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Questions and Answers
Which of the following is not typically considered a source of short-term financing?
Which of the following is not typically considered a source of short-term financing?
Trade credit is often available for a duration of 60 days.
Trade credit is often available for a duration of 60 days.
False
What are accrued expenses?
What are accrued expenses?
Expenses acknowledged before payment is made.
A firm receives payments in advance for services not yet provided, which are classified as ______.
A firm receives payments in advance for services not yet provided, which are classified as ______.
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What form of bank credit is not secured by collateral?
What form of bank credit is not secured by collateral?
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Match the following short-term financing options with their descriptions:
Match the following short-term financing options with their descriptions:
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Commercial papers are long-term financial instruments.
Commercial papers are long-term financial instruments.
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A company uses ______ when it borrows money using a promise to repay in future but without collateral.
A company uses ______ when it borrows money using a promise to repay in future but without collateral.
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What does the weighted average cost of capital (WACC) represent?
What does the weighted average cost of capital (WACC) represent?
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Debt financing typically has a higher cost than equity financing.
Debt financing typically has a higher cost than equity financing.
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What is capital structure?
What is capital structure?
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Equity arises from ownership shares in a company and claims to its future cash flows and _____ .
Equity arises from ownership shares in a company and claims to its future cash flows and _____ .
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Match the following types of financing with their characteristics:
Match the following types of financing with their characteristics:
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Why is debt generally preferred over equity in financing?
Why is debt generally preferred over equity in financing?
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Accumulating too much debt can lead to increased credit risk.
Accumulating too much debt can lead to increased credit risk.
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What are some forms of debt that a company can use?
What are some forms of debt that a company can use?
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What does the operating cycle primarily measure?
What does the operating cycle primarily measure?
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A shorter operating cycle is more favorable for a company.
A shorter operating cycle is more favorable for a company.
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Define the cash conversion cycle (CCC).
Define the cash conversion cycle (CCC).
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The formula for Inventory Turnover Ratio is Inventory divided by __________.
The formula for Inventory Turnover Ratio is Inventory divided by __________.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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What aspect of a business does the cash conversion cycle assess?
What aspect of a business does the cash conversion cycle assess?
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Longer operating cycles imply better cash flow management.
Longer operating cycles imply better cash flow management.
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What does a favorable operating cycle allow a company to do?
What does a favorable operating cycle allow a company to do?
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What is a major advantage of short-term financing?
What is a major advantage of short-term financing?
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A Letter of Credit guarantees payment to the seller only if the buyer is liable.
A Letter of Credit guarantees payment to the seller only if the buyer is liable.
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What is an investment in economic terms?
What is an investment in economic terms?
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A Letter of Credit is issued by a ______ to ensure seller payment.
A Letter of Credit is issued by a ______ to ensure seller payment.
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What is a common disadvantage of short-term financing?
What is a common disadvantage of short-term financing?
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Investments include only financial assets such as stocks and bonds.
Investments include only financial assets such as stocks and bonds.
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Short-term financing is less risky compared to ______ financing.
Short-term financing is less risky compared to ______ financing.
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Match the following types of investments with their definitions:
Match the following types of investments with their definitions:
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What is the main benefit of a Just in Time (JIT) inventory system?
What is the main benefit of a Just in Time (JIT) inventory system?
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In a JIT inventory system, a company holds inventory in case of supply disruptions.
In a JIT inventory system, a company holds inventory in case of supply disruptions.
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What does AR management monitor?
What does AR management monitor?
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A firm can conclude that its customers are paying late by comparing the accounts receivable days to the credit terms specified, such as 'net ______'.
A firm can conclude that its customers are paying late by comparing the accounts receivable days to the credit terms specified, such as 'net ______'.
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Which of the following is NOT part of accounts receivable management?
Which of the following is NOT part of accounts receivable management?
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The accounts receivable days measures how quickly a firm collects cash from its sales.
The accounts receivable days measures how quickly a firm collects cash from its sales.
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When a firm identifies that 40% of its sales are collected in the month following the sale, this reflects the firm’s _______ pattern.
