Finance Final.txt

The process of planning and evaluating expenditures on assets whose cash flows are expected to extend beyond one year - analysis of potential additions to fixed assets - long term decisions involving large expenditures - very important to a firms future

A firms growth and its ability to remain competitive depend on a constant flow of _____ for new products, ways to make existing products better, and ways to produce output at a lower cost.

Procedures must be established for evaluating the _____ of capital procedures

Project Classification - Whether to purchase capital assets to take the place of existing assets to maintain or improve profitable operations using existing production levels.

Project Classification - Whether to purchase capital projects and add them to existing assets to increase production levels.

Project Classification - Projects whose cash flows are not affected by decisions made about other projects; acceptance of one project does not affect the acceptance of the other projects.

Project Classification - A set of projects where the acceptance of one project means the others cannont be accepted.

The length of time before the original cost of an investment is recovered from the expected cash flow or how long it takes to get our money back. Provides an indication of a project's risk and liquidity and it is easy to calculate and understand. But it ignores TVM and cash flows occuring after.

The length of time it takes for a project's discounted cash flows to repay the cost of the investment. Uses discounted cash flows at a specified time. If DPB < Projects Life, Accept the project

Sum of the PVs of Inflows and Outflows - shows by how much a firms value and thus stockholders' wealth will increase if a capital budgeting project is purchased

the discount rate that forces PV_inflows to equal the cost. Same as forcing NPV to equal 0.

How is a projects IRR related to a Bond's YTM?

If IRR> the firm's requrired rate of return, r, then _____ _____ is left over to boost stockholders' returns

A curve showing the relationship between a projects NPV and various discount rates (required rates of return)

Smaller project frees up funds at t = 0 for investment. The higher the opportunity cost, the more valuable these funds, so high r favors these projects.

A project with faster payback provides more CF in early years for reinvestment. If r is high, early CFs are especially good.

NVP assumes reinvestment at

IRR assumes reinvestment at

Reinvestment at the opportunity cost, r, is more realistic, so the ____ method is best. ___should be used to choose between mutually exclusive projects.

Firms use decision making methods that are based on ____ _____ concepts

Which capital budgeting methods do firms actually use

The actual cash, as opposed to accounting net income, that a firm receives or pays during some specified period. Financial Staffs roles - 1) Coordinating other department's forecasting efforts 2) Ensuring that everyone uses the same set of economic assumptions 3) Making sure that no biases are inherent in forecasts

The specific cash flows that should be considered in a capital budgeting decision - include investment outlays - based on cash flows after taxes, not accounting income - only incremental cash flows are important

The change in a firms net cash flow attributable to an investment project - Cash flows that change if the project is purchased- are relevant to the accept/reject decision

A cash outlay that already has been incurred and cannot be recovered - Problem in determining incremental cash flows

The return on the best alternative use of an asset - problem in determining incremental cash flows

The effect of acepting a project on the cash flows in other parts of the firm - Problem in determining incremental cash flows

The incremental cash flows associated with a project that will occur only at the start of a projects life - includes change in net working capital

The changes in day-to-day cash flows that result from the purchase of a capital project and continue until the firm disposes of the asset

The net cash flows that occur only at the end of a projects life - includes final disposal of the project and returning the firm's operations to where they were before the project was accepted.

A project that is intended to increase sales; provides growth to the firm

An analysis invloving the decision of whether to prepalce an existing, still productive asset with a new asset

The risk an asset would have if it were a firm's only risk - measured by the variability of the asset's expected returns

Risk not considering the effects of stockholder's diversification - measured by a projects effect on the firm's earnings variability

Part of a project's risk that cannot be eliminated by diversification - measured by the project's beta coefficient

Technicque for measuring stand alone risk - Key variables are changed and the resulting changes in the NPV and the IRR are observed

Technique for measuring stand alone risk - "bad"and "good" sets of financial circumstances are compared with the most likely situation

Technique for measuring stand alone risk - probable future events are simulated on a computer - reflects probability of each input - but it is difficult to specify probabilty distributions and correlation - garbage in garbage out

The risk adjusted required rate of return for an individual project =r_RF+(r_M-r_RF)B_proj

for measuring beta risk for a project -1. idetntify companies whose only business is the project in question 2. Determine the beta for each company 3. Average te betas to find an approximation of proposed project's beta

Discount rate that applies to particularly risk stream of income - it is equal to the risk free rate of interest plus a risk premium - most firms use this

A situation in which a constraint is placed on the total size of the firm's capital investment.

