Financial Management

Question 1

What is a capital structure?

Answer 1

An entity’s capital structure of a mix of debt (long and short term) and equity (common and preferred) used to financial operations and growth

Question 2

What is commercial paper?

Answer 2

An unsecured, ST debt instrument issued by a corporation. Commercial paper matures in 270 days or less and typically matures in 30 days. The proceed must be used to to finance current assets.

Question 3

What are debentures?

Answer 3

Represents an unsecured obligation of the issuing company. A holder has general creditor status.

Question 4

What are income bonds?

Answer 4

Income bonds represent securities that pay interest only upon achievement of target income levels.

Question 5

What are mortgage bonds?

Answer 5

A mortgage is a loan secured by residential or commercial real property. Mortgages are typically pooled together and issued as mortgage bonds

Question 6

What is leasing?

Answer 6

A contractual agreement in which the owner of an asset, the lessor, allows another party, the lessee, the use the asset in exchange for lease payments.

Question 7

In order to classify a lease as a financing lease, a lessee must meet one of the 5 criteria.. OWNES

Answer 7

• Ownership transferred at the end of the lease
• Written purchase option that the lessee is reasonably certain to exercise
• Net present value of all lease payments and guaranteed residual value is equal to or substantially exceeds the underlying assets fair value
• Economic life of the underlying asset is primarily encompassed within the terms of the lease
• Specialized asset

If none of these are met, if if the lease is a short term lease(12 months or loss) , it will be classified as an operating lease.

Question 8

What is the Weighted Average Cost of Capital for?

Answer 8

It is the average cost of debt and equity financing associated with a firms existing assets and operations. It is often used as a hurdle for capital investment decisions. It covers cost of funds employed.

Question 9

What are 3 common methods to calculating the cost of retained earnings?

Answer 9

1. Capital asset pricing model
2. Discounted cash flow
3. Bond yield plus risk premium

Question 10

What would be considered the optimal cost of capital?

Answer 10

The ratio of debt to equity that produces the lowest WACC

Question 11

What is operating leverage?

Answer 11

Operating leverage is the degree to which a company uses fixed operating costs rather than variable costs. Capital intensive industries typically have high operating leverage. Labor-intensive industries generally have low operating leverage.

Question 12

What is financial level?

Answer 12

The degree to which a company uses debt rather than equity to finance the company

Question 13

What is net working capital?

Answer 13

The difference between current assets and current liabilities

Question 14

What is the goal of working capital management?

Answer 14

Shareholder wealth maximization

Question 15

What are 3 types of inventory?

Answer 15

Raw materials, WIPs and finished goods

Question 16

How should inventory be valued?

Answer 16

Inventory should be valued at the lower of cost, market value or net realizable value.

Question 17

The market value of inventory represents the median value of the items…

Answer 17

replacements cost (= to cost to purchase inventory and the valuation date), market ceiling (net selling price less cost to dispose) and market floor (= market ceiling less normal profit)

Question 18

What is net realizable value?

Answer 18

NRV is equal to the net selling price less costs to complete and dispose. (market ceiling)

Question 19

What is the economic order inventory model?

Answer 19

The model attempts to reduce the total ordering and carry costs. It can be applied to the management of any exchangeable goods.

Question 20

What are the components of the EOQ equation?

Answer 20

E = Order size (EOQ)
S = Annual Sales in units
O = Cost per purchase order
C = Annual carrying cost per item 

E= square root (2SO/C)

Question 21

What is the goal of Internal Supply Chain Management (ISCM)?

Answer 21

The goal is to better understand the preferences and the needs and cultivate the needs of the relationship with them. This is a collaborative effort between the buyers and the sellers.

Question 22

What is the SCOR stand for?

Answer 22

Supply chain operations reference

Question 23

What is the purpose of SCOR?

Answer 23

A generic model for supply chain analysis. It assists firms in mapping out its true supply chain and then configuring it to best fit the needs of the firm.

Question 24

What are the 4 key management processes pertaining to SCOR?

Answer 24

Plan
Source
Make
Deliver

Question 25

The capital asset pricing model is equal to

Answer 25

the risk free rate plus a risk premium (stocks beta coefficient * the market risk premium)

= risk free rate + (Beta * (Market return - risk free rate)

Question 26

The discounted cash flow is equal to

Answer 26

dividend per share expected at the end of the year/current market price per share + growth rate

Question 27

The bond yield plus risk premium is equal to

Answer 27

pretax cost of LT debt + market risk premium

Question 28

Why do lenders use debt covenants?

Answer 28

To protect their interests by limiting or prohibiting the actions of borrows that might negatively affect the position of the lenders.

Question 29

What is the formula to calculate growth rate?

Answer 29

Return on assets * retention / 1- (ROA*retention)

Question 30

How is the Times interest earned ratio calculated?

Answer 30

EBIT/Total interest expense

Question 31

How is the cash conversion cycle calculated?

Answer 31

days in inventory + days sales in AR - days of payables outstanding

Question 32

working capital turnover

Answer 32

sales/average working capital