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BEC 300 - Working Capital
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Terms in this set (82)
Working capital is current assets less current liabilities
Working capital is current assets less current liabilities
Quick ratio is cash, accounts receivable and marketable securities divided by current assets.
Quick ratio is cash, accounts receivable and marketable securities divided by current assets.
First, business receive inputs from suppliers. Second, business pays suppliers. Third. Business sells. Fourth business collects.
First, business receive inputs from suppliers. Second, business pays suppliers. Third. Business sells. Fourth business collects.
The cash conversion cycle measures the number of days between when a business pays for its inputs to when the business collects cash from sale. The goal is to shorter the C.C.C. to minimize financing.
The cash conversion cycle measures the number of days between when a business pays for its inputs to when the business collects cash from sale. The goal is to shorter the C.C.C. to minimize financing.
Cash conversion cycle equals inventory conversion plus receivable collection minus payable deferral period.
Cash conversion cycle equals inventory conversion plus receivable collection minus payable deferral period.
Inventory conversion period average number of days required to convert inventory to sales. average inventory divided by cost of goods sold per day.
Inventory conversion period average number of days required to convert inventory to sales. average inventory divided by cost of goods sold per day.
Receivables collection period average number of days required to collect accounts receivable. Average accounts receivable divided by average credit sales per day.
Receivables collection period average number of days required to collect accounts receivable. Average accounts receivable divided by average credit sales per day.
payable deferral period is average number of days between buying inventory and paying for inventory. Average payable divided by purchases per day.
payable deferral period is average number of days between buying inventory and paying for inventory. Average payable divided by purchases per day.
time it takes for checks to be mailed, processed, and cleared. Managing cash involves maximizing float on payment and minimizing float on receipts
time it takes for checks to be mailed, processed, and cleared. Managing cash involves maximizing float on payment and minimizing float on receipts
Pay by draft = check
Pay by draft = check
Concentration banking is paying local branches instead of main offices. Lock box system are payments made directly to bank
Concentration banking is paying local branches instead of main offices. Lock box system are payments made directly to bank
Managing receivables includes credit approval and collection. Consider credit period, discounts, credit sales and collection policies.
Managing receivables includes credit approval and collection. Consider credit period, discounts, credit sales and collection policies.
A/R Turnover is net credit sales divided by average A/R.
A/R Turnover is net credit sales divided by average A/R.
Number of days of sales in average receivable is 360 divided by A.R. turnover
Number of days of sales in average receivable is 360 divided by A.R. turnover
Inventory turnover is cost of goods divided by average inventory.
Inventory turnover is cost of goods divided by average inventory.
Lead time is the time it takes to order and receive inventory.
Lead time is the time it takes to order and receive inventory.
materials requirement planning, or MRP, is a computerized system that uses demand to forecast production and requirement inventory.
materials requirement planning, or MRP, is a computerized system that uses demand to forecast production and requirement inventory.
economic order quantity helps decide appropriate quantity to order.
economic order quantity helps decide appropriate quantity to order.
economic order quantity is the square root two times the annual usage of inventory times the cost of placing an order, all over the cost of storing or carrying the unit.
economic order quantity is the square root two times the annual usage of inventory times the cost of placing an order, all over the cost of storing or carrying the unit.
The reorder point helps decide how often, or when the order should be placed.
The reorder point helps decide how often, or when the order should be placed.
avg daily demand multiply by avg lead time equals reorder point without a safety stock. Add safety stock to get reorder point with a safety stock.
avg daily demand multiply by avg lead time equals reorder point without a safety stock. Add safety stock to get reorder point with a safety stock.
safety stock is the difference between 2 values: 1 - average daily demand divided by average lead times and 2. average daily demand divided by maximum lead time
safety stock is the difference between 2 values: 1 - average daily demand divided by average lead times and 2. average daily demand divided by maximum lead time
Future value equals one divided by present value.
Future value equals one divided by present value.
ordinary annuity is at the end of the month
ordinary annuity is at the end of the month
To convert ordinary to annuity due, multiply PV of ordinary annuity by 1 plus the interest rate, or using the PV table, go down 1 period and add 1 to the factor.
To convert ordinary to annuity due, multiply PV of ordinary annuity by 1 plus the interest rate, or using the PV table, go down 1 period and add 1 to the factor.
Payback period equals initial investment divided by after tax annual net cash inflows
Payback period equals initial investment divided by after tax annual net cash inflows
the IRR is the discount rate at which the NPV is $0. Take investment divide by annual cash flows to determine the present value factor. Use the table to determine your discount rate. This is the minimum rate of return on a project you can take, this is your hurdle rate.
the IRR is the discount rate at which the NPV is $0. Take investment divide by annual cash flows to determine the present value factor. Use the table to determine your discount rate. This is the minimum rate of return on a project you can take, this is your hurdle rate.
