SU5: Working Capital Flashcards

1
Q

Net Working Capital

A

Current Assets - Current Liabilities

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2
Q

Permanent Working Capital

A

Minimum level of current assets maintained by the firm, usually financed with long term debt.

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3
Q

Current Ratio

A

Current Assets / Current Liabilities

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4
Q

Quick Ratio or Acid Test Ratio

A

Quick Assets / Current Liabilities

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5
Q

Economic Order Quantity

A

sq root of (2bT/i)
b = fixed cost per transaction
T = total demand for cash
i=intrest rate on marketable securities

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6
Q

Annual Benefit of receiving cash earlier

A

Daily Cash Receipts x Days of Reduced Float x Opportunity Cost of Funds

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7
Q

The three motives for holding cash are

A

Transactional Motive, precautionary motive and the speculative motive

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8
Q

T-Bills

A

1 year or less, no coupon rate, sold at a discount

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9
Q

T-Notes

A

Maturities of 1-10 years, interest paid every 6 months

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10
Q

T-Bonds

A

Maturities of 10 years or longer. Interest payment every 6 months.

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11
Q

Repos

A

Repurchase agreement - a means for dealers in government securities to finance their portfolios.

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12
Q

Commercial Paper

A

Unsecured, short-term ntoes issued by large companies that are very good credit risks

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13
Q

CD’s

A

Certificate of Deposits - less risky than commercial paper and bankers acceptances

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14
Q

Eurodollars

A

time deposits of US dollars in banks located abroad

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15
Q

Bankers Acceptance

A

less risky than commercial paper

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16
Q

CAPM Model

A

ROR = Rf + B*(Rm-Rf)

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17
Q

Long hedges are purchased to protect against price <> and short hedges are sold to protect against price <>

A

Long hedges are purchased to protect against price increases, and short hedges are sold to protect against price declines

18
Q

Economic Order Quantity

A

= square root of ( 2ad/k)
a= fixed cost per PO (ordering costs)
D=periodic demand in units
k=carrying cost per unit

19
Q

List the assumptions of the EOQ model

A

Demand is uniform.
Carrying costs are constant.
The same quantity is ordered at each reorder point.
Purchasing costs are unaffected by the quantity ordered.
Sales are perfectly predictable.
Lead time is known with certainty.
Deliveries are consistent.
Adequate inventory is maintained to avoid stockouts.

20
Q

Cost of carrying safety stock

A

=expected stockout cost + carrying cost

21
Q

Reorder formula

A

average daily demand x lead time in days + safety stock

22
Q

List the four types of inventory costs

A

Purchase Costs, order or setup costs, carrying costs and stockout costs

23
Q

Equation for effective interest rate on loan with compensating balance

A

Stated rate divided by (1-stated rate-compensating balance %)

24
Q

Current Market Value Eq

A

Next divident divided by (Required Rate of Return - Dividend Growth Rate)

25
In the context of the capital asset pricing model (CAPM), the beta coefficient of a stock that has the same systematic risk as the market as a whole is equal to
1
26
List the three main items that contribute to a firms beta value
Debt to equity ratio, Industry characteristics and operating leverage
27
List the three major motives for holding cash according to Keynes.
i) the transactions-motive, i.e. the need of cash for the current transaction of personal and business exchanges; (ii) the precautionary-motive, i.e. the desire for security as to the future cash equivalent of a certain proportion of total resources; and (iii) the speculative-motive, i.e. the object of securing profit from knowing better than the market what the future will bring forth
28
Covariance of two stock portfolio eq
correlation coefficient x standard dev of stock A x standard dev of stock B
29
Risk premium
the risk premium is the difference between the return on market portfolio and the risk free return
30
An optimal portfolio of investments is
Tangential to the investors highest indifference curve
31
Describe capital rationing
Capital rationing exists when a firm sets a limit on the amount of funds to be invested during a given period. In such situations, a firm cannot afford to undertake all profitable projects. Another way of stating this is that the firm cannot invest the entire amount needed to fund the theoretically optimal capital budget, so only those projects that will return the greatest net present value for the limited capital available in the internal capital market can be undertaken.
32
Method for calculating Beta
divide the covariance of the return on the market and the return on the security by the variance of the return on the market
33
Describe factors that would impact the beta value that is chosen for use in evaluating a project
the inudustry and it's risk characteristics experience the division has with similar projects ability of the division to realize estimated returns on projects in the past strength of the management team in the division level of competition expected geographical location of the project the degree to which the project involves new technology
34
Coefficient of variation (as related to returns on a project)
= the standard deviation of a project divided by the expected return
35
The returns on two stocks can be correlated in values except those that are
Skewed. | The correlation voefficient measures the degree to which to variables are rleated. This can be positive, negative or 0.
36
The returns on two stocks can be correlated in values except those that are
Beta Coefficient
37
For a firm engaged in risk management, value-at-risk is defined as the
Maximum loss within a certain time period at a given level of confidence
38
Things to consider when looking at lease vs buy
Bank covenants, expected rate of obselescence (cancellation clause) Potential use of asset after useful life
39
What rate to use in lease vs buy?
Risk free rate.
40
List the three motives to hold cash
Medium of exchange (transactions), provide a reserve for contingencies (precautionary) and to take advantage of unexpected opportunity (speculative)