When a firm identifies that 40% of its sales are collected in the month following the sale, this reflects the firm’s _______ pattern.
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Match the terms with their definitions:
Match the terms with their definitions:
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Which of the following strategies can increase a company's profit?
Which of the following strategies can increase a company's profit?
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The breakeven point is the level of production where total revenues exceed total costs.
The breakeven point is the level of production where total revenues exceed total costs.
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What is the Break-Even Point formula in corporate accounting?
What is the Break-Even Point formula in corporate accounting?
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The formula for profit is Revenues – ________.
The formula for profit is Revenues – ________.
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What type of costs remain consistent regardless of production output?
What type of costs remain consistent regardless of production output?
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Dividend payouts are considered irrelevant according to the dividend irrelevance theory.
Dividend payouts are considered irrelevant according to the dividend irrelevance theory.
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What is a primary goal of the Activity-Based Management (ABM) method?
What is a primary goal of the Activity-Based Management (ABM) method?
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Study Notes
Corporate Finance
- Individuals prefer present consumption over future consumption
- Monetary inflation is a risk factor in cash flow
- Present Value (PV) - Barwert
- Future Value – zukünftiger Wert
- EU inflation rate = 2.4% (October 3, 2024)
- High inflation countries (Summer 2024, July-August): Turkey, Venezuela, Argentina, Syria, South Sudan, Zimbabwe, etc.
- Inflation can be beneficial for companies
- Inflation is a general price increase in goods and services over time
- Deflation (negative inflation) countries (Summer 2024): Sri Lanka, Senegal, Afghanistan, etc.
- Deflation: decrease in the general price level of goods and services
- Disinflation: a slowdown in the inflation rate
- Deflation is detrimental to the economy, as it indicates slower production by companies and usually leads to falling wages.
- Customers view deflation as it providing lower costs for goods or services, however, it takes a longer time to acquire the goods/service due to lower production.
- First test date: November 7th
Financial Statements
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Balance sheet: a snapshot of a company's financial position at a specific time.
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Assets: what the company owns (short-term and long-term)
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Liabilities: what the company owes
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Stockholders' Equity: the difference between a company's assets and liabilities
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Current assets: cash or assets that can be easily turned into cash within a year
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Current liabilities: obligations that must be paid within a year
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Long-term liabilities: obligations that must be paid over a period of more than one year.
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Current assets examples: cash, marketable securities, accounts receivable, and inventories.
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Current liabilities examples: Accounts payables, Short-term debt, Current maturities of long-term debt, wages payable.
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Long-term liabilities examples: Long-term debt, Capital leases, Deferred taxes
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Stockholders' equity is the book value of assets less the book value of liabilities.
Retained Earnings
- Net income (net profit) - no dividends
- Current assets:
- Cash
- Raw material
- Accounts receivable
- Marketable securities
- Inventories
Statement of Cash Flows
- Summarizes cash flow entering and leaving a company
- Operating activities
- Investing activities
- Financing activities
- Direct method - every spending is noted
- Indirect method - balance sheet detail is used instead of the transaction details
Income Statement
- Revenues = total revenues
- Cost of sales = cost of revenues
- EBITDA = EBITDA - gross profit = other operating expenses
- EBIT = EBIT - EBITDA = depreciation
- EBT = EBIT - interest expense
- Tax expenses = difference between Net income and EBT
Financial Analysis
- Comparing a company's performance over time or against other similar companies
- Evaluating stability, liquidity, solvency, and profitability.
- Internal users: management.
- External users: investors, creditors, regulators, stock market analysts, and auditors
Short Term Asset Management
- Short-term assets or securities in investments refer to assets that are held for less than one year.
- Examples: Cash, marketable securities, accounts receivable, inventories, and other current assets
Net Working Capital
- Net Working Capital = Current Assets - Current Liabilities
- A measure of a company's liquidity, operational efficiency, and short-term financial health
Cash Management
- Operating cycle: time it takes to buy goods, sell them, and receive cash.
- Cash conversion cycle (CCC): time it takes to convert cash spent on inventory into cash from sales.
