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82 Cards in this Set
- Front
- Back
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Function of Financial management |
1. Capital budgeting
2. Corporate Governance 3. Risk management 4. Financing funcition 5. Financial Managment functions |
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Cash conversion cycle
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The length of time its takes from purchasing product, converting and finally paying for it.
Inventory conversion cycle + Receivable conversion cycle -Payables deffaral peirod |
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Inventory conversion peirod
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Average Inventory/ Cogs per day
Ave time require to convert materials into goods and sell those goods |
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Days sales outstanding or Receivable Conversion cycle
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Average receivable / Credit sales per day
Average time to collect AR |
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Payable Deferral period
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Average payable/ Cogs per day
Length of time between purchase of materials, labor and payment of cash |
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Why Cash management is necessary?
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1. To take advantage of trade discount
2. Maintain credit rating 3. Meet unexpected needs |
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Why do we need to hold cash
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Transaction need
Compensating financial institution |
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Purpose of cash budget
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1. To take advantage of trade discount
2. Maintain credit rating 3. Meet unexpected needs (precautionary balances) 4. take advantage of business opportunites (Speculative balance) |
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What is Float
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Tme that elapses relating to mailing, processing and clearing chck
the goal is to extend payable float and minimize receivable float |
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What is Zero Balance Accounts
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Receives daily fund drawn on customers acount from reverse bank. Regional bank then notify custoemr how much needed to clear all checks for the day
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Advantages of Zero Balance Accounts
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checks take longer to clear, longer disbursement float
extra cash doesnt have to be deposited for contengencies |
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Advantages of lockbox
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Internal control
more timely deposites for receipts reduces business risk |
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Concentration banking
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Another way to shorten receivalbe float
customers pay at local bank additional $ is then transferred to regional bank |
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Which system take float out of the process
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EFT
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Compensating balance
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required minium level of deposit required by a loan agreement
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Marketable securities factors
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minimum investment
security liqudity maturity yield |
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Most important consideration for investing in marketable securities
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Safety and liquidity
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Who issues commercial paper
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issued to the large credit worthy corportation
2 - 9 months no active secondary market |
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Banker's acceptance
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A draft dwarn on bank for payment when presented to the bank. Generally arises from payment for foods by corp in foreign countries
30 to 90 days wait period secondary market is available slightly higher risk |
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Goals of inventory managment
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Ensure adequet inventory to sustain operation
To minimize invenotry costs including carrying cost, ordering cost, receiving cost, cost of running out of stock |
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Economic order quantity
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Square root of (2X ave order cost X annual deman in unit / carrying cost per unit)
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Order Point
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(Daily Deman X Leadtime) + safety stock
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Safety stock vs carrying cost
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Safety stock reduces stock out cost but increases carrying cost
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Carrying costs
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Storage
Interest Insurance property tax spoilage/obsolence |
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Stock out costs
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Profit lost on sales
customer ill will idle equipment work stoppage |
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What is MRP
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Material Requirement planning
Manufectures finishes good based on demand forecast production planning drices master schedule which drives material plans |
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Charateristics of JIT
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Most important is relationship with suppliers
Suppliers must inspect their own product |
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To accomplish JIT, Mgmt must do what:
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1. Emphesize reducing production cycle and set up time
2. Emphasize production flexibility 3. Emphasize solving production problems immidiately 4. Focus on simplyfying production activity |
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Advantages if JIT production
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Lower interest and inventory and storage space
lower inventory carrying and handling cost Reduces risk of defective and obsolete products Able to deal with better quality supplier Recude manufecturing cost Able to user simplifed costing system such as Backflush costing |
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Disadvantages of JIT
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Suppliers do not provide timely and quanlity material
Employees are not well trainined Technology/Equipment are not reliable |
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Credit policy should consist
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discount
credit period credit rating collection policy |
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Days sales outstanding
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total receivables/credit sales per day
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Permanent current assets should be financed by
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long term assets such as stocks and bonds
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What are temporary current assets
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cash, inventory, Receivables
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Disadvantages of short term debt financing
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Firm may not be able to pay off as it comes due
Recession may render the firm unable to meet obligation Volatile interest rate |
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Disadvantages of long term debt financing
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more expensive
covenant may restrick firms future action prepayment penalties can be expensive |
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Maturity matching of debt
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Also known as hedging apporach and self liquidating approach
Financing assets with same liablity maturing date |
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Cost of not taking discount
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(discount rate/100% - discount rate) / (365/payment days - discount days)
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Features of bank loans
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short term, less than 90 days
promissory notes Interest flactuates based on short term indexes |
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Prime rate
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the rate bank chagnes to its most credit worthy customer
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LIBOR
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London interbank offered rate
Rate to borrow fun in the international market |
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Effective interest rate on compensating balance
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Interest payment / Available principal
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Source of Accounts receivalbe financing
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1. AR Pledging
