Working Capital Management Flashcards
Increase in borrowing costs represent a drag or pull on liquidity?
A drag on liquidity and not a pull on liquidity
Is a sale of short term assets considered a secondary or primary source of liquidity
A secondary source of liquidity
What other name does the cash conversion cycle have
Net operating cycle
How does a firm manager its daily cash position
To efficiently manage daily cash position a firm must analyze its typical cash inflows and outflows and create a short medium and long run forecasts and identify periods in which the cash balance is low for short term borrowing, liquidation short term investments or in excess for short term investments
Issuing long term debt to pay short term debt is considered a primary or secondary source of liquidity
A secondary source of liquidity
The denominator of accounts recievables, payables and inventory turnover ratios all have what?
Averages and not just the ending period amount. In addition they are all considered liquidity measures or also called activity measures
What is the numerator in inventory turnover ratio
COGS
What is the appropriate result for turnover ratios
Close to the industry average
What does the days in receivables, payables and inventory mean
The number of days it takes to collect money from customers, sell the inventory or pay off creditors.
Too high cash conversion cycle or operating cycle is good or bad?
Too high cash or operating cycles are bad because it means that too much capital is tied up in assists
The return on the short term securities investments should stated as from a corporation perspective?
Bond equivalent yield and the return on the portfolio is the weighted average of those yields
Should inventory turnover ratios be compared between firms in different industries?
No
When is it optimum to accounts payables on time?
When the interest charged on late payments exceed the interest earned for keeping the money beyond the payment period
The cost for a company that doesn’t take discounts for early payments is called?
Cost of trade credit and its formula is = (1+%discount/1-%discount)^365/days last discount-1
What happens to the cost of trade credit as the payments are delayed or extended?
Decreases
What is adjustable rate preferred stocks?
Have dividends rate that reset quarterly to common market yields and offers corporate holders a tax advantage because a percentage of the dividends received are exempt from federal tax
When can small firms with low credit rating use bank borrowings
When they pledge assets as a collateral for their loans, when a firm services its receivables as collateral it’s still responsible for any uncollected payments. Another source of non bank financing for small firms with low credit ratings is borrowing funds from other non banks entities at a higher interest rate.
A firm pays more interest on issuing commercial paper or borrowing funds from banks?
From bank borrowings
Which lines of credit has a fee and which of them can be listed on a companies footnotes?
Only the committed and revolving lines of credit
The revolving line of credit it considered short term or long term borrowing?
Long term unlike the other two lines of credits
The formulas of bond equivalent yield money market yield and bank discount yield(discount basis yields) are?
Look them up
The costs of lines of credit, bankers acceptance and commercial paper formulas are?
Check them up
