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BEC > Financial Mgmt > Flashcards

Financial Mgmt Flashcards

1
Q

What is the primary focus

of working capital management?

A

Managing inventory & receivables (CA + CL)

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2
Q

How is Net Working Capital calculated?

A

NWC = CA - CL

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3
Q

What are the characteristics of

effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

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4
Q

What is the Inventory Conversion Period?

A

Avg Inventory

Sales Per Day

Avg time needed to convert DM to FG & sell them

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5
Q

What is the Receivables Collection Period?

A

Avg AR

Daily Credit Sales

Avg time needed to collect AR

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6
Q

What is the Payables Deferral Period?

A

Avg Payables / (COGS/365)

Avg time b/t materials and labor purchase and their AP payment

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7
Q

What is the Cash Conversion Cycle?

A

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors) Inventory Conversion Period

+ Receivables Collection Period

- Payables Deferral Period

Cash Conversion Cycle

(Inventory Really (-Pays) Cash)

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8
Q

What traits should Cash

and Short-Term Investments have?

A

Liquid

Safe

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9
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

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10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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11
Q

What is a Lockbox System?

What are the advantages?

A
  • Customer Paymts sent to a bank-managed PO box
  • Employees don’t see cash
  • Deposits more timely
  • Interest income from deposits pays for Lockbox fees
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12
Q

What is float?

A
  • Time it takes to mail payment & clear bank acct
  • Maximize float on cash payments
  • Minimize float on cash receipts
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13
Q

What are Zero Balance Accounts?

What are the advantages?

A

Regional bank sends enough cash to cover daily checks

Advantages: Checks take longer to clear, more float

Low amounts of cash tied up for compensating (minimum) balances

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14
Q

What is the difference between

Treasury Bills, tNotes and tBonds?

A

Treasury Bills: Short term (< 1 yr) i.e. $1 Bill

Treasury Notes: Med term (1 - 10 yrs)

Treasury Bonds: LT (10+ yrs)

Govt in long-term bondage to you; they owe you money

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15
Q

What is commercial paper?

A
  • Similar to T-Bill- but issued by corps
  • Greater than 9 Months Maturity
  • Unsecured
  • Issued by large firms
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16
Q

What are the advantages

and disadvantages of Commercial Paper?

A
  • Advantages: Financing at less than Prime.
  • No compensating balances required.
  • Disadvantages: Unpredictability of markets.
  • Credit crisis emerges and large ins/investmt companies aren’t lending.
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17
Q

What is Economic Order Quantity?

A

The order quantity that minimizes inventory costs.

EOQ = Square Root of (2DO/C)

D : Unit Demand (Annual)

O : Order Cost

C : Cost of Inventory

18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

19
Q

What is Order Cost?

A

Cost of executing an order

and starting product production.

20
Q

What is inventory reorder point?

A

Avg Daily Demand x Avg Lead Time

Minimum inventory before re-ordering.

21
Q

What is a Just In Time (JIT) system?

A

Orders inventory so that you get it just in time for when it’s needed

JIT is valuable when Order Cost = low

and Cost of Carrying Inventory = high

22
Q

What is Factoring of receivables?

A

Receivables are sold to a financing company that pays less than the value of the receivables due to a discount related to risk of non-collection

23
Q

What is a Trade Discount?

A

Buyer saves if paid early

  • Ex: 1/10 Net 30
  • 1% Discount if paid in 10 days
  • Reg price due in 30 days
24
Q

What is the cost of forgoing a discount?

A

Discount % x 365

(100% - Discount) x (Pay Period - Discount Period)

25
Q

What is the Prime Rate?

A

A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%

Ex: If the lending institution & customer are not in the same country, the LIBOR rate often used

26
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

27
Q

How is Current Yield calculated?

A

Interest Payment

Bond Price

28
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle

+ Interest

Bond Price

29
Q

What is a Zero Coupon Bond?

A
  • No interest payments made
  • Bond sold at a discount
  • Interest reflected when Bond matures
30
Q

What are the characteristics of a Junk Bond?

A

High interest rate

High default risk

31
Q

What are debenture bonds?

A

Bonds unsecured by collateral

32
Q

What are subordinated debentures?

A

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

33
Q

What are Redeemable Bonds?

A

Provision in Bond contract

allows demand of Bond payment

under certain circumstances

34
Q

What is a Callable Bond?

A

Borrower can pay off debt early

35
Q

What is a Convertible Bond?

A

Lender can demand payment

via company stock instead of money

36
Q

What is a Sinking Fund?

A

Borrower deposits regular sums

into an account that will eventually pay off the debt

37
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)

38
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

39
Q

What is Weighted Average Cost of Capital?

A

A company uses this to determine the true cost of their capital

Ex: Debt costs 5%; 40% of Cap.

Equity costs 12%; 60% of Cap.

(5% x 40) + (12% x 60)

= 2 + 7.2

WACC = 9.2

40
Q

What is CAPM?

A
  • A stock’s expected performance
  • based on its beta (risk) compared to that of the stock market.
  • More risk => more expected return.
41
Q

How is Cost of Debt calculated?

A

Interest Expense - Tax Benefit

Carrying Value of Debt

BEC (9 decks)

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