Accounting rate of return equals accounting income divided by average investment. This is also known as ROI.
Accounting rate of return equals accounting income divided by average investment. This is also known as ROI.
NPV is net PV inflows/outflows. If NPV is positive, it means your IRR is greater than your hurdle rate.
NPV is net PV inflows/outflows. If NPV is positive, it means your IRR is greater than your hurdle rate.
Annual financing cost equals discount divided by 1 minus discount times 360 divided by total pay period less discount period.
Annual financing cost equals discount divided by 1 minus discount times 360 divided by total pay period less discount period.
Cost of loan equals interest paid divided by net funds available
Cost of loan equals interest paid divided by net funds available
In order of security, mortgage, collateral, debenture, subordinated, and then income bonds.
In order of security, mortgage, collateral, debenture, subordinated, and then income bonds.
Current yield equals stated payment divided by bonk market price.
Current yield equals stated payment divided by bonk market price.
yield to maturity is the interest rate at which the PV of the cash flows from interest and principal will equal the current selling price of a bond. Also known as the effective rate.
yield to maturity is the interest rate at which the PV of the cash flows from interest and principal will equal the current selling price of a bond. Also known as the effective rate.
effective rate equals 1 plus stated rate divided by compounding frequency. root this to the compounding frequency and then subtract 1 from the amount.
effective rate equals 1 plus stated rate divided by compounding frequency. root this to the compounding frequency and then subtract 1 from the amount.
To reduce the interest rate on the bonds being sold, a company would agree to a debt covenant limiting the percentage of its long term debt.
To reduce the interest rate on the bonds being sold, a company would agree to a debt covenant limiting the percentage of its long term debt.
High marginal tax rates and few noninterest tax benefits would result in a greater benefit of debt financing over equity financing
High marginal tax rates and few noninterest tax benefits would result in a greater benefit of debt financing over equity financing
The coupon rate is the stated rate, but the actual interest rate is the effective rate. Since interest is tax deductible, this is reduced by the tax savings. Multiply the tax rate by the effective rate to determine the amount of tax savings. Subtract this from your effective rate to determine net cost of debt
The coupon rate is the stated rate, but the actual interest rate is the effective rate. Since interest is tax deductible, this is reduced by the tax savings. Multiply the tax rate by the effective rate to determine the amount of tax savings. Subtract this from your effective rate to determine net cost of debt
Need to consider after tax affect for bond payments, not dividends or for common stock.
Need to consider after tax affect for bond payments, not dividends or for common stock.
Degree of operating leverage measures degree of fixed costs built into company's operations. The higher leverage, the more business risk, but at higher sales volume profitability will be much higher.
Degree of operating leverage measures degree of fixed costs built into company's operations. The higher leverage, the more business risk, but at higher sales volume profitability will be much higher.
Degree of operating leverage is change in EBIT divided by change in sales volume.
Degree of operating leverage is change in EBIT divided by change in sales volume.
Degree of financial leverage measures how much a business relies on debt financing. Change in EPS divided by change in EBIT.
Degree of financial leverage measures how much a business relies on debt financing. Change in EPS divided by change in EBIT.
The more debt you have, the more expensive new debt will cost you because interest rate will be higher.
The more debt you have, the more expensive new debt will cost you because interest rate will be higher.
Leveraged buyout is a method of financing the acquisition of all or a voting majority of the outstanding shares of a company.
Leveraged buyout is a method of financing the acquisition of all or a voting majority of the outstanding shares of a company.
REMEMBER TO TAKE OUT THE NET OF TAX EFFECT ONLY FOR DEBT
REMEMBER TO TAKE OUT THE NET OF TAX EFFECT ONLY FOR DEBT
Cost of capital is average cost of debt and equity, expressed as a percentage per annul.
Cost of capital is average cost of debt and equity, expressed as a percentage per annul.
Cost of debt can be calculated two ways: first, yield to maturity times one minus the effective tax rate. Second, interest expense minus tax deduction, all divided by carrying value of debt.
Cost of debt can be calculated two ways: first, yield to maturity times one minus the effective tax rate. Second, interest expense minus tax deduction, all divided by carrying value of debt.
Cost of preferred stock is dividend divided by net issue price.
Cost of preferred stock is dividend divided by net issue price.
Cost of common, or existing equity, can be calculated in 4 ways: CAPM, arbitrage, bond yield plus, and dividend yield plus growth rate.
Cost of common, or existing equity, can be calculated in 4 ways: CAPM, arbitrage, bond yield plus, and dividend yield plus growth rate.
The CAPM approach of calculating cost of existing equity is expected market rate less the risk free rate, multiplied by the beta coefficient. Add this to the risk free rate to determine the cost.
The CAPM approach of calculating cost of existing equity is expected market rate less the risk free rate, multiplied by the beta coefficient. Add this to the risk free rate to determine the cost.
