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BEC CPA EXAM > Financial Management > Flashcards

Financial Management Flashcards

1
Q

Net working capital formula

A

CA - CL

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2
Q

What is the most effective way to manage working capital?

A

Shorten the cash conversion cycle

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3
Q

Cash conversion cycle formula

A

(IR-P) Inventory CP + Receivables CP - Payables DP

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4
Q

Cash conversion cycle definition

A

Time from cash outflow to cash inflow

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5
Q

Inventory conversion period definition

A

Time to convert materials into goods and sell

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6
Q

Inventory conversion period formula

A

Average inventory / (COGS/365)

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7
Q

Receivables collection period formula

A

Avg Rec / (COGS/365)

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8
Q

Payables deferral period definition

A

Time from purchase to A/P payment

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9
Q

Payables deferral period formula

A

Avg payables / (COGS/365)

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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

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11
Q

Autonomy

A

The right or condition of self governance

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12
Q

The infancy stage of a product is also called

A

The experimentation stage

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13
Q

The growth stage of a product is also called

A

The exploitation stage

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14
Q

Financial assets

A

Claims on assets, stocks, bonds, warrants options, futures, notes, mortgages

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15
Q

Spot markets

A

Delivery within days

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16
Q

Futures markets

A

Delivery at a future date

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17
Q

Money market

A

exchanges for short term debt securities (< 1 yr)

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18
Q

Capital markets

A

Exchange long term debt and equity

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19
Q

Debt market

A

Exchange binds, notes, loans

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20
Q

Equity markets

A

exchange stock and ownership

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21
Q

Cash and short term investments must be

A

liquid

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22
Q

Letter of credit

A

used for importing goods

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23
Q

Who issues the letter of credit

A

Importers bank

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24
Q

What is the advantage of a trade credit

A

No interest cost if paid timely

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25
Q

What is a lockbox system

A

payments sent to bank managed po box

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26
Q

Advantages of a lockbox system

A

Employees don’t have access, timeline of deposits, interest income pays for lockbox fees

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27
Q

What is float time

A

time it takes to mail a payment and have it clear your bank account

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28
Q

You want to minimize float time on

A

Cash receipts

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29
Q

You want to maximize float time on

A

Cash payments

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30
Q

How could you increase float time for payments?

A

create a zero balance account

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31
Q

Zero balance accounts

A

Regional bank sends enough cash to cover each transaction

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32
Q

Treasury Bills Lifespan

A

Short term (<1 year) Think $1 bill

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33
Q

Treasury Notes Lifespan

A

Medium term (< 10 years)

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34
Q

Treasury Bonds lifespan

A

Long term (> 10 years)

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35
Q

Commercial paper

A

Short term unsecured promissory note issued by a company

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36
Q

Lifespan of commercial paper

A

< 9 months

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37
Q

What is the advantage of issuing commercial paper

A

Financing for company at less than prime

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38
Q

Disadvantage of commercial paper

A

unpredictability of markets, if a credit crisis emerges, large investment firms wont be lending

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39
Q

Economic order quantity (EOQ)

A

The purchase order size that minimizes the total of inventory order cost and inventory carrying cost

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40
Q

How could the formula for EOQ be used by a manufacturer

A

They use it to determine optimum size for a production run by using start up costs as their numerator

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41
Q

How do LIFO and FIFO affect EOQ

A

they do not affect it

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42
Q

What is carrying cost?

A

The cost of keeping inventory on your shelves

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43
Q

What is order cost

A

cost of executing an order and starting product production for that order

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44
Q

What is the economic order quantity formula?

A

EOQ = √(2*(Order cost * Annual Unit demand))/Inventory carrying cost

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45
Q

The economic order quantity formula spits out what

A

the optimal production run

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46
Q

In order to get the number of production runs that should be made annually, you should divide the annual units produced by

A

The optimal production run

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47
Q

Lead time is the time between placing an order and the

A

receipt of goods

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48
Q

Inventory re-order point is computed as the

A

amount of inventory demand during the lead time

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49
Q

What is safety stock

A

Extra inventory kept on hand to avoid the possibility of a stock out because demand is unknown

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50
Q

Inventory re-order point formula

A

Average daily demand(sales) * Average lead time(wait for inv shipment)

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51
Q

Just in time (JIT)

A

Order inventory

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52
Q

Why would a company use just in time manufacturing

A

When carrying cost is high and price of inventory is low

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53
Q

What is factoring

A

Company sells AR to a financing company

54
Q

What is a trade discount

A

It is when the buyer is given a discount if they pay early

55
Q

Example of trade discount

A

1/10 net 30

56
Q

What is the 1/10 in 1/10 net 30

A

1% discount if paid within 10 days

57
Q

What is the 30 in 1/10 net 30

A

The balance is still due within 30 days even if you don’t get the discount

58
Q

Cost of forgoing discount formula

A

(disc % * 365)/((100%-disc%)*(pay pd. - disc pd))

59
Q

Forgoing discount for 1/10 net 30

A

.1843%

60
Q

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.

A

5 production runs (see p 27)

61
Q

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.

A

Reorder point with safety stock = 1350, Safety stock = 750 (see p 28)

62
Q

Prime rate

A

The best loan rate available to anyone except other banks. It is the baseline rate

63
Q

What rate is used if a lender and customer are not in the same country?

A

LIBOR

64
Q

Other names for nominal rate

A

Stated rate/Face rate/coupon rate

65
Q

What is the nominal rate

A

the interest rate on the face of a bond. before inflation

66
Q

Current yield formula

A

Interest payment / Bond price

67
Q

Other names for effective Rate

A

Market rate, YTM

68
Q

Effective rate formula

A

PV of principal + Interest = Bond Price

69
Q

What amount of interest is paid on a zero coupon bond?