The process of sending cash flows from a foreign subsidiary bank back to the parent company

The uncertainty associated with the price at which the currency from one country can be converted into the currency of another country

The risk of seizure of a foreign subsidiary's assets by the host country or unanticipated restrictions on cash flows to the parent company

The management of short term assets(investments) and short term liabilities(financing sources)

A firms investment in short term assets such as: cash, marketable securities, inventory, accounts receivable

The amount of current assets financed by long term liabilities

Decisions regarding target levels for each current asset account and how current assets will be financed

Working capital does not include _______ _______ that might be due in the current period if they are due from long-term capital decisions, even though these must be considered when assessing the firm's ability to meet its current obligations

Current maturies of long term debt - financing associated with a constructions program that will be funded with the proceeds of a long term security issue after the project is completed - use of short term debt to finance fixed assets

A decision affecting one ____ ____ _____ will impact other working capital accounts

The length of time from payment for purchases of raw materials used to manufacture a product until the collection of accounts receivable associated with the sale of the product - average length of time a dollar is tied up in current assets

The amount of time a product remains in inventories in various stages of completion - length of time required to convert materials into finished goods and then to sell those goods

The time it takes to collect cash following a sale - average length of time required to convert the firm's receivables into cash - A.K.A Days sales outstanding

The average length of time between the purchase of raw materials and labor and the payment of cash for them

Relatively large amounts of cahs and marketable securities and inventories are carried and sales are stimulated by a liberal credit policy that results in a high level of receivables - customers can wait a while before paying - need high current assests

Holdings of cash and marketable securities and inventories are minimized - require customers pay quickly

A policy that is between relaxed and restricted policies

Current asset balances that do not hcnage due to seasonal or economic conditions - even at the trough of a firm's business cycle

current assets that fluctuate with seasonal or economic variations in a firm's business

A financing policy that matches asset and liability maturities - considered a moderate current asset financing policy

a policy in which all of the fixed assets of a firm are financed with long term capital but some of the frim's permanent current assets are financed with short term nonspontaneous sources of funds

a policy in which all of the fixed assets, all of the permanent current assets, and some of the temporary assets of a firm are financed with long term capital

speed and flexibility - can be obtained much faster than long term credit and avoids long term debt (cost, penalties, and restrictive covenants)

short term debt subjects the firm to more risk than long term debt does- short term interest expenses fluctuate and firms may not be able to repay short term debt and be forced into bankruptcy

Average ____ ____ ____ of european firms is more than twice that of u.s. firms - partly because u.s. firms follow more conservative working capital policies than european firms do

The goal of ___ ___ is to minimize the amount of cahs the firm must hold for use in conducting its normal business activities, but keep enough sufficient to pay creditors, mantain its credit rating, or meet unexpected cash needs

A cash balance necessary for day to day operations - the balance associated with routine payments and collections

a minimum checking account balance that a firm must maintain with a bank to help offset the costs of services such as check clearing and cash management advice

a cash balance held i nreserve for unforseen fluctuations in cash flows - access to line of credit can reduce need for this

a cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise

A schedule showing cash receipts, cash disbursements, and cash balances for a firm over a specified time period

The minimum cash balance a firm desires to maintain in order to conduct business

the net cash flow is determined by estimating the cash disbursements and the cash receipts expected to be generated each period

