Financial Management (M44) Flashcards
1
Q
This is raising capital to support the firm’s operations and investment programs
A
Financing Function
2
Q
This is selecting the best projects in which to invest firm resources, based on a consideration of risks and return
A
Capital Budgeting Function
3
Q
This is managing the firm’s internal cash flows and its capital structure (mix of debt and equity financing) to minimize the financing costs and ensure that the firm can pay its obligations when due
A
Financial Management Function
4
Q
This is developing an ownership and corporate governance system for the firm that will ensure that managers act ethically and in the best interest of stakeholders
A
Corporate Governance Function
5
Q
This is managing the firm’s exposure to all types of risk
A
Risk-Management Function
6
Q
Total Current Assets - Total Current Liabilities =
A
Working Capital
7
Q
This involves managing and financing the current assets and current liabilities of the firm.
A
Working Capital Management
8
Q
The primary focus of working capital management is managing _____ & _____
A
Inventories & Receivables
9
Q
This is the average time required to convert materials into finished goods and sell those goods
A
Inventory Conversion Period
10
Q
This is the average time required to collect accounts receivable
A
Receivables Collection Period (Days Sales Outstanding)
11
Q
This is the average length of time between the purchase of materials and labor and the payment of cash for them
A
Payables Deferral Period
12
Q
This is the time that elapses relating to mailing, processing, and clearing checks
A
Float
13
Q
This way to speed up collection of payments is a technique under which customers in an area make payments to a local branch office rather than the firm’s headquarters
A
Concentration Banking
14
Q
CDs are normally insured up to….
A
$250,000
15
Q
In the Economic Order Quantity Formula (square root of 2aD / k), what does the “a” stand for?
A
Cost of Placing one Order
16
Q
In the Economic Order Quantity Formula (square root of 2aD / k), what does the “D” stand for?
A
Annual Demand in units?
17
Q
In the Economic Order Quantity Formula (square root of 2aD / k), what does the “k” stand for?
A
Cost of carrying one unit of inventory for one year
18
Q
Firms that maintain very low or no inventory levels
a) Have higher ordering costs
b) Have higher carrying costs
c) Have higher ordering and carrying costs
d) Have lower ordering and carrying costs
A
A
19
Q
This is a computerized manufacturing system that manufactures finished goods based on demand forecasts
A
Materials Requirements Planning (MRP)
20
Q
This is the length of time buyers are given to pay for their purchases
A
Credit Period
21
Q
This is the percentage provided and period allowed for discount for early payment
A
Discounts
22
Q
This is the required financial strength of acceptable credit customers. Firms often use a statistical technique called credit scoring to evaluate a potential customer
A
Credit Criteria
23
Q
This is the diligence used to collect slow-paying accounts
A
Collection-Policy
24
Q
A certain amount of current assets are required to operate the business in even the slowest period of the year. These are
A
Permanent Current Assets
25
Additional current assets are accumulated during periods of higher production and sales. These are...
Temporary Current Assets
26
This involves matching asset and liability maturities. This strategy minimizes the risk that the firm will be unable to pay its maturing obligations
Maturity Matching
| Self-Liquidating Approach
27
T/F
Having a compensating balance is going to raise your effective interest rate when borrowing
TRUE
28
T/F
Discount interest subtracts the interest payment first and then the balance of the loan they give to us (when borrowing). This is not good
TRUE
29
This is an informal specification of the maximum amount that the bank will lend to the borrower
Informal line of credit
30
A line of credit in which the bank is formally committed to lend the firm a specified maximum amount. The bank typically receives a commitment fee as a part of the agreement.
Revolving Credit Agreements
31
This is an instrument that facilitates international trade. It is issued by the importer's bank, promises that the bank will pay for the imported merchandise when it is delivered. It is designed to reduce the risk of nonpayment by the importer
Letter of Credit
32
Interest payment / Selling price of bond today
Current Yield
33
T/F
Preferred stock is a hybrid security"
TRUE
34
T/F
Preferred stock may be convertible into common stock
TRUE
This is the Conversion factor
35
T/F
Preferred stock, like debt, may have a call feature
TRUE
36
A small percentage of preferred shares are _____, which means they may share with common shareholders in dividends above the stated amount
Participation
37
A ____ security is a bond or preferred stock that can be converted, at the option of the holder, into common stock
Convertible
38
This is a pool of funds that is used to make actively managed direct equity investments in rapidly growing private companies
Venture Capital
39
This measures the degree to which a firm builds fixed costs into its operations
Operating Leverage
40
A firm with a higher degree of operating leverage when compared to the industry average implies that...
The firm's profits are more sensitive to changes in sales volume
41
When a company increases its degree of financial leverage:
a) the equity beta of the company falls
b) the systematic risk of the company falls
c) the unsystematic risk of the company falls
d) the standard deviation of returns on the equity of the company rises
D
42
Which of the following methods of valuation provides the most reliable measure of fair value?
a) use of a discounted cash flow method
b) market values obtained from active markets
c) combination of valuation models and active markets
d) sophisticated valuation model
B
A - the LEAST reliable
D - they made up
43
Firms often acquire other firms due to synergies. What are synergies?