- Inventory turnover: ratio of inventory to total sales, multiplied by 360.
- Accounts receivable turnover: ratio of accounts receivable to total sales, multiplied by 360
- Accounts payable turnover: ratio of accounts payable to total sales, multiplied by 360.
- Cash cycle = inventory turnover + accounts receivable turnover - accounts payable turnover
Inventory Management
- Ordering, storing, using, and selling a company's inventory (raw materials, components, finished goods)
- Capital tied up
- Costs of holding stock
Economic Order Quantity (EOQ)
- The ideal quantity of units a company should purchase to meet demand while minimizing inventory costs(holding costs, shortage costs and order costs)
- EOQ = √(2*(O)*(S))/C O = Cost of placing an order S = Annual demand C = Holding cost of one unit
Just-in-Time (JIT) Inventory Control
- Inventory is received as close as possible to when it's needed.
Account Receivables Management
- Monitoring and controlling customers' credit.
- Establishing credit standards and terms.
- Establishing a collection policy.
- Accounts Receivable Days: average number of days to collect on sales.
Short-Term Financing
- Financing of business for a short period (less than one year).
- Trade credit (accounts payable): floating time to pay for goods/services.
- Bank finance (unsecured and secured): a way of borrowing from the bank, such as working capital loan, bill discounting, overdraft, letter of credit, and cash credit.
- Accrued expenses: expenses already acknowledged, but not yet paid.
- Commercial papers: short-term notes to provide financing for trade receivables.
Deferred Revenues
- A part of the firm's income that has not been acquired, but pre-payment has received from the customers
Long-Term Financing
- Financing for capital assets
- Equity financing: sale of company shares
- Debt financing: loans or bond issues
- Angel investors: wealthy individuals who invest in businesses
- Venture capital firms: groups of investors who invest in growing businesses
- Initial public offerings (IPOs): companies selling shares to the public.
Investment Decision-Making
- Putting investment into something to generate profit.
- Investment analysis: return greater than the minimum acceptable hurdle rate, the mix of debt or equity financing.
- Investment decision-making ('Capital Budgeting'): dealing with physical and intangible assets.
Capital Expenditures (CAPEX)
- Costs incurred on the acquisition of a fixed asset or any subsequent expenditure that increases the earning capacity
Cash Flow from Investments
- aggregate change in a company's cash position resulting from investments in financial markets and operating subsidiaries
- Examples of cash flows from investment activities: payments for long-term assets, cash receipts from the sale of assets.
- Evaluations of investment projects effectiveness
- Methods:
- Accounting Rate of Return
- Payback Period
- Net Present Value
- Internal Rate of Return
Cost of Capital
- The return a company needs to justify capital project cost.
- Weighted average cost of capital (WACC)
- Average cost of all types of financing; weighted by their proportion in the capital structure.
- Cost of Debt
- Effective interest rate for loans/bonds.
- Cost of Equity
- Return that the market demands for ownership risk.
- Dividend capitalization model
- Capital asset pricing model (CAPM).
Optimal Capital Structure
- Best mix of debt and equity for maximizing market value and minimizing cost of capital.
- Finding the optimal point when the marginal benefit of debt equals marginal cost
Company's Profit and Dividend Policy
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Revenue: average sales price multiplied by the number of units sold
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Costs / Expenses:
- Operating expenses: costs directly related to business operations
- Non-operating expenses: costs not directly related to business operations
- Costing methods
- Activity-Based Costing (ABC)
- Activity-Based Management (ABM).
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Break-even point: the production level where total revenues equal total expenses
Company Valuation
- Determining the economic value of a company or business unit.
- Tools used: management analysis, capital structure, future earnings.
- Methods
- Market Approach:
- Market capitalization
- Times revenue method
- Earnings multiplier
- Yield Method
- Discounted Cash Flow (DCF)
- Economic Value Added (EVA)
- Book Value
- Market Approach:
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Description
Explore the concepts of inflation and deflation in corporate finance. This quiz covers the impact of present and future value, risk factors in cash flow, and the economic implications of inflation on businesses. Test your understanding of how these factors influence financial decision-making.
