Financial Management

Average Inventory / Sales per day

It describes the average time required to convert materials into finished goods and sell those goods

Average Payables / Purchases Per Day

It is equal to the average length of time between the purchase of materials and the payment of cash for them

Cash Conversion Period = Inventory Conversion Period + Receivables Collection Period - Payables defferral period

CCP = (Avg Inv. / Salses per day) + (Avg. A/R / Sales per day) - Days before you have to pay

An example is a check. It is slower than other methods of payment such as electronic cash tranfers and there is a working capital technique that increases the payable float

The minimum balance required by the bank to compensate the bank for services

Risk and Liquidity

• An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories
• and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a
• discount, reflecting prevailing market interest rates. Commercial paper is issued by a corporation and, therefore, has more risk than Treasury notes, Treasury bonds, or money market accounts

• (1) They have lower yields than banker's acceptances and commercial paper--they have less risk
• (2) They have a secondary market
• (3) Are regulated by the Federal Reserve System
• (4) Usually sold in denominations of a minimum of $100,0000

• - The goal is to eliminate all non-value added activities
• - A major feature is a decrease in the # of suppliers to build strong relations and ensure quality goods
• - Material is purchased only as it is needed for production, thereby eliminating the need for costly storage
• - Vendors make more frequent deliveries of small quantities of materials that are placed into production immediately upon receipt

The EOQ represents the optimal quantity o finventory to be ordered based on demand and various inventory costs. The formula for computing EOQ is.......... EOQ = The square root of (2*(ordering costs per purchase order)*(Demand (in units) for a specified time period)) / Cost of carrying one unit in inventory for the specified time period

• (1) Demand occurs at a constant rate throughout the year and is known with certainty
• (2) Lead-time on the receipt of orders is constant
• (3) The entire quantity ordered is receiced at one time
• (4) The unit costs of the items ordered are constant
• (5) There are no limitations on the size of the inventory

Daily Demand * Lead time in days + Safety stock

Receivables Balance / Sales per Day

((Discount% / (100%-Discount%)) * (365 days / (Total pay period - Discount Period))

• Revolving credit agreements,
• Bankers' acceptances
• Lines of credit
• Commercial paper

• Floating Liens
• Chattel mortgages
• Factoring agreements

Interest cost / Funds available

The sales of accounts receivable

A legal document that establishes inventory as collateral for a loan

An instrument that acknowledges that the borrower holds the inventory and the proceeds from sale will be put in trust for the lender

Storing inventory in a public warehouse under the control of the lender.

LIBOR, like the prime rate, is an example of a nominal rate. It is adjusted for inflation risk, but not credit risk

• - Long-term debt does not have to be repaid as soon as short-term debt and thus it reduces the risk of the firm.
• - LTD is generally more costly than STD
• - Debt covenants are usually more restrictive in LTD agreements
• - Early payment of LTD can result in prepayment penalties

The offering of debt collateralized by a firm's accounts receivable

Rate charged on business loans to borrowers with high creit ratings

Are always sold in some country other than the one in whose currency the bond is denominated

An operating lease is one that does not mee the criteria to be a capital lease. Operating leases are treated as rental agreements and the payments are expensed as rent as incurred

• - The obligation is generally fixed in terms of interest and principal payments
• - Interest is tax deductible
• - The use of debt will assist in lowering the firm's cost of capital
• - IN periods of inflation, debt is paid back with dollars that are worth less than the ones borrowed

• - Interest and principal obligations must be paid regardless of the economic position of the firm
• - Debt agreements contain covenants
• - Excessive debt increases the risk of equity holders and therefore depresses share prices

A floating rate bond has a rate of interest that floats with changes in the market interest rate

Bonds that are paid off in installments over the life of the issue

Bonds for which the firm makes payments into a sinking fund to be used to retire the bonds by purchase

DOL = (% change in operating income) / (%change in unit volume)

DFL = (% Change in EPS) / (% change in EBIT)

Expected Rate of Return = Risk free rate + Beta (Expected Market Return - Risk Free Rate)

Estimated cost of common equity = (expected dividend / estimated cost of common equity) + the growth rate

Involves adding a risk premium of 3% - 5% to the firm's cost of long-term debt

((Call Price% - Flotation Cost%) * $amount of bonds issued) / ($amount of all finacing aquired) *Cost% +

$amount of Equity financed / ($amount of all finacing aquired) * market rate for equities

• or
• (weight of equity) * (cost of equity) + (weight of debt) * (pretax cost of debt) * (1-tax rate)

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. This risk cannot be elliminated through diversification