Cash inflows coincide with cash otflows, thereby permitting a firm to hold low transactions balances

the process of converting into cash a check that has been written and mailed, into the payee's(receiver's) account

the difference between the balance shown in a checkbook and the balance on the bank's records

the value of checks that have been written and disbursed but have not fully cleared through the banking system and thus have not been deducted from the account upon which they have been written

the total amount of money from checks that have been received and deposited but that have not yet been credited to the account into which they were deposited

reduces float by having payments sent to post office boxes located near customers - faster mail delievery - faster check clearing within the same federal reserve district - acceleration of receipts

allows a customer's bank to periodically transfer funds from that customer's account to a selling firm's bank account for the payment of bills -acceleration of receipts

a technique used to move funds from many bank accounts to a more central cash pool to more effectively manage cash- -acceleration of receipts

centralzizing the processing of payables permits the financial manager to evaluate the payments coming due for the entire firm and to schedule the availability of funds to meet these needs on a companywide basis, and it also permits more efficient monitoring of payables and the effects of float - more control but can delay payments - disbursement control

a special checking account used for disbursements that has a balance equal to zero when there is no activity - disbursement control

a checking account in which funds are not deposited until checks are presented for payment, usually on a daily basis - disbursement control

securities that can be sold on short notice without loss of principal or original investment - substitutes for cash balances and temporary investment

primarily because their competitiors offer credit, financially selling goods for credit is not to the benefit of the firm, but most firms have competition and must conform to customer's expectations in order to keep/attract customers

a set of decisions that include a firm's credit standards, credit terms, methods used to collect credit accounts, and credit monitoring procedures

standards that indicate the minimum financial strength a customer must have to be credit worty

the payment conditions offered to credit customers - includes the length of the credit period and any cash discounts offered

the length of time for which credit is granted- after that time the credit account is considered delinquent

a reduction in the invoice price of goods offered by the seller to encourage early payment

the procedures followed by a firm to collect its accounts receivable

the process of evaluating the credit policy and payment patterns to determine whether a shift in the customer's payment pattern occurs or whether the credit policy needs modifications

the average length of time required to collect accounts receivable- also called the average collection period or receivables collection period

report showing how long accounts receivable have been outstanding - the report divides receivables into specified periods, which provides information about the proportion of receivables that are current and proportion that are past due for given lenghts of time

any liability originally scheduled for repayment within one year -such as accruals, accounts payable, short term bank loans, commercial paper

continually recurring short term liabilities - liabilities, such as wages and taxes, that increase spontaneously with operations

The creid created when one firm bus on credit from another firm

credit received during the discount period

credit taken in excess of free trade credit whose cost is equal to the discount lost

a document specifying terms and conditions of a loan includes amount, interest rate, repayment schedule, collateral, and any toehr agreements

a minimum checking account balance that a firm must maintain with a bank to borrow funds - generally 10 to 20 percent of the amount of loans outstanding

an arrangement in which a bank agrees to lend up to a specified maximum amount offunds during a designated period

a formal, committed line of credit extended by a bank or other lending institution

a fee charged on the unused balance of a revolving credit agreement to compensate for bank for guaranteeing that the funds will be availabe when needed by the borrower; the fee normally is about 25% of the unused balance

a published rate of interest charged by banks to short-term borrowers (usually large, financially secure corporations) with the best credit - rates on short term loans generally are pegged to this

some bank loan officers are active in providing counsel and in stimulating dvelopment loans to firms in their early and formative years

banks differ in the extent to which they will support the activites of borrowers in bad times

larger banks have separate departments that specialize in different kinds of loans

the maximum loan a bank can make to any one customer is limited to 15% of the banks capital accounts

banks that not only loan their depositors' money but also provide services such as providing customers with equity capital and financial advice

unsecured short term promissory notes issued by large financially sound firms to raise funds - restricted to a comparatively small number of firms that are exceptionally good credit risks- permits a corp to tap a wider range of credit sources - less persoalized relationship than bank relationships

vary from 1 to 9 months with an average of about 5 months

dollar cost of borrowing includes the interest paid on the loan, application fees, charges for commitment fees, and so forth - amount of usable funds includes the amount of the loan that actually can be used (spent) by the borrower

