MORE Knowledge Flashcards
WHAT way (Upward or Downward) is the yield curve depicting the term structure of interest rates?
A normal yield curve is upward sloping
WHY? - Because it reflects the fact that issuers of longer-term debt must offer higher yields to compensate for increased risk
WHAT type of investment instrument is this phrase referring to: “. . . 10% convertible participating . . . $10,000,000”?
Preferred Stock
WHY? - Because Preferred stock may be convertible into common stock, and may be participating
why may a firms cost of debt be lower than that of the marketplace?
Because the interest is tax deductible
Thus, the actual cost of debt capital is the net effect of the interest payment and the offsetting tax deduction
WHAT is Net working capital?
THE excess of current assets over current liabilities
i.e. An increase in current assets or a decrease in current liabilities increases working capital
WHAT are examples of Marketable Securities suitable for Short Term Investing?
(1) Commercial Paper
(2) U.S. Treasury Bills
(3) Eurodollars
(4) Floating rate Preferred Stock
i.e. These are all near-cash items used primarily for short-term investing (less than 1 year in the future)
WHAT is the equation for Working Capital?
Current assets minus Current liabilities
WHAT would be considered Current Assets?
Cash and Cash Equivalents
Net Accounts Receivable
Inventory
Prepaid Expenses
WHAT would be considered Current Liabilities?
Accounts Payable Interest Payable (less than year)
WHAT is a Cash Management technique that focuses on cash disbursements?
Zero-Balance Accounts or “ZBA”
i.e. It is a method of managing cash disbursements as well as maintaining higher balance in the master account for short-term investments
WHAT is a Zero-Balance Account?
Zero-Balance Accounts or “ZBA is;
- a practice in which at the end of each processing day, the bank transfers just enough from the firm’s master account to pay all checks presented against the ZBA that day
WHAT is a “Lock-Box” System?
IT is a strategy for expediting cash collections
i. e. Customers submit their payments to a post office box rather than the company’s offices
- Bank personnel remove the checks from the mailbox and deposit the checks into the company’s account immediately
WHAT is the equation for the acid-test (quick) ratio?
Cash and equivalents + Investment Securities + Net Receivables
Divided By
Current Liabilities
WHAT is a possible limitation for a bank when using the “Quick-Ratio” to evaluate a firm’s credit worthiness?
Fluctuating Market prices of short-term investments may adversely affect the ratio
WHY? - Because Marketable Securities are included in the Numerator of the quick ratio, fluctuating market prices of short-term investments may adversely affect the ratio
WHAT is a Working Capital method that delays the outflow of cash?
A “Draft”
How? - Because the outflow is delayed until the check clears the drawee bank
A Draft is a three-party instrument in which one person (the drawer) orders the drawee (i.e. the second party) to pay money to the third-party, the “payee”
WHY is it invalid to assume that a company with a higher current ratio is better?
A higher current ratio may indicate an inefficient use of various assets and liabilities
WHY? - Because the current ratio does not measure the efficiency of handling the individual current assets account
Alternatively, a high ratio may indicate a slow collection of accounts receivable, holding of excess inventory, or hoarding of more cash than needed
