P2B.4 WORKING CAPITAL MGMT Flashcards
Equation: Reorder point
[Average Daily Usage * Average lead time in days] + Safety stock
What are ways to manage cash outflows?
Zero balance accounts, centralization of payables and controlled disbursements
BANK ACCEPTANCE: What is it?
time draft (a promise to pay bearer of draft on a specific date in future once conditions are met)
Used when buyer & seller are complete strangers (i.e. no relationship)
Banker’s Acceptance: How is it booked in the banker’s books?
Banker will post banker’s acceptance as a LIABILITY
Government-sponsored entities issue bonds that ______ backed by US government
ARE NOT
Money markets focus on (short/long) term instruments while capital markets focus on (short/long) term instruments
Money markets: short-term
Capital markets: long-term
What is commercial paper?
Unsecured financial instrument issued by a firm with high credit rating
Matures less than 270 days and low cost
Not really for general public
List ways to speed UP cash collections
- Lockbox - this decreases processing time
- Factoring ARs - firm will get cash immediately
- Discount within certain days
- more ways to pay electronically
Define Negotiable CD
- lower risk financial instrument than that of commercial paper
- can be sold BEFORE maturity date
- fixed interest rate paid with a maturity date
Define: Commercial Paper
- unsecured debt issued by firm with high credit rating
- maturity date of 270 days or less
- not necessarily registered with SEC
- not available to general public usually
List Steps of bankers’ acceptance
- importer buys goods from exporter on agreed upon price
- importer requests acceptance agreement to its bank
- Importer’s bank agrees to receive draft on importer’s behalf and importer will repay drafts
- Exporter ships goods
- Importer bank sends time draft and shipping dox to exporter’s bank
- Importer’s bank sends payment to exporter’s bank; bank creats BA
- Importer pays back its bank in full ON maturity date of BA
Define: Factoring
Selling AR to a 3rd party @ a discount
Define: Marketability
The ease an investor has to sell a security w/o impairing its value
Define: Maturity Risk
Risk that interest rates will go UP when investor is currently locked in a lower interest rate debt instrument
Equation: Annual cost of NOT taking a cash discount
[% of discount offered/1-% of discount offered] * (365/# of days of discount period)
Equation: Effective Interest Rate of Not taking a cash discount
(1 + periodic rate)n - 1
where
Periodic rate = (periodic rate/(1 - periodic discount))
Definition: Effective Interest Rate of Not taking a cash discount
If firm’s investments > effective interest rate, DO NOT TAKE cash discount
IF < effective interest rate, firm pays buyer early and take discount
Equation: Effective A/R with compensating balance
Nominal Interest Due
÷
available principal
Equation: Effective AR with commitment fee
[Nominal Interest Due + commitment fee]/principal balance
Equation: Annual Carrying Cost of inventory
Carrying per unit * [# of units per order/2]
Equation: Annual Ordering Cost of Inventory
Cost per Order * [Annual Demand/# of units per order]
List assumptions made for Economic Order Quantity
- Demand is known & constant throughout entire period
- Order Cost is FIXED
- Carrying costs include: obsolescence, interest, insurance, storage and materials
- Lead time is known & constant
- stock replenishment is immediate, w/o outages
EOQ moves in _____ direction as Annual Sales and Order Cost
SAME
(as Annual Sales and Order Cost go UP, EOQ goes UP)
EOQ goes _____ while Carrying Cost per unit goes ______
UP, DOWN
Equation: Lockbox benefit
Float reduction in days * Average daily receipts * Interest rate
Equation: Financial Leverage Ratio
Total Debt
÷
Total Equity
Equation: Equity Multiplier
Total Assets
÷
Total Equity
How does Zero Balance Account help the firm?
- It reduces cost of cash management via reducing time managers spend in transferring cash between accounts to cover check balances
- reduces excess cash balance by having the firm only have 1 account to worry about as other accounts are maintained at 0 balances
- reduces mgmt’s time by taking out the time mgmt spends in transferring cash
Definition: Speculative Motive
taking advantage of an exploit
Definition: Transaction Motive
need for cash to cover business daily opex
Definition: Precautionary Motive
action done to reduce risk of an event occurring:
ex: holding more cash in case a client goes BK
Equation: Cost of Foregoing Discount
]Discount offered/1-Discount offered] x 365/# of days discount is applicable
Equation: Total Inventory Value
Set up costs + holding costs + cost of purchase
Equation: set up cost
set up cost x # of units used annually
÷
of units ordered
Equation: Holding costs
annual holding cost of 1 unit x # of units ordered
÷
2