APR we annualize the cost to make it easier to compare short term credit insturments with different ...

both the amount borrowed and the interest charged on that amount are paid at the maturity of the loan - there are no payments made before maturity

the amoutn of the loan or the amount borrowed

the APR that is used to compute the interest rate per period r_per

a loan in which the interest, which is calculated on the amount borrowed(principal) is paid at the beginning of the loan period - interest is paid in advance

interest that is calculated and then added to the amount borrowed to obtain the total dolalr amount to be paid back in equal installments

compensating balances can raise the _____ rate on the loan

a loan backed by collateral - for short term loans it is usually inventory recievables or both

a system of standards that simplifies procedures for establishing loan security

using accounts receivable as collateral for a loan

the lender can seek payment from the borrowing firm when receivables accounts used to secure a loan are uncollectible

the outright slae of receivables

gives the lending institution a lien against all of the borrower's inventories - generally is used when the inventory put up as collateral is relatively low period, fast movine, and difficult to identify individually

an instrument acknowledgin that the goods are held in trust for the lender - automobile dealer financing is one of the best examples

similar concept to trust receipts, but requires the inventory in quesiton be stored in a warehouse under custody of a thrid party

field warehouse loans are cuitable for nonperishable items such as canned goods, etc

fixed costs of a field warehousing arrangement are relativley high - not suitable for a very small firm - an efficient field warehousing operation requires an inventory of at least $1 million

the amount to which a cash flow or series of cash flows will grow over a period of time when compounded at a given interest rate

the value today of a future cash flow or series of cash flows

the process of finding the present value of a future cash flow or series of future cash flows, it is the reverse of compounding

a series of payments of equal amounts at fixed intervals for a specified number of periods

an annuity whose payments occur at the end of each period- this is the more more common form of an annuity will take

an annuity whose payments occur at the beggining of each period

annuities that go on indefinitely pmt/r

a series of casthe process of determining the future value of a cash flow or series of cash flows when interest is added once a year

is the process of determining the future value of a cahs flow or series of cash flows when interest is added twice a year

will the FV of a lump sum be larger or smaller if we compound more often, holding the stated r constant?

the nominal or face value of a stock or bond - establishes the amount due to the preferred stockholders in the event of liquidation - the preferred dividend generally is stated as a percentage of this

any preferred dividends not paid in previous periods must be paid before common dividends can be distributed dividends in arrears

dividends must be paid on preferred stock before they can be paid on common stock and i nthe event of bankruptcy the claims of preferred stockholders must be satisfied before the common stockholders receive anything

gives the issuing corporation the right to call in the preferred stock for redemption

the amount in excess of par value that a company must pay when it calls a security

call for the repurchase and retirement of a given percentage of the stock each year

stocks of firms that tradidionally pay large relatively constand dividends each year

stocks that gnerally pay little or no dividends so as to retain earnings to help fund growth opportunities

a document giving one person the authority to act for anohter, typically the power to vote shares of common sotkc

an attempt by a person or group of people to gain control of a firm by getting its stockholders to grant that person or group the authority to vote their shares so as to change the management team

an action whereby a person or group succeeds in ousting a firms management and taking control of the company

a provision in the corporate charter or bylaws that gives existing common stockholders the right to purchase on a pro rata basis any addiotnal shares of stock sold by the firm

common stock that is given a special dsicnation such as class a b etc to meet special needs of the company

a class of stock owned by the firm's founders who have sold voting rights

certificates created by banks that represent ownership in stocks of foreign countries

stock issued by foreign companies and traded in the u.s.

stock traded in countries other than the home country of the company not including the u.s.

the change in price during a givne year divided y its price at the beginning of the year

a common stock whose future dividends are not expected to grow at all

growth that is expected to continue into the foreseeable future at about the same rate as that of the economy as a whole

the part of the life cycle the calue of assets that are owned minus the amount of debt that is owed