A

None until maturity

70
Q

A zero coupon bond is a bond sold at a

A

discount

71
Q

Interest on a zero coupon bond is paid

A

when the bond matures

72
Q

What is a junk bond

A

Has high interest rate and high risk

73
Q

Why would a company issue junk bonds

A

They are trying to finance quickly in order to finance a takeover

74
Q

Debenture bonds

A

Unsecured with no collateral or physical assets. Usually longer than 10 years

75
Q

Subordinated debentures

A

Paid only if there are assets left after the liquidation of a company

76
Q

Redeemable bond

A

provision in bond contract allows demand of bond payment at a specified price at the bondholders option

77
Q

Convertible bond

A

a bond that can be paid in common stock instead of money

78
Q

Callable bond

A

Borrower can pay off debt early, and it is callable at a specified price at the issuers option. Usually at a premium

79
Q

Sinking fund

A

Borrower deposits funds into an account that will be used to pay off debt

80
Q

Common stock is more expensive than

A

Debt

81
Q

Would an investor or debtor demand more return on investment?

A

Investors (Common stock holders)

82
Q

Preferred stockholders hold what kind of priority over common stockholders?

A

Dividends are paid first

83
Q

What is the disadvantage of preferred stock

A

no voting rights

84
Q

Weighted average cost of capital

A

weighted average of a company’s costs of debt and equity

85
Q

Weighted average cost of capital formula

A

WACC = (E/V * Re) + (D/V * Rd * (1-T)

86
Q

The E in WACC formula is

A

Market Value of total equity

87
Q

D in WACC formula is

A

Market value of Debt

88
Q

V in WACC formula is

A

Equity + Debt

89
Q

Re in WACC formula is

A

Total cost of equity

90
Q

Rd in WACC is

A

Total cost of debt

91
Q

What is CAPM

A

Stock’s expected performance based on its Beta(Risk) compared to that of the stock market

92
Q

More risk =

A

Higher return

93
Q

Cost of Debt

A

(Interest expense - Tax Benefit) / Carrying value of debt

94
Q

Earnings dilution

A

When a company issues additional stock and the earnings per share decreases, the original shareholders have suffered from this

95
Q

A primary market exchanges

A

Newly issued securities

96
Q

A secondary market exchanges

A

securities that were previously issued

97
Q

What is a DRIP

A

Dividend reimbursement plan

98
Q

What is a DRIP - definition

A

A plan that involves a company providing more shares of its stock (treasury stock) to its shareholders rather than cash

99
Q

Facilitated transfer involves a

A

middleman for transactions (mortgage broker, investment bank)

100
Q

Repackaged transfers

A

Trading the corporations stock through a corp intermediary and the individuals intermediary

101
Q

Credit union

A

An association which cooperates with members. They typically only take deposits from members and loans are only made to members

102
Q

Mutual funds

A

Pool money from investors and invest in debt and equity securities

103
Q

Market capitalization

A

Total dollar market value of a company’s outstanding shares

104
Q

When would a company prefer debt financing over equity financing

A

When tax rates are high

105
Q

Investors are willing to pay a premium for a bond when its stated (coupon) rate is higher or lower than prevailing market rates?

A

Higher

106
Q

What type of bonds dont have collateral

A

Debenture bonds

107
Q

What type of bonds are rated less than investment grade and higher potential for becoming worthless?

A

Junk bonds

108
Q

Payback period

A

Time required to earn back investment

109
Q

Main advantage of zero coupon bond

A

No cash outflow - they dont pay the face value or interest until maturity

110
Q

A company has 5000 shares of 7% cumulative preferred stock with a $1000 par value. What amount is required to be paid annually?

A

$350,000

111
Q

Operating leverage

A

Present when a small change in sales causes a large change in earnings before interest & tax

112
Q

What is a put option?

A

Option that gives the owner the right to sell a security at a specific price and time

113
Q

What is a warrant?

A

The right to purchase common stock at a specified price. They are typically attached to long term debt or preferred stock.

114
Q

What do companies use warrants for

A

To reduce the cost of debt

115
Q

What is capital structure

A

The long term debt and equity of an entity

116
Q

A floating rate bond has what type of interest rate

A

variable

117
Q

For a floating rate bond, the interest rate is considered floating because it

A

Is reset to match the current market interest rate

118
Q

WHat is a debt convenant

A

A promise to debt holders. Promises that there will be sufficient resources to make interest payments. Basically insurance against default

119
Q

A callable bond can be redeemed by who before maturity

A

The issuer

120
Q

A convertible bond gives who the option to call the bond

A

the bondholder

121
Q

A serial bond

A

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
Q

What is a trade credit

A

Spontaneous Financing source that originates from purchasing transactions

123
Q

Who usually issues commercial paper

A

Large financially strong investors

124
Q

Another name for a debenture

A

Unsecured bond

125
Q

Do treasury bills or commercial paper usually have lower rates?

A

Treasury bills

126
Q

SHort selling

A

Borrow shares from a broker, sell them and repay the loan with securities bought on the open market

127
Q

Agency securities

A

SHort term securities that are issued by governemnt agencies such as Fannie Mae

128
Q

Bankers acceptances

A

The drafts down on bank deposits on which the bank guarantees payment

129
Q

Who issues treasury bills

A

The US Treasury

130
Q

A compensating balance is

A

minimum balance that must be maintained in a bank account

BEC CPA EXAM (4 decks)

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