FINA 4422 midterm Flashcards Quizlet PDF

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11/18/2019

FINA 4422 midterm Flashcards | Quizlet

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Samdupont

Terms in this set (68) what color are variables

grey fill and yellow fill

and assumptions?

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what color font are hard

blue

coded values?

what color font for

default black

formulas?

what color are links to

green

other worksheets?

future value

The compounded value of an investment for t periods -gives us the equivalent value in the future of some value today, assuming the interest rate reflects the fair "rent" for the use of money.

what kind of items make

a mix of cash and non-cash items

up net income?

ROIC formula

NOPAT/Invested Capital

ROIC formula expanded

=NOPAT/Sales*Sales/Invested Capital

(evaluating operating performance type shit)

NOPAT (net operating

EBIT(1-t)

profit after taxes) formula

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Invested Capital Formula

=total assets - cash - non interest bearing

Version 1

liabilities (NIBL)

Invested Capital Formula

=Line of Credit (LOC) + CMLTD + LT Debt +

Version 2

equity - cash

after-tax operating

NOPAT/Sales

margin

-measures "contribution" of business operations

invested capital turnover

Sales/Invested Capital -measures the "efficiency" of using investment in NOWC and net fixed assets in the business

drivers of NOPAT

-Sales -Cost of Sales -Operating Expenses -Contribution from NOPAT is reduced by Taxes

gross margin

Gross Profit/Sales

operating margin

EBIT/Sales

after tax operating

NOPAT/Sales

margin

Days of Sales

•DSO = Accounts Receivable/(Sales/365)

Outstanding (DSO)

•A lower/(higher) number indicates

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faster/(slower) collection of receivables.

Days of Sales in

•DSI = Inventory/(COGS/365)

Inventory (DSI)

•A lower/(higher) number indicates faster/(slower) sale of inventory. -time required to purchase and sell the inventory

Days of Payables

-DPO = Payables and

Outstanding (DPO)

Accruals/(COGS/365) -A lower/(higher) number indicates faster/(slower) payment of payables -time required to collect on credit sales -time between purchase of inventory and payment for the inventory

Fixed Asset Turnover

Sales/Fixed Assets -Indicates the firm's ability to generate sales for a given level of fixed asset investment. -This ratio can also be viewed as a measure of the sales volume. -In some industries, this needs to be very high to make up for low margins. -Also an indication of how much needs to be invested in fixed assets to support and grow the business

what can produce a

•Higher NOPAT (profitability)

higher ROIC?

•Lower Invested

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Capital (WC management) •Quality/Brand •Innovative products and/or processes •High-switching costs •Scalability / Flexibility •Economies of Scale

•Balance sheet identity

-NWC + fixed assets = long-term debt +

(rearranged)

equity -NWC = cash + other CA - CL -Cash = long-term debt + equity + CL - CA other than cash - fixed assets

sources of cash

-Increasing long-term debt, equity, or current liabilities -Decreasing current assets or fixed assets

uses of cash

-Decreasing long-term debt, equity, or current liabilities -Increasing current assets or fixed assets

Net Working Capital

current assets - current liabilities

(NWC)

Net Operating Working

Operating CA - Operating CL =

Capital (NOWC)

(Cash + Inv. + A/R) - (Accruals + A/P)

why might a company

-If sales turn out to be considerably less

want to hold more cash?

than expected, they could face a cash shortfall -A company may choose to hold large

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amounts of cash if it does not have much faith in its sales forecast, or if it is very conservative -The cash may be there, in part, to fund a planned fixed asset acquisition

operating cycle

=DSI + DSO -time between purchasing the inventory and collecting the cash from sale of the inventory

cash cycle

= DSO + DSI - DPO = Operating cycle - days in payables -Amount of time we finance our inventory -Difference between when we receive cash from the sale and when we have to pay for the inventory

types of inventory costs

Carrying Costs: Storage and handling costs, insurance, property taxes, depreciation, and obsolescence. Ordering Costs: Cost of placing orders, shipping, and handling costs. Costs of Running Short: Loss of sales, loss of customer goodwill, and the disruption of production schedules.