This is when the two firms can perform more effectively together than separately.
44
Synergies arise from...
Operating or Financial Economies
as well as Managerial Efficiency
45
Horizontal Mergers are...
When a firm combines with a competitor
46
Vertical Mergers are...
When a firm combines with another firm in the same supply chain (soft drink producer acquiring a bottle producer)
47
A Congeneric Merger is when...
The merging firms are somewhat related but not enough to make it a vertical or horizontal merger
48
A Conglomerate Merger is when...
the firms are complete unrelated. These types of mergers provide the greatest degree of diversification
49
T/F
Current liabilities are an important source of financing for many small firms
TRUE
50
T/F
Profitability varies inversely with liquidity
TRUE
51
T/F
The hedging approach to financing involves matching maturities of debt with specific financing needs
TRUE
52
T/F
Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy
FALSE
This is a conservative approach
53
What is the formula for the cash conversion cycle?
Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
54
T/F
Adopting a new inventory system that reduces the inventory conversion period will reduce the length of a firm's cash conversion cycle
TRUE
Formula: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
55
T/F
Adopting a new inventory system that increases the inventory conversion period will reduce the length of a firm's cash conversion cycle
FALSE
Formula: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
56
T/F
Increasing the average days sales outstanding on its A/R will reduce the length of a firm's cash conversion cycle
FALSE
Formula: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
57
T/F
Reducing the amount of time the firm takes to pay its suppliers will reduce the length of a firm's cash conversion cycle
FALSE
Formula: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
58
How do you calculate Days Sales Outstanding?
As an example say that 1/3 of individuals pay by one deadline and 2/3 of individuals pay by another deadline
[1/3 * (deadline 1)] + [2/3 * (deadline 2)]
59
How do you determine the effect of changing from using a depository transfer check to using a wire transfer?
The change is feasible if the interest savings offsets the increased costs. Calculate this by:
Fee/Interest Rate
60
a. The most important considerations with respect to short-term investments are _____ & ______
risk and liquidity
61
Alternative Marketable Securities Suitable for Investment Include: (4)
US T-Bills
EuroDollars
Commercial Paper
Negotiable CDs
62
This alternative marketable security suitable for investment has a lower return because it has less risk as it is backed by the government
US T-Bills
63
This alternative marketable security suitable for investment has a higher return because it is issued by a corporation and therefore has more risk than investments that are backed by the government
Commercial Paper
64
This alternative marketable security suitable for investment has yields considerably lower because they are not too risky.
Negotiable CDs
65
Why are Negotiable CDs not too risky?
1) Secondary market for investors
| 2) Regulated by the Federal Reserve System
66
What is an example of an investment that is excluded from alternative marketable securities suitable for investment?
Convertible Bonds
67
Why are convertible bonds not suitable to be alternative marketable securities for investment?
They are long-term investments that have more risk than securities that are typically used for ST investment.
68
Negotiable CDs are usually sold in denominations of a minimum of ____
$100,000
69
When the cost per purchase order is ___ and the inventory unit carrying costs are ____ you would expect managers to switch to a JIT Ordering System
Decreasing
| Increasing
70
This answers how much to order
Economic Order Quantity
71
This answers when to order
Inventory Reorder Point
72
The economic order quantity involves considering the ____ cost and the ____ cost
Ordering
| Carrying
73
The inventory reorder point involves consider _____
Average Daily Usage
74
T/F
The inventory reorder point considers the economic order quantity
FALSE
75
How do you calculate the Inventory Reorder Point?
[Daily Demand * Lead-time-in-days] + Safety Stock
76
This is is a buffer of excess inventory held to guard against stockouts. It is usually a multiple of demand and has NO effect on a company’s Economic Order Quantity but DOES effect the reorder point.
Safety Stock
77
T/F
A benefit of a JIT system for raw materials is that it eliminates non-value-added operations
TRUE
78
T/F
A benefit of a JIT system for raw materials is that it increases the number of suppliers, thereby ensuring competitive bidding
FALSE
Decreases the number of suppliers to build strong relations and ensure quality goods
79
T/F
A benefit of a JIT system for raw materials is that is maximizes the standard delivery quantity, thereby lessening the paperwork for each delivery
FALSE
80
T/F
A benefit of a JIT system for raw materials is that it decreases the number of deliveries required to maintain production
FALSE
More frequent deliveries of small quantities of materials
81
How do you calculate A/R Outstanding?
Projected Sales * Percentage of Credit Sales/Total Revenue = Credit Sales/Year
/ Days in the year = Credit Sales/Day
* Days in Collection =
AR Outstanding
82
How do you calculate the cost of not taking a trade discount?
