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Financial Management & Capital Budgeting Flashcards

1
Q

working capital

A

current asset - current liab

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2
Q

cash conversion cycle (CCC)

aka net operating cycle

A

measures # of days from when businesses pay for its supplies to when business collects cash from sale of finished goods

shortening CCC improves profitability bc larger CCC requires business to use more financing.

CCC = ICP + RCP - PDP

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3
Q

ICP

inventory conversion period

A

avg number of days required to convert inventory to sales

ICP = avg inventory/COGS per day(sometimes sales per day)

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4
Q

RCP

receivable collection period

A

avg number of days to collect a/r

RCP = avg AR/avg credit sales per day

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5
Q

PDP

accounts payable deferral period

A

avg number of days between buying inventory and paying for that inventory

PDP = avg payable/ purchases per day (or COGS/365)

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6
Q

CCC (net operating cycle)

A
  1. receive supplies from suppliers
  2. pay suppliers
  3. sell finished goods on credit
  4. collect receivables
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7
Q

business keep cash for serveral purposes

A
  1. operations - pay for ordinary expenses
  2. compensating balances - bank required min amt in checking balance
  3. trade discounts - quick payment of bills may result in early payment discounts
  4. speculative balances - take advantage of unexpected business opportunities
  5. precautionary balance -s for emergencies
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8
Q

float

A

time it takes checks to be mailed, processed and cleared.

managing cash requires maximum float on pmt to others and minimize float on receipts from others

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9
Q

pay by draft (3 party instruments)

A

customer pay by check for slower processing

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10
Q

zero balance accounts

A

bank offer these acct to notify customer each day of checks presented for payment and transfer only the funds needed to cover them.

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11
Q

concentration banking

A

customer pay local branches instead of main offices so business get heir money faster, so theres less floating.

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12
Q

lock box system

A

customer send payment directly to bank to speed up deposits and increase internal control over cash

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13
Q

electric fund transfers

A

customer pay electronically for faster processing. (using debit card, eliminate float)

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14
Q

treasury bill

A

T-Bills

obligation of Us govt.

maturity date under 1 year

zero coupon (no interest pmt), but instead receive “interest” by buying sec. at discount from value that will be paid at maturity.

MOST liquid sec. in the world. no risk of capital losses, even if sell before maturity.

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15
Q

treasury notes

A

us govt oglibations

mat. date b/w 1-10 years

Treasury notes pay coupons (interest payments) semiannually

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16
Q

treasury bond

A

same as notes but maturities over 10 yrs.

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17
Q

treasury inflation-indexed securities (TIPS)

used to have the word protected (P) now replaced by “indexed”

A

are treasury notes and bonds that pay a fixed real rate of interest by adjusting the principal semi-annually for inflation.

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18
Q

federal agency securities

A

offering that may or may not be backed by full faith and credit US govt.

do not trade as actively as treasury securities, but pay slightly higher rates.

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19
Q

certificates of deposits (CD)

A

time deposits at banks with limited govt insurance.

interest are higher on CDs than on US govt sec.

for amounts lower than FDIC limits, they are not as liquid

for amounts higher than FDIC limits, they are not as safe

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20
Q

commercial paper

A

promissory notes issued by corps with lives up to 9mths

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21
Q

bankers’ acceptances

A

drafts drawn on banks that are payable at specific future due dates, usually 30-90 days after being withdrawn.

usually generated to pay for goods across international borders and trades in secondary markets at discount period to their due dates

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22
Q

money market mutual funds

A

they invest in instruments with short maturities (under one year)

maintain stable value for investors

during crisis, fed reserve provided temporary insurance for these.

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23
Q

short term bond mutual fund

A

they invest in instruments with maturities under 5 years,

generate higher returns than money market fund

but has potential for fluctuation in value

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24
Q

stocks and bonds

A

offer higher potential return

greater risk (of losses, up to whole amount invested)

