Financial Management

  1. Inventory conversion period
    Average Inventory / Sales per day

    It describes the average time required to convert materials into finished goods and sell those goods
  2. Payables Deferral Period
    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
  3. Cash Conversion Period
    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
  4. Payment Draft
    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
  5. Compensating Balance
    The minimum balance required by the bank to compensate the bank for services
  6. Most important considerations with respect to short-term investments are...
    Risk and Liquidity
  7. What is Commercial Paper
    • 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
  8. Characteristics of a Negotiable Certificate of Deposit
    • (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
  9. Just in time inventory system
    • - 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
  10. Economic Order Quantity formula
    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
  11. The economic order quantity formula was developed on the basis of the following assumptions?
    • (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
  12. Order Point calcluation
    Daily Demand * Lead time in days + Safety stock
  13. Sales Outstanding formula
    Receivables Balance / Sales per Day
  14. Ratio for calculating the cost of not taking a trade discount
    ((Discount% / (100%-Discount%)) * (365 days / (Total pay period - Discount Period))
  15. Short Term Borrowing forms

    Unsecured Credit
    • Revolving credit agreements,
    • Bankers' acceptances
    • Lines of credit
    • Commercial paper
  16. Short Term Borrowing forms

    Secured Credit
    • Floating Liens
    • Chattel mortgages
    • Factoring agreements
  17. Formula for Effective Interest rate on a loan with a compensating balance
    Interest cost / Funds available
  18. Factoring
    The sales of accounts receivable
  19. Blanket inventory lien
    A legal document that establishes inventory as collateral for a loan
  20. Trust receipt
    An instrument that acknowledges that the borrower holds the inventory and the proceeds from sale will be put in trust for the lender
  21. Warehousing
    Storing inventory in a public warehouse under the control of the lender.
  22. LIBOR
    LIBOR, like the prime rate, is an example of a nominal rate. It is adjusted for inflation risk, but not credit risk
  23. Long-term debt
    • - 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
  24. Securitization
    The offering of debt collateralized by a firm's accounts receivable
  25. Prime rate
    Rate charged on business loans to borrowers with high creit ratings
  26. Eurobonds
    Are always sold in some country other than the one in whose currency the bond is denominated
  27. Operating Lease
    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
  28. Advantages of Debt Financing
    • - 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
  29. Disadvantages of debt financing
    • - 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
  30. Floating rate bond
    A floating rate bond has a rate of interest that floats with changes in the market interest rate
  31. Serial Bonds
    Bonds that are paid off in installments over the life of the issue
  32. Sinking fund bonds
    Bonds for which the firm makes payments into a sinking fund to be used to retire the bonds by purchase
  33. Degree of Operating Leverage
    DOL = (% change in operating income) / (%change in unit volume)
  34. Degree of Financial Leverage
    DFL = (% Change in EPS) / (% change in EBIT)
  35. CAPM
    Expected Rate of Return = Risk free rate + Beta (Expected Market Return - Risk Free Rate)
  36. Dividend-yield -plus-growth approach to calculate the cost of common equity
    Estimated cost of common equity = (expected dividend / estimated cost of common equity) + the growth rate
  37. Bond-yield -plus approach
    Involves adding a risk premium of 3% - 5% to the firm's cost of long-term debt
  38. Weighted average cost of capital
    ((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)
  39. Beta
    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
Card Set
Financial Management
Financial Management section of BEC section of CPA exam