Financial Management Concepts Quiz

Calculating Cost of Giving Up Cash Discount

• Calculate the cost by finding the difference in total costs with and without the discount.
• This includes the cost of goods sold, the cash discount lost (if any), and the financing costs used for paying for the product or services within the discount period.

Commercial Paper

Advantages

• Fast and inexpensive way to raise short-term capital
• Can be issued for a variety of maturities
• Often issued for several months.

Disadvantages

• Only suitable for short-term needs
• Issuance may require detailed procedures.
• Repayment risk exists, despite high credit rating.

Line of Credit

• A pre-approved loan amount.
• Allows a company to borrow funds as needed up to a certain limit.
• Useful for covering fluctuating needs like seasonal increases in sales or unexpected expenses.

Annual Cleanup Logic

• Regular review and reconciliation of credit balances.
• Maintaining accurate records and financial statements.
• Minimizes risks, improves financial health, and prevents default issues.

Factoring

• A process where a company sells its accounts receivable to a third party (factor) for immediate cash.

Factoring with Recourse

• The company remains responsible for the receivables if they are not collected.
• Lower cost for the seller but higher risk.

Factoring Without Recourse

• The factor assumes all risks and losses if the receivables are not collected.
• Higher cost but lower risk for the seller.

Cost of Factoring

• Calculated as a percentage (factor's fee) or dollar amount of the receivables factored.

Bond Definitions

• Bond: A debt security.
• Coupon: Interest payment on a bond.
• Face/Par/Nominal Value: The amount the bond will repay at maturity.
• Convertible Bond: Can be exchanged for the issuer's stock.
• Floating Rate Bond: Interest rate adjusts periodically.
• TIPS (Treasury Inflation-Protected Securities): Principal adjusted for inflation.
• Indenture: Bond's contract with the issuer and bondholders.
• Zero-Coupon Bond: No periodic interest payments.
• Callable Bond: The issuer can repay early.
• Puttable Bond: The holder can repay early.

Coupon Rates on Callable/Puttable Bonds

• May differ from ordinary bonds because of extra risk/reward for either party. Callable offers a lower coupon initially to encourage investor participation. Puttable may have a higher coupon to entice the holder to let the issue expire.

Bond Classification

• Classified by issuer (government, corporate) and maturity (short-, medium-, long-term).
• Risk levels vary by issuer and type of bond.

Factors Impacting Bond Prices

• Interest rate changes in the market.
• Changes in the perceived creditworthiness of the bond issuer.
• Changes in inflation expectations.

Bond Trading

• Can trade at a discount (price below face value), premium (price above face value), or par (price equal to face value).

Coupon Rate & YTM Relationship

• Higher coupon rates usually mean a lower YTM when compared.

YTM (Yield to Maturity)

• The total return anticipated on a bond if it is held until it matures.

Bond Price Calculation

• Annual and semiannual bond pricing calculations using present value formulas are essential.

Stock Price Calculation (Dividend Discount Model)

• Zero Growth: Calculates the value of a stock assuming no growth in dividends.
• Constant Growth: Assumes dividends grow at a constant rate forever.

Calculating D1 (Dividend 1)

• D1 can be calculated from D0 (previous dividend) or EPS (earnings per share) depending on the information present.

Dividend Discount Model Advantages/Disadvantages

• Advantages: Simple, intuitive, adaptable for growth.
• Disadvantages: Reliability depends on future dividend assumptions and a constant growth assumption.

Stock Intrinsic Value (Book Value/Liquidation Value)

• Book Value: Calculated based on the balance sheet.
• Liquidation value: Estimated from the liquidation value of assets.

WACC (Weighted Average Cost of Capital)

• The average rate a company pays to raise capital from all sources.

WACC Weight Selection

• Weights should correspond to the proportion of capital from each source in the capital structure.

EPS Calculation

• Essential for financial analysis and stock valuation.

Test your knowledge on key financial management concepts such as cash discounts, commercial paper, and lines of credit. This quiz covers advantages, disadvantages, and strategies for effective financial decision-making. Perfect for students and professionals in finance!