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financial management
ch 15
| Answer | |
|---|---|
| it involves finding the optimal levels for cash, marketable securities , accounts receivable and inventory and then financing that working capital at the least cost. | working capital managment |
| current assets are often called working capital because | these assets "turn over" (i.e. are used and then replaced all during the year) |
| net working capital = | current assets - current liabilities |
| current assets are often called working capital because | these assets "turn over" (i.e. are used and then replaced all during the year) |
| net working capital = | current assets - current liabilities |
| it represents the working capital that is used for operating pourposes | net operating working capital |
| NOWC differs from net working capital because | interest bearing notes payable are deducted from current liabilities in the calculation of NOWC. |
| NOWC = | current assets - (current liabilites - notes payable) |
| investment policy where relatively large amounts of cash, marketable securities, and inventories are carried and a liberal credit policy results in a high level of receivables. | relaxed investment policy |
| holdings of cash, marketable securities, inventories, and receiables are constrained | restricted investment policy |
| an investment plicy that is between the relaxed and restricted policy | moderate investment policy |
| restricted investment policy | indicates low level of assets which results in a high ROE , other things held ocnstant. It exposes firm to risk because shortages can lead to work stoppages, unhapppy customers, and serious long run problems. |
| relaxed investment policy | minimizes operating problems, but it results in a low turnover, which in turn lowers ROE. |
| current assets that a firm must carry even at the trough of its cycles. | permanaent current assets. |
| current assets that fluctuate with seasonal or cyclical variations in sales | temporary current assets |
| the manner in which current assets are fiananced. | current assets financing policy |
| a financial policy that matches the maturities of assets and liabilities. | maturity matching or "self - liquidating " approach. |
| example of maturity matching approach | all of the fixed assets plus the permanent current assets are financed with long term capital, but temporary current assets are financed with short term debt. inventory expected to be sold in 30 days would be fiancned with a 30 day bank loan |
| example of maturity matching approach | a machine expected to last for 5 years would be financed with a 5 year loan, a 20 year building would be financed with a 20 year mortgage bond and so forth. |
| two factors that prevent an exact maturity matching : | 1. there is uncertainty about thelives of assets. for example, a firm might finance inventories with a 30 day bank loan, expecting to sell the inventories and use the cash to retire the loan. company won't be able to pay loan if sales bad. |
| two factors that prevent an exact maturity matching: | some common equity must be used , and common equity has no maturity. |
| advantage of agressive approach | the yield curve is generally upward sloping, ence, short term rates are generally lower than long term rates. |
| disadvantage of agressive approach | financing long term assets with short term debt is risky. the firm would be subject to dangers from loan renewal as well as problems with rising interest rates. |
| long term capital is used to finance all the permanent assets and to meet some of the seasonal needs. | conservative approach |
| advantages of conservative approach. | this is very safe, conservative financing policy since the firm uses a small amount of short term credit to meet its peak requirements, but it also meets part of its seasonal need by storing liquidity in the form of marketeable securities. |
| The length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital. | cash conversion cycle. |
| the average time required to convert raw materials into finished goods and then to sell them | inventory conversion poeriod |
| the average length of time required to convert the firm's receivables into cash that is, to collect cash following a sale. | average collection period( ACP) |
| The average length of time between the purchase of materials and labor and the payment of cash for them. | Payables Deferral Period |
| cash conversion cycle= | inventory conversion period + average collection period - payable s deferral period |
| inventory conversion period = | inventory / cost of goods sold per day |
| average collection period = | receivables / sales/365 |
| payables deferral period = | payables / purchases per day or payables / cost of goods sold / 365 |
| a table that shows cash receipts, disbursements, and balances over some period. | Cash budget |
| the desired cash balance that a firm plans to maintain in order to conduct business. | target cash balance |
| two categories of marketable security | 1. operating short-term securities 2. other short term securities |
| securities which are held primarily to provide liquidity and are bought and sold as needed to provide funds for operations | operating short term securities |
| securities which are holdings in excess of the amount needed to support normal operations. | other short term securities. |
| a post office box operated by a bank to which payments are sent. | lockbox |
| techniques used to optimize demand deposit | 1.hold marketable securities rather than demand deposits to provide liquidity.2. borrow on short notice 3. forecast payments and receipts better.4. speed up payment.5. use credit cards, debit cards, wire transfers,& direct deposits.6.synchronize cash flow |
| fund due from a customer | account receivable |
| a set of rules that include the firm's credit period, discounts, credit standards, and collection procedures offered. | credit policy |
| the length of time customers have to pay for purchases. | credit period |
| price reductions given for early payment | discounts |
| The financial strength customers must exhibit to qualify for credit. | credit standards. |
| degree of toughness in enforcing the credit terms. | collection policy |
| statement of the credit period and any discount offered. | credit terms |
| three main reasons why credit policy is important | 1. it has major efect on sales. 2. it influences the amount of funds tied up in receivables. 3. it affects bad debt losses. |
| A numerical score that indicates the likelihood that a person or business will pay on time | credit score |
| Debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer. | trade credit |
| credit received during the discount period | free trade credit |
| credit taken in excess of free trade credit , whose cost is equal to the dicount lost. | costly trade credit |
| a document specifying the terms and conditions of a loan, including the amount, interest rate, and repayment schedule | promissory note |
| an arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period. | line of credit |
| a formal , committed line of credit extended by a bank or other lending instituiton. | revolving credit agreement |
| a published interest rate charged by commercial banks to large, strong borrowers. | prime rate |
| The situation when interest only is paid monthly. | refular or simple interest |
| interest that is calculated and added to funds received to determine the face amount of an installment loan. | add-on- interest |
| unsecured, short term promissory notes of large firms, usually issued in denominations of $100000 or more with an interest rate somewhat below the prime rate. | commercial paper. |
| continually recurring short-term liablities, expecially accrued wages and accrued taxes. | accruals |
| ed spontaneously as firm expands. | spontaneous funds. |
| a loan backed by collateral, often inventories or accounts receivable. | secured loan |
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