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25
managing receivables
1. credit period - time buyers have to make pmts (30 days) 2. discounts (2net10) 3. credit criteria 4. collections policies (method to collect on receivables thats late)
26
seasonal dating | referring to credit period
induce customer to buy early but not requiring pmt until selling season begins.
27
to generate immediate cash
1. pledging - business obtains loan by offering receivable as collateral 2. assignment of a/r - borrower assign a/r for cash. must pay interest and service charge 3. factoring w/o recourse- sell receivable, (buyer accepts noncollection and charges fee for accepting that risk) (improves a/r turnover)
28
material requirements planning (MRP)
computerized system that uses demand forecasts to manage production of finished goods and required inventory levels for various raw materials.
29
reorder point
avg daily demand x avg lead time = reorder point without safety stock 25 units a day 10 days to fill order = need to reorder when theres 250 units left.
30
economic order quantity (EOQ) how to calculate APPROPRIATE quantity to order
annual usage of inventory (A) cost of placing an order (P) cost of storing (S) EOQ = squareroot [(2*A*P)/S]
31
just in time (JIT)
order as little as possible order as close to time inventory are needed as possible - use when cost of storing inventory is high - lead times are low - needs for safety stock are low bc good relationship w supplier bc reliable - cost per order is low good produced on demand rather than base don long range forecast of sales
32
blackflush approach | part of JIT
cost assigned to jobs will not be tracked in much detail 1. all manuf. cost are charged directly to COGS since little or no inventory is expected to remain at any point 2. at end of acct. period, company determine if there's any inventory 3. if inventories exist at reporting date, cost are allocated from COGS to inventory accounts
33
cycle counting
counting small subsets of inventory in specific locations
34
inventory turnover ratio
COGS/ avg inventory
35
of days of supply in avg inventory
360/inventory turnover
36
PV of an amount (lump sum)
single cash flow that will occur at future date. find its equivalent today. or how much you need to invest today to get certain amount in future.
37
PV of ordinary annuity
value today of repeated cash flows with amounts paid at END of period.
38
PV of annuity due
value today of repeated cash flows with amounts paid at BEG. of period. RENT
39
capital budgeting techniques
payback period internal rate of return (IRR) accounting rate of return NPV
40
pay back period
years =initial investment/inflows (minus operating exp, exclude depreciation) does not consider time value of money The payback method is applied by dividing an initial investment amount by the undiscounted periodic cash inflows to determine the number of periods required to recover the investment. DEPRECIATION IGNORED
41
IRR internal rate of return
= investment/annual cash flows rate at which PV of annual cash INflows equals investment. what PV factor to use to get inflows to equals outflow. outflow will be PV of 1 since it's being paid today.
42
accounting rate of return
=accounting income/avg investment
43
NPV
PV cash inflow - initial investment = NPV if + thats good if - thats bad
44
3/15 net 45
3% discount if paid within 15 days or else due in 45 days
45
prime rate
rate lenders charge customers. usually 3% above the federal fund rate.
46
LIBOR london interbank offered rate
base rate for business and consumers loans both abroad and in US. LIBOR computes rates for many short maturities and currencies.
47
public debt (fixed interest)
business obligations that may be readily resold w general public in markets includes bonds thats large corps sell to retail and institutional investors. corps selling bonds allow them to get money from other sources other than bank, with less interest rates that may be fixed.
48
eurobonds
bonds dominated in US dollars that are sold abroad.
49
debt covenant
to convince lender/investor to lend money, borrowers agree to restriction on their financial behaviors
50
positive covenent
stipulates what borrowers must DO: - provide annual audited fs to lender - maintain certain fs ratio - maintain life insurance for officers
51
negative covenent
stipulates what borrowers may NOT do: - not borrow additional sums during time period - not sell various listed assets - not exceed certain div pmt to shareholders - not exceed certain compensations for executives
52
mortgage bond
secured by real estate owned by borrower
53
collateral trust bond
seccured by fin. asset owned by borrower
54
debenture
unsecured bond
55
subordinated debentures
unsecured bond that, in liquidation of bus., receive any repayments only after all senior creditors have been paid in full
56
income bond
make interest pmt only if bus has earnings in excess of some preset level.
57
term bond
face value is repaid on single maturity date
58
serial bond
bonds pay in installment (every year for 10 years)
59
sinking fund
borrower set fund aside to cover repayment of face value of bond
60
convertible bond
may convert to common stock of company as repayment instead of holding them to maturity
61
redeemable bond
may redeem bond before maturity date (during buyout of company by another firm)
62
callable bond
borrower may repay bondholder before normal mat. date (force to redeem) requires borrower to repay bondholder some premium over face value of bond
63
stated rate
fixed int. pmt coupon rate face rate nominal rate
64
current yield
=annual interest paid/bond market price
65
zero coupon bond
no coupon(int) pmt but only pay face value at date of mat. ex: short term US treasury bill sell at discount
66
floating rate bond
dont have fixe coupon pmt pmt fluctuate with some general indexed int rate.
67
reverse floaters
pmts increase when general interested rate index goes down and pmt decrease when index goes up.
68
registered bond
borrowers has names and address of bond holder, so they can send pmt directly to bondholder (not through broker)
69
junk (high yield, speculative grade) bond
issued by companies with shitty credit ratings. they're more likely to default, so that's why they pay higher interest rate.
70
primary market for CM
new issues market (initial price offering IPO)
71
secondary market for CM
where already outstanding shares are resold
72
over the counter market for CM
market for unlisted securities
73
preferred stock | cumulative div
if bus. skips pref. div in arrears for any period, bus must pay all previously skilled div before pay any div to CM shareholders
74
preferred stock - participation
pref. stockholders receive higher div when common div are increased.
75
degree of operating leverage (DOL)
= % change in EBIT (earnings before interest an tax) / % change in sales volume
76
DOL
measures how size of business's fixed cost affects its performance when revenue change.
77
DFL degree of financial leverage
measures how much bus. rely on debt financing.
78
DFL
= % change in EPS/ change in EBIT
79
leveraged buy out LBO
method of financing the acquisition of all or voting majority of os shares of a company. LBOS financed wi debt secured by assets of the target company.
80
horizontal merger
involve bus. that are in the same market
81
vertical merger
involve bus acquiring others in same supply chain (supplier or customer (supplier or customer)
82
conglomerate mergers
involve bus. acquiring others in unrelated markets
83
gordon growth model
reinvested assets will increase distribution by amount of reinvestment growth of asset will be growth rate of future div.
84
fair value hedge
against change in value of asset or liab that firm has or expects to have G/L on income from continuing operations (i/s)
85
cash flow hedge
against fluctuation in future cash flow G/L on OCI (b/s)
86
foreign currency hedge
against effects of fluctuation in value of foreign currently on value of assets/ liab or cash flow G/L on OCI
87
valuing derivatives
on public market: at quoted price not on public market: fair value using: - black scholes : used to est. the value of stock options - monte carlo simulations - binomial trees - zero coupon method: used to est. value of int. rate swaps
88
cost of capital
is the weighted average of the various financing sources: (40% x 8%) + (60% x 10%) = 9.2%.
89
credit risk
risk that the counterparty to a contract will fail to honor its obligations
90
Legal risk
is the risk that legal or regulatory action will invalidate the derivative.
91
Market risk,
applicable to derivatives acquired for speculation purposes, is the risk that adverse changes will affect the fair value of the derivative.
92
investment turnover
=sales/avg investment
93
the profitability index
Profitability index is the ratio of the present value of the cash inflows to the initial cost of a project. Profitability index is the best method for initial ranking of independent projects under capital rationing.
94
residual income
A) =income - exp - rate of return rate of return = rate * asset $$ B) =net income minus the required return on investment C) =operating income - imputed interest on invested capital D) =operation profit – interest on investment
95
net present value (NPV)
Net present value is the difference between the present value of the proceeds from the cash flows generated by an investment, including its sale, MINUS the initial cost of the investment.
96
return on investment ROI
=(revenue - expenses)/ avg assets OR =operating profit / investment =net income / amount invested
97
weighted-average cost of capital (WACC) aka hurdle rate
sum(Proportion of capital structure * Cost of capital)
98
return on sale
=Net income / Sales "profit" return on sale (net income)= return on sales % * sales
99
return on asset
= net income/avg total asset
100
Economic value added equals
net operating profit after taxes (NOPAT) minus the costs of financing, cost of financing equals the weighted average cost of capital times the difference of total assets minus current liabilities. The economic value-added is a financial measure of the value being created in a company in excess of its required return on capital. It is the income that remains after the cost of all capital. The cost of debt is included in the calculation of income, which is further reduced by the required return on assets to provide the economic value added.
101
Treasury bill market rate
Risk free rate + Inflation premium
102
operating profit margin
=operating profit/sales =EBIT/sales
103
operating profits
earnings before interest and tax (EBIT)
104
collection float
Collection float is the lapse between the time money is collected and when it can be spent
105
measure of the volatility of an investment
standard deviation
106
Credit default swap (CDS)
holder pays premiums periodically CDS issuer pays only if the underlying bond defaults protect holders against credit risk CDS are not very liquid, or do not exist at all, for smaller issues. CDS protect from bond (credit) defaults
107
PERT (program evaluation and review technique) slack time
slack time represents the difference between the time it takes a task to be completed and the longer amount of time between when the process can be started and when it needs to be completed without causing a delay in the project.
108
market capitalization
is fair market value of equity

BEC (8 decks)

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