The beta coefficient is the correlation between changes in the stock's price and change sin the price of the overall market. If beta is 2, that means the stock is twice as volatile as the market.
The beta coefficient is the correlation between changes in the stock's price and change sin the price of the overall market. If beta is 2, that means the stock is twice as volatile as the market.
Arbitrate model is a more sophisticated CAPM and has a separate beta for each component.
Arbitrate model is a more sophisticated CAPM and has a separate beta for each component.
Bond yield plus is taking the historical relationship between equities and debt and adding a risk premium.
Bond yield plus is taking the historical relationship between equities and debt and adding a risk premium.
Dividend yield plus growth rate is the net expected dividend divided by current stock price, plus the expected growth in earnings.
Dividend yield plus growth rate is the net expected dividend divided by current stock price, plus the expected growth in earnings.
The cost of new common stock is numerator is net expected divided and denominator is current stock price less flotation cost. Then add the expected growth in earnings. Flotation cost is the cost to get the stock out there.
The cost of new common stock is numerator is net expected divided and denominator is current stock price less flotation cost. Then add the expected growth in earnings. Flotation cost is the cost to get the stock out there.
Once you determined cost of all debt and equity, multiply by proportionate share to determine weighted average cost of capital.
Once you determined cost of all debt and equity, multiply by proportionate share to determine weighted average cost of capital.
3 valuation approaches: level 1, level 2 and level 3
3 valuation approaches: level 1, level 2 and level 3
Horizontal merger is same market. Vertical is same supply chain. Conglomerate is unrelated companies.
Horizontal merger is same market. Vertical is same supply chain. Conglomerate is unrelated companies.
Selling inventory, regardless of whether it is sold at a profit or loss, decreases inventory, which does not affect the quick ratio and increases cash or accounts receivable, which improves the quick ratio since liquid assets (numerator) is increased without corresponding increases in current liabilities.
Selling inventory, regardless of whether it is sold at a profit or loss, decreases inventory, which does not affect the quick ratio and increases cash or accounts receivable, which improves the quick ratio since liquid assets (numerator) is increased without corresponding increases in current liabilities.
Gordon growth model assumes reinvested assets will increase distributions by the amount of reinvestment, so that growth in the assets will be the growth rate of future dividends.
Gordon growth model assumes reinvested assets will increase distributions by the amount of reinvestment, so that growth in the assets will be the growth rate of future dividends.
arithmetic average return rate is best for short term. Return divided by number of periods.
arithmetic average return rate is best for short term. Return divided by number of periods.
Geometric average rate of return considers compounding interest.
Geometric average rate of return considers compounding interest.
Standard deviation is a measurement of investment risk.
Standard deviation is a measurement of investment risk.
Coefficient variation measures how investment reacts to changes in market condition.
Coefficient variation measures how investment reacts to changes in market condition.
Modern portfolio theory states risk for a portfolio is less than one stock.
Modern portfolio theory states risk for a portfolio is less than one stock.
Correlation coefficient is relationship between two investments. If it is 1, one stock goes up the other goes up. If it is -1, one stock goes up the other goes down.
Correlation coefficient is relationship between two investments. If it is 1, one stock goes up the other goes up. If it is -1, one stock goes up the other goes down.
combining variances with low covariances with each other, investor can eliminate unsystematic risk. Systematic risk is risk that cannot be diversified away and results from market wide factors and economy wide factors
combining variances with low covariances with each other, investor can eliminate unsystematic risk. Systematic risk is risk that cannot be diversified away and results from market wide factors and economy wide factors
Beta is a measure to estimate an investment's systematic risk
Beta is a measure to estimate an investment's systematic risk
Bear refers to a period during which prices have fallen by more than 20% from their previous peak
Bear refers to a period during which prices have fallen by more than 20% from their previous peak
Bull refers to a period during which prices have risen by more than 20% from previous trough
Bull refers to a period during which prices have risen by more than 20% from previous trough
Efficient market hypothesis - individuals cannot outperform market unless with luck
Efficient market hypothesis - individuals cannot outperform market unless with luck
normal yield curve and liquidity preference theory states interest rates are higher for long term investments.
normal yield curve and liquidity preference theory states interest rates are higher for long term investments.
Inverted yield curve and expectation theory states interest rates are lower for long terms and that long term interest rates reflect future expected short term rates.
Inverted yield curve and expectation theory states interest rates are lower for long terms and that long term interest rates reflect future expected short term rates.
Market segmentation theory states that participants in bond markets focus on lending at different times, and this may result in interest rates (temporarily) changing in different directions for different terms
Market segmentation theory states that participants in bond markets focus on lending at different times, and this may result in interest rates (temporarily) changing in different directions for different terms
Liquidity preference, market segmