The Effective annualized percentage cost of the financing Flashcards
3-month commercial paper FV of $1,000,000 for $980,000. Transaction costs would be $1,200. Based on 360 Day year, the effective annualized % cost of the financing is
The cost to issue the commercial paper is $20,000 plus transaction costs of $1,200 for a total cost of $21,200
21,200/980,000 = 2.16% ==three month
Annualized is 2.16 X 4 = 8.65%
A factor that is inherent in a firm’s operations if it utilizes only equity financing is
Business Risk
Financial Risk or Default Risk
is the exposure of lenders to the failure of borrowers to repay principal and interest on debt. An entity using its own cumulative earnings in capitalizing its operations is not exposed to default risk
A derivative is
A financial contract which derives its value from the performance of another asset or financial contract.
Credit Risk Premium
Credit Risk relates to the ability of a firm to obtain, not grant, credit. Require Rate of return adjustment do not include Credit Risk Adjustment
A put is an option that gives its owner
The Right to sell a specific security at fixed condition or price and time.
A put option
Specifies conditions and is not indefinite
An option to buy is called
A call option. A call option gives its owner the right to purchase a specific security at fixed conditions o price and time.
Short Term Financing
results in lower interest rates, but higher interest rate risk, because rates will fluctuate more dramatically for ST issues than LT issues.
Long Term Financing
Credit risk will decrease because the company will seek refinancing less frequently and hereby have less credit risk or opportunity that the rates associated with debt will be changed
As inflation associated with a foreign currency increases in relation to a domestic economy
demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and it reduces demand. Reduced demand for a foreign import will reduce the demand for its currency.
To minimize risk from foreign currency fluctuations
Hold parables and receivables in the same amount.
Purchasing currency futures on payable scheduled for payment
helps minimize currency risk pertaining to imports, but it does not mitigate currency risk pertaining to exports (receivables)
Currency Swaps
minimize the risks associated with foreign exchange rate fluctuations
what is the effect when a foreign competitor’s currency becomes weaker compared to the US dollar
the Foreign company will have an advantage in the US market
As a foreign competitor’s currency becomes weaker with the US dollar
The product becomes less expensive in US dollars. The less expensive product will increase demand and result in an advantage in the us market
Management has elected to hedge transactions as a means to mitigating transaction exposure to exchange rate risk. What is the most effective means to avoid over-hedging
Management should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions
to fix a price in dollars to buy British pounds,
British pound call options should be purchased
as inflation associated with a foreign economy increases in relation to a domestic economy
demand for the foreign currency falls
Net cash outflows of a foreign currency and the foreign currency depreciates
economic gain
Net cash inflows of a foreign currency and the foreign currency, depreciates
economic loss
Net cash outflows of a foreign currency and the currency appreciates
economic loss
if the dollar price of the euro rises,
then the euro is getting more expensive, that means that the dollar is getting less expensive or the dollar is depreciating against the euro
