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CPA: BEC > IV - Financial Management > Flashcards

IV - Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

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2
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

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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

Average time needed to convert materials into finished goods and sell them

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

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5
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

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6
Q

What is the Payables Deferral Period?

A

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)

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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 Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

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12
Q

What is float?

A

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

Maximize float on cash payments

Minimize float on cash receipts

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13
Q

What are Zero Balance Accounts?

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- Notes and Bonds?

A

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is 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 corporations instead of Government

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 insurance/investment 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

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18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

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19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

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20
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered.

IOP : Average Daily Demand x Average Lead Time

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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 is low and Cost of Carrying Inventory is high

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22
Q

What is Factoring of receivables?

A

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

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23
Q

What is a Trade Discount?

A

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

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24
Q

What is the cost of forgoing a discount?

A

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

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25
What is the Prime Rate?
A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used
26
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
27
How is Current Yield calculated?
CY : Interest Payment / Bond Price
28
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
29
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
30
What are the characteristics of a Junk Bond?
High interest rate High default risk
31
What are debenture bonds?
Bonds unsecured by collateral
32
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
33
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
34
What is a Callable Bond?
Borrower can pay off debt early
35
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
36
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
37
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
38
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
39
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capital ``` Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC : 9.2% ```
40
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
41
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
42
Sunk Cost?
Cost of resources incurred in the past that can't be changed
43
Opportunity Cost
Benefit lost from choosing one option over another (Not actual $ lost) **Everything costs something bro**
44
Differential/Incremental Cost
Difference between 2 or more alternatives 50k vs 40k = 10k incremental
45
Cost of Capital
cost of LT funds: debt and equity (ex stock, loans)
46
Debt vs Equity(stock) | Whats the risk, required rate of return?
Debt has a lower risk and lower rate of return | Preferred stock is lower than common stock
47
Weighted Average Cost of Capital (WACC)
Rate of return of each source weighted by its share of total amnt %of tot cost of cap WC (indiv) $40k/ = 20% x 6% = 1.2% (add with others) 200k
48
Buying a new delivery van, what relevant costs factor into this decision? Purchase price of new van, purchase price of old van, accumulated depreciation of old van, gain on sale of old van, disposal price of old van
The *Purchase price of the new van* and *Disposal price of the old van* The purchase price of the old van and related depreciation are sunk costs and the gain that would be recognized on the sale of the van ($12,000 - $10,000 = $2,000) would be incorporated in the disposal price (selling price) of the old van.
49
Which is relevant in making financial decisions: Opportunity or Sunk costs?
**Opportunity** | Sunk costs are already incurred so can't be changed
50
What amount is opportunity cost? Paid: 1M Can sell: 1.2M Can develop: 1.5M (cost)
**1.2M** Opportunity cost is the (discounted) dollar value of benefits lost from an opportunity, as a result of choosing another alternative. By developing the land, Carter would give up the opportunity to sell the land for $1,2M
51
Should a company minimize or maximize its weighted-average cost of capital?
WACC should be minimized | The WACC is not only costs the firm for its long-term financing, but also is the min the firm must earn on investments
52
Which would have the highest present value? $100 decrease in taxes each year for 4 years. $100 decrease in the cash outflow each year for 3 years $100 increase in disposal value at the end of 4 years $100 increase in cash inflows each year for 3 years.