Discount % / (100* - Disc %)
*
365 Days / (Total Pay Period - Disc Period)
83
T/F
Revolving credit is a secured ST borrowing
FALSE
it is unsecured
84
T/F
Bankers Acceptances are a secured ST borrowing
FALSE
it is unsecured
85
T/F
Lines of Credit are a secured ST borrowing
FALSE
it is unsecured
86
T/F
Commercial Paper is a secured ST Borrowing
FALSE
it is unsecured
87
T/F
Floating liens are secured ST Borrowings
TRU
88
T/F
Factoring is a secured ST Borrowing
TRUE
89
T/F
Chattel Mortgages are a secured ST Borrowing
TRUE
90
____ involves the sale of AR
Factoring
91
____ involves a legal document that establishes inventory as collateral for a loan
Blanket Inventory Lien
92
_____ is an instrument that acknowledges that the borrower holds the inventory and the proceeds from sales will be put in trust for the lender
Trust Receipt
93
____ involves storing inventory in a public warehouse under the control of the lender
Warehousing
94
Financing with LT as opposed to ST debt _____ (Reduces/Increases) the risk of the firm
Reduces
95
LT Debt is generally ____ (more/less) costly than ST Debt
More
96
T/F
Debt covenants are usually more restrictive in LT Debt Agreements
TRUE
97
T/F
You can easily repay LT debt early
FALSE
Early payment can result in prepayment penalties
98
Commercial paper is normally issued with a short maturity period, usually ____ to _____ months
2-9
99
T/F
Commercial paper is issued through a bank
FALSE
It is issued by the corporation
100
T/F
Commercial paper is secured by the issuer's assets
FALSE
Commercial Paper is unsecured
101
T/F
Commercial Paper issuer is usually a small company
FALSE
Commercial paper is usually issued by larger corporations
102
How do you calculate the effective interest rate?
[Net Interest Expense - Interest Income] /
[Loan Amount - Compensating balance]
103
This is the rate charged on business loans to borrowers with high credit ratings
Prime Rate
104
T/F
An advantage of leasing as a form of financing is that up front costs may be less
TRUE
Leases often do not require down payments
105
T/F
An advantage of leasing as a form of financing is that the provisions of the agreement may be less stringent than for other debt agreements
TRUE
106
T/F
An advantage of leasing as a form of financing is the dollar cast
FALSE
The dollar cost to lease an asset is generally greater than the cost to purchase and finance through other means
107
T/F
An advantage of leasing as a form of financing is that the firm may be able to lease the asset when ti does not have the credit capacity to purchase the asset
TRUE
108
How do you calculate the current yield on a bond?
Annual Interest Paid / Bond Market Price
109
How do you calculate the degree of operating leverage?
% Change in Operating Income / % Change in Unit Volume
110
How do you calculate the degree of financial leverage?
% Change in EPS / % Change in EBIT
111
How do you calculate the WACC (Weighted Average Cost of Capital?)
Weight of Equity * Cost of Equity +
Weight of Debt * Before-Tax Cost of Debt * (1-Tax Rate)
OR 2nd portion would be:
Weight of Debt * After-Tax Cost of Debt
112
According to the Capital Asset Pricing Model (CAPM) the relevant risk of a security is its ____
Systematic Risk
113
How do you calculate the cost of common equity using the dividend-yield-plus-growth approach?
(Expected Dividend/Stock Price) + Growth Rate
114
What is the CAPM Formula?
Cost of Capital = Risk-Free Rate + (Market Rate - Risk Free Rate) * Beta
115
T/F
The CAPM is simple to understand & implement
TRUE
116
T/F
The CAPM can be applied to all firms
TRUE
117
T/F
The CAPM does not rely on any dividend assumptions or growth of dividends
TRUE
118
T/F
The CAPM is based upon the stock's actual market price
FALSE
119
How do you calculate the current net cost of debt? (when given basis points)
(Risk Free Rate + Basis Points) * (1 - Tax Rate)
120
_____ refers to the amount of debt in the firm's capital structure.
Financial Leverage
121
Increasing the financial leverage of a Corporation would mean....
financing future investments with a higher % of bonds
122
The Gordon Model calculates the cost of retained earnings. What is the formula?
krm = (D1/PO) + g
123
The Gordon Model calculates the cost of retained earnings and is as follows:
krm = (D1/PO) + g
What does the krm stand for?
the cost, in percentage, of using existing equity in the form of retained earnings
124
The Gordon Model calculates the cost of retained earnings and is as follows:
krm = (D1/PO) + g
What does the D1 stand for?
The estimated dividend that will be paid next year
125
The Gordon Model calculates the cost of retained earnings and is as follows:
krm = (D1/PO) + g
What does the PO stand for?
The current market price of the stock
126
The Gordon Model calculates the cost of retained earnings and is as follows:
krm = (D1/PO) + g
What does the g stand for?
the estimated annual growth rate in dividends, in percentage
127
This covenant obliges the borrower to repay the bonds if a large quantity of common stock is held by a single investor and the bond rating is downgraded. This type of bond covenant is used as a defensive strategy to prevent hostile takeovers.
Poison Put Clause
128
Net Working Capital = ...
Current Assets - Current Liabilities