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inventory management

-can be measured by inventory turnover or DSI •By holding excessive inventory, a firm is increasing its operating costs which reduces its NOPAT. The excess inventory must be financed. •Reducing inventory, without adversely affecting sales, increases cash by reducing WC requirements.

accounts receivable

If customers pay sooner, this increases

management

cash holdings. -Increasing A/R turnover reduces Days Sales Outstanding (DSO)

things impacting A/R

-Collections

turnover and DSO

•Tougher policy will reduce DSO, but may damage customer relationships. -Credit policy •Tighter standards: reduce bad debt losses, but may reduce sales. Fewer bad debts reduces DSO. •Cash Discounts: Lowers price. Attracts new customers and reduces DSO. •Credit Period: How long to pay? NOTE: Tightening its credit policy to reduce its DSO, However, tighter credit policy may discourage sales -Some customers may choose to go elsewhere if they are pressured to pay their bills sooner.

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accounts payable

-Higher A/P turnover leads to a lower Days

management

Payable Outstanding (DPO). -trade credit

trade credit

-is credit furnished by a firm's suppliers. -is often the largest source of short-term credit, especially for small firms. -Spontaneous, easy to get, but cost can be high.

Carrying vs. Shortage

Managing short-term assets involves a

Costs

trade-off between carrying costs and shortage costs

carrying costs

increase with increased levels of current assets, the costs to store and finance the assets

shortage costs

decrease with increased levels of current assets •Trading or order costs •Costs related to safety reserves, i.e., lost sales and customers, and production stoppages

short-term borrowing

-unsecured loans

options

-secured loans -commercial paper -trade credit

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unsecured loans

-line of credit (LOC) -committed vs. non-committed -revolving credit arrangement

secured loans

-Accounts receivable financing •Assigning •Factoring -Inventory loans •Blanket inventory lien •Trust receipt •Field warehouse financing

short-term financial

•Size of investments in current assets

policy

-Flexible (conservative) policy - maintain a high ratio of current assets to sales -Restrictive (aggressive) policy - maintain a low ratio of current assets to sales •Financing of current assets -Flexible (conservative) policy - less shortterm debt and more long-term debt -Restrictive (aggressive) policy - more short-term debt and less long-term debt

what is the analysis

accounting data and projections and plans

underlying financial decisions based on?

long term financial plan https://quizlet.com/450262621/fina-4422-midterm-flash-cards/

a set of projected annual financial 9/18

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statements for the period of the plan -Balance sheet -Income statement -Cash flow statement -reflects the expected results of some specific strategy (business model). -actual plan would likely include more detailed projections for segments of the business and major components of the projections. -The company would have a financial planning and analysis group that oversees preparing, explaining, comparing of actual results to plans, and revising the plan. -Many companies refer to long-term financial plans as the business plan.

steps in forecasting

1. Analyze Historical Performance (Ratios) 2. Forecast the Income Statement 3. Forecast the Balance Sheet 4. Forecast Cash Flow statement 5. Raise additional long-term or short-term funds (if needed) 6. Analyze Forecast

what is a cash budget

• Cash Flows

about?

• Cash Balances • A plan for investing excess cash and/or borrowing to meet cash shortages.

cash budget typical

usually for a year and on a monthly basis

length

-can be prepared weekly and daily as well

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steps in cash budgeting

1. Prepare a sales forecast. 2. Prepare a forecast of expenses incurred related to the sales. 3. Estimate when sales are collected. 4. Estimate payment dates for expenses and other cash outlays. 5. Estimate when other fixed or scheduled payments are required. 6. Prepare a budget reflecting any sources and uses of cash other than operations. For example: • Capital expenditures • Sale of investments • Loan/debt payments

line of credit details

• Most companies do not have enough long-term financing (debt and equity) to keep cash balances positive throughout the year. • Credit lines from banks can cover: a. Expected periodic shortfalls. [E.g., ramping up for the busy season.] b. Unanticipated cash needs. • A credit line is like "overdraft protection" on your checking account.

line of credit usual

a. A credit limit, which is a maximum loan

provisions

balance. b. Monthly interest charges based on daily balances and variable interest rate (often prime, LIBOR, or a Treasury rate plus some fixed %). c. A commitment fee on the credit line,

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usually a % of the credit limit d. A compensating balance or minimum checking acct. balance, usually a % of the credit limit. e. Terms and conditions are generally renegotiated annually f. Frequently a "borrowing base" is required

typical line of credit

a. The company makes deposits and writes

process

checks. b. If the account falls below zero, a loan advance brings the checking balance up to the minimum balance. c. The advance is added to the loan; interest begins accruing that day. d. Each month the bank deducts the interest from the checking account. e. Repayments are made by the company from the checking account when cash is available (with a phone call or online). f. Should the company have a zero balance in its checking account while the loan balance is equal to the credit limit, the company is in default. g. The bank may start returning the company's checks. h. At best, the CFO will need to discuss an increase in the credit limit with the banker. i. The CFO will not be in a strong negotiating position.

