L10-12 Leasing and working capita management Flashcards
What shall be specified in a leasing contract
The leasing perid, payment terms, maintenance terms, insurance terms and ownership at the end of the term
Name some characteristics of a financial lease
It is fully amortized, the lessee bears the entire cost risk by being responsible for service and maintenance costs as well as the asset’s depreciation, the lessor is often a finance company, the lessee has right to renew lease at expiration and often it cannot be cancelled
Name some characteristics of an operating lease
It is not fully amortized, the lessor takes the cost risk and is responsible for service and maintenance of the asset, there is often a cancellation option
Financial companies can engague in operating leases
True
What are some good reasons for leasing
Leasors have expertise regarding their assets and their maintanence and it can spread risks thinner. If you are only going to use an asset for a limited time it also makes sense to lease
Leasing does not effect equity
False
How is a long term lease accounted
The asset is depreciated as normal but is also a financial liability with payments counted as debt payments
How is a short term lease accounted
As an expense
In a financial lease the leasee takes all cost risk
true, they are responsibel for servive and maintanence
Leese fees are payed in advance in operational leases
False, in financial leases
What is the concrete difference between taking a loan to buy and asset and to lease an asset through a financial lease in a world without taxes
None
How sould futere cashflows be discounted when comparing leasing and buying
at the market lending rate
What is the diference between renting and leasing
Leases can have less than full cost risk and renting is usually for a shorter period with an exception of buildings.
Taking out a long terme loan increases net working capital
Yes becouse cash increases and long term liability does not count to working capital
What is the operationg cycle
the period from the arival of stock to the recival of cash. Inventory period + account receivable period
what is the cash cycle
operating cycle - account payable period. Minimize this is good
What is the difference between a flexible and restrictive financial policy
Flexible holds more current assets on hand while a restrictive financial policy tries to mimimize idle cash
What is the difference between a flexible and restrictive financing policy
When it is flexible debt is more long term while restrictive has more short term debt
A restrictive financial policy has few to no credit sales and small investments into inventory
True
If carrying costs are high and shortage costs are low the optimal financial policy calls for substantial current assets
False, carrying costs are the costs of holding current assets (maintanence and opertunity) and shortage costs are the cost of trading marketable securities.
In an ideal economy, short-term assets can always be financed with short-term debt, and long-term assets can be financed with long-term debt and equity.
True so the optimal level of current liabilities is in line with current assets in theory which would make net working capital always zero
Why engague in cash budgeting
To have a plan for when cash will needed in the near future
Name four financing options for a temporary cash shortfall
Unsecured bank borrowing, secured loans, commerial papers and bankers apraisals
Commericial papers are like verry short term corporate bonds
True
Why hold cash
The transaction motive is that current assets and liabilities are not syncronised and it can also be a compensating balance for banks
What are the three inputs of the Baumol model
F (the fixed cost of replenishing cash), T(cash needed in period) and R(the opportunity cost of holding cash)
What are the limitations of the Baumol model
It assumes a constant disbursment rate, it assumes no cash reviepts durring planning phase and it assumes no safety sock which is quite unrealistic
What are the inputs of the Miller Orr model
Lower controll limit for cash, stdev of daily flows, the interest rate and the trading cost of marketable securities
Float is still verry important becouse payments can be slow and it is not harmonized arround the world
Flase, it is now electornic and harmonized at least in the EU with SEPA
What are sweep accounts
A bank account where banks automatically invest excess cash
Why do firms a temporary cash surplus
if they save up for planned expenses, if there are seasonal differences or they may have contingency buffers
What is the default risk of marketable securities
Extermely low
Is evaluating the creditwothyness of a customer free
usually not
What are the five C’s of credit scoring
Character (willingness to meet obligation), Capacity (ability to meet obligations), Capital (financial reserves), Collateral (pledged assets) and Conditions (general economic)