2. Factor 3. Asset backed public offering 4. Inventory Financing 5. Hedging to reduce interest rate |
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Types of inventory financing
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Blanket inventory lien
trust receipt warehousing |
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Interest computation for factor
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(Flat fee + Monthly interest rate) X 12 months = annual rate
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Securitization of assets
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Creation of assets backed securities
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Trust receipts
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Borrower holds inventory and proceeds from sales goes to a trust to cancel trusts receivable
aka floor planning common in automobiel, industrial equipment |
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warehousing
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most secure souce of inventory financing
Inventory is stored in public warehouse under control of public warehouse personnel goods can only be removed with the lenders permission |
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types of private debt
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1. From financial institution for which rate is tied to LIBOR or prime rate
2. Private palcement of unregistered bonds to acredited investors |
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types of private debt
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1. From financial institution for which rate is tied to LIBOR or prime rate
2. Private palcement of unregistered bonds to acredited investors |
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Negative debt covenant
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Restriction on
1. sale of certain asset 2. top employee compensaton 3. issuance of additioanl debt 4. payment of dividend |
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Positive debt covenant
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borrower must do:
1. provide audited financial statements 2. maintain a certain financial ration 3. carry life insruance on key employees |
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Debenture
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A bond that is not secured by the pleget of a specific property
higher yeild than other secured bond |
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Suordinated debenture
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bondholder are paid after genral creditor and other senior debt holder have been paid
very high yields |
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Current yield
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Interest expense/Selling price of bond
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Yield to maturity
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(Annual interest rate +(principal payment - bond price / # of years to maturity)) / ( .6 X price of the bond + .4 X principal payment)
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types of bond
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zero coupon rate
floating rate registered junk foreign eurobonds |
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Advantages of debt financing
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Interest is tax deductible
obligatoin is generally fixed in terms of interest and pricipal payment peirods of inflation debt is paid off with dollars that are worth less owners dont give up control debtor dont participate in excess earning |
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Disadvantages of debt financing
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Interest and principal msut be paid regardless of economic position
Interest rates are fixed covenants can make firm less flexible can increse risk of equity holder |
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Capital lease criterial
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bargain purchase price
transfer of ownership 75% of life should be leased PV of lease payment should be 90% of the fair value of the property |
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Advantages of lease
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1. Can lease when unable to uy
2. provisions are less stringent than a bond indenture 3. may not have downpayment requirement 4. creditor claim on lease is restricted 5. operating lease is not considered a liability, so has tax advantage |
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Advantages of issuing common stock
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1. Firm has no obligation to pay
2. Reduces cost of capital 3. More attractive because of profit potential |
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Disadvantages of issuing common stock
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1. ownership right given up
2. Issurance cost is greater than debot 3. Dividends are not tax deductible 4. Shareholder require higher rate of return than lender 5. Issurance of too much common stock may increase the cost of capital |
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Advantages of issuing Preferred stock
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1. No obligation to pay dividend
2. Reduces cost of capital 3. Common Shareholder do not give up control 4. Do not participate in superior earnings |
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Disadvantages of issuing Preferred stock
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1. Cost of issurance
2. Dividend not tax deductible 3. Too much dividend in arrears can cause financial pproblems |
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Operating leverage formula
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% change in operating income / % Change in unit volumn
Measure the degree of which fixed cotst are part of operation. Lower sales period, high fixed cost can cause financial problems |
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Financial Leverage Formula
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% change in EPS/ % change in EBIT
to which extent firm uses debt financing |
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2 ways common equity can be raised
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1. Retained earnings
2. Issuing common stock |
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Methods of estimating cost of existing common equity (4)
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1. CAPM
2. Arbitrage 3. Bond yield plus 4. Divident yield growth |
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CAPM - Capital Asset Pricing Model
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Ks = Krf + Km X beta coefficient
Krf = Risk free rate Km = expected rate of return bi- Beta, votalitity of the firm stock |
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Arbitrade Pricing Model
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Uses a series of systematic risk factors to develop a valoue that reflects the multiple dimentsions of systematic risk
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Arbitrade Pricing Model Formula
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Rp = bi (K1 = Krf) + b2 (K2 + Krf)......
Rp= Risk permium Krf = Risk free rate B123... Betas for individual risk factors K123... Market risk assoicated with each risk factors |
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Divident yield + groth approach
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Ks = (D1/P0) + Expected growth %
P0= today's stock price D1 = annual divident estimate |
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Cost of New stock formula
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Ks = (D1 / P0 + F) + Expected growth
F= Floting cost Usually higher than existing stock because of floting cost |
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Cost of new debt formula
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(Annual Interest payment + (Principal payment - bond price after floting cost)/ # of years to maturity)) / .6 (bond price after floting cost) + .4(principal payment
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Factors affecting capital structure
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1. Business Risk
2. Tax position 3. Financial Flexibility 4. Mgmt conservatism vs aggressiveness |
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Factors affecting dividend policy
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1. Legal requirements
2. Cash Position 3. Desire for control 4. tax position of shareholder 5. Access to capital market 6. Clientele effect 7. Investment opportunities |
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Types of mergers
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1. Horizontal
2. Vertical 3. Congeneric 4. Conglomerate |
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Horizontal marger
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acquiring similiar line of business
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Vertical Merger
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Combines with another firm in the same supply chain
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Congeneric
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somewhat related but not enough to be considered horizontal or vertical
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Conglomerate
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Firms are completely unrelated. Provides greatest degree of diversification
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