T/F: short-term financing

False

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within a one year time frame, while long-term financing refers to working capital financing

the financing needs in

b

the jones electrical distribution case were driven primarily by: a. a deterioration in the management of inventory and receivables b. an increase in sales growth requiring greater working capital c. capital expenditures to expand a distribution facility d. all the above

which of the following is

c

true about equity? a. when a company borrows money, equity is reduced b. if there is not new equity issued to shareholders, ending stockholder's equity will equal beginning stockholder's equity c. net income minus dividends increases https://quizlet.com/450262621/fina-4422-midterm-flash-cards/

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equity d. all the above which of the following

c. taking longer to pay your vendors

would likely improve the ROIC in a business (assuming there was no decline in NOPAT)? a. instituting a new credit policy which relaxes the standards for accepting a new customer b. developing a strategy to make sure your customers can come to your business for that "hard to find" item c. taking longer to pay your vendors d. none of the above

T/F: If working capital

False

increases from period to period, that is a source of cash

identify 3 Excel best

-highlight/fill assumptions in yellow

modeling practices

-hardcoded numbers should be in blue font -numbers derived from formulas should be in black -variables should be in grey fill -links to other worksheets should be in green

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what are the operating

-cash cycle is the number of days it takes

cycle and cash cycle and

from paying cash for inventory to receiving

why are they important?

cash from its sale. Difference between when we receive cash from the sale and when we have to pay for the inventory -operating cycle is the number of days it takes to turn inventory into cash. The time between purchasing the inventory and collecting the cash from sale of the inventory -important because it helps businesses understand how much working capital is needed to sustain and fuel growth

list the four common

-average

approaches to

-median

forecasting a variable

-trend

given three years

-last historical period

historical data

how are a drop down

-both can be used as a "what-if analysis"

menu and goal seeking

-with drop down menu, you are testing

similar?

how an answer would change based on changing a variable, while goal seeking can be used to determine what "value a" has to to be in order to get a particular "value b"

which of the following

Answer: a, b, and d

statements is correct? a. the more frequent the compounding, the higher https://quizlet.com/450262621/fina-4422-midterm-flash-cards/

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the Future Value b. given two time horizons that are the same, the higher discount rate will produce the lower Present Value c. the Future Value of an ordinary annuity will be higher than the FV of an annuity due d. the Present Value of an annuity due will be higher than the PV of an ordinary annuity

T/F: the vlookup function

True

can be replicated using the match and offset functions

in the Tire City Case, the

c

primary financing need was: a. working capital b. the expansion of the distribution facility c. a combination of both long-term and shortterm financing needs d. purchasing more inventory

polymet case

Problem Facing: need to provide millions in financial assurance for closure costs and

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long-term water treatment care costs -TVM problem -how much do they need to put down now depending on rates to have the required amount? Proposed Solution: calculate PV of FA costs at rate r, put down PV amount now -use PV of growing perpetuity for LT costs

Tire City Case

Problem Facing: need long-term and short-term financing Proposed Solution: currently have a LOC for short-term, taking out loan for funding of warehouse

Jones Case

Problem Facing: additional working capital needed because of the increase in sales growth -take or not take purchase discounts -how big of a LOC will he need? -will the 350k LOC from the bank be enough? -how fast will growth be? Proposed Solution: -LOC not enough and will never be paid off at current rates -needs to reduce his DSO and DSI -don't take 2% purchase discount (increase DPO to 30-35)

Polar Sports Case

Problem Facing: should the company switch from seasonal to level production? -is the amount of savings worth the risk? -how will the amount of LOC needed

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change? Proposed Solution: -level has potential savings of ~$430k -move stable and accepted products to level

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