues commercial paper
Large financially strong investors
124
Another name for a debenture
Unsecured bond
125
Do treasury bills or commercial paper usually have lower rates?
Treasury bills
126
SHort selling
Borrow shares from a broker, sell them and repay the loan with securities bought on the open market
127
Agency securities
SHort term securities that are issued by governemnt agencies such as Fannie Mae
128
Bankers acceptances
The drafts down on bank deposits on which the bank guarantees payment
129
Who issues treasury bills
The US Treasury
130
A compensating balance is
minimum balance that must be maintained in a bank account