A is highest ABD are annuities (but BD are only $300) Lesson: PV of a single amount has to be less than the present value of a series of equal amounts due in the same/less time
53
What interest is earned on both an initial principal and the unpaid accrued interest that accumulated on that principal from prior periods?
Compound interest
54
Loan $200,000 Annual rate of 12% Mandatory balance 20% What is the effective cost of the loan?
15% effective rate 200k x 20% = 40k mandatory 200k x 12% x 1 = 24k rate 24k / (200-40) = 15%
55
What is the real interest rate?
Standard rate for a period less inflation rate
56
What is the annual rate of a "2/10, net 30" loan? | use $1 as a base
36.73% (Int/Princ) x (1 / fract of year) (.02/.98) x (1/ (30-10/360)) .204 x 18 = 36.73%
57
What do the numbers mean in a: | 3/10, net 30
3 - debtor may take a 3% discount if paid in 10 days 10 - days to receive discount if paid 30 - days full pmt is due
58
Stated Interest
annual rate, stated in contract, w/o compounding
59
Simple Interest
No compounding, received on original payment ONLY | Just use PRT = I
60
Compound Interest
Principal plus accumulated unpaid int
61
Effective interest
Net cost of borrowing / net proceeds
62
Annual Percentage Rate (APR)
(portion of Effective rate) x (# of fractions in year)
63
Which GAAP approach determines fair value by converting future amounts to current amounts? Market, income, cost
Income approach
64
Which GAAP approach for determining value is most likely to provide the best evidence of fair value? Market, income, cost
Market approach
65
What is the CAPM formula? | Use required rate of return, risk-free rate, beta, expected rate
RRR = RFRR + beta (ERR - RFRR)
66
In the CAPM formula what is beta? Do you want a high/low?
Beta is the risk for the asset | Lower beta's have lower risk for the class
67
1 is NOT a limit of CAPM: - It assumes that there are no restrictions on borrowing at the risk-free rate of return. - It assumes that no external costs are associated with the investment. - It fails to consider the time value of money. - It fails to consider risk derived from other than variances from the asset class benchmark.
-It fails to consider the time value of money. | CAPM actually DOES consider time value of $
68
1 is NOT a limit of Black-Scholes option pricing: It fails to consider the probability that the option will be exercised. It assumes the stock does not pay dividends. It assumes the risk-free rate of return used for discounting remains constant during the option period. It assumes the option can be exercised only at the expiration date.
It fails to consider the probability that the option will be exercised. Actually it considers both the probability of paying off and exercising of option
69
1 is NOT an advantage of Black-Scholes option pricing Incorporates the probability that the price of the stock will pay off within the time to expiration. Incorporates the probability that the option will be exercised. Discounts the exercise price. Accommodates options when the price of the underlying stock changes significantly and rapidly.
Accommodates options when the price of the underlying stock changes significantly and rapidly. Actually assumes the value increases in small increments
70
What is the basic approach used to capitalize earnings to determine the value of a business? Use Annual earnings, Req RoR
Annual earnings / Req RoR
71
``` Which one of the following is NOT a major approach for assigning a value to an entire going business? A. Market approach. B. Income approach. C. Cost approach. D. Asset approach. ```
Cost Approach
72
Price Earnings ratio (P/E ratio) formula | Using EPS, Market price
Market price / EPS
73
``` Which one of the following is NOT an income approach to the valuation of a business? A. Discounted cash flow. B. Comparable sales. C. Earnings multiple. D. Free cash flow. ```
Comparable sales | This is actually a market approach
74
Define: Market approach Income approach Asset approach
Market - compare to similar busin Income - Net present value, use F/S and ratios Asset - based on FMV of assets, liquidation/distress sale of busin
75
Qualitative Forecasting | and its methods
Opinion, subjective Executive opinion, Market research, Delphi
76
Quantitative Forecasting | and its methods
Data/Models, Objective Time series (from past), Casual (variables)
77
Whats the difference between the simple moving average and the weighted moving average times series models for forecasting?
Under the simple moving average model for forecasting, the raw prior values are not adjusted, whereas under the weighted moving average model the prior values are adjusted.
78
Data patterns that reflect an upward movement over a long period of time would describe what pattern?
A trend | Can be either upward or downward slope
79
Each month Co forecasts its next three months sales using the average of its actual sales for the most recent 12 months. What times series model is Co using?
Simple Moving Average Avg of a specific number of the most recent periods' actual values, without adjusting, as a forecast for future period(s)
80
``` Which one of the following is not a causal model approach to forecasting? A. Decomposition. B. Regression analysis. C. Economic statistical models. D. Input-output models. ```
Decomposition is not a causal model approach to forecasting. Decomposition is the removal of the effects of various patterns from a set of time series data.
81
``` Which one of the following is not a time series pattern? A. Cyclical. B. Seasonal. C. Trend. D. Naïve. ```
Naïve is not a times series pattern, but a simple method of forecasting that uses the immediate prior period's actual value as a forecast for the next period.

CPA: BEC (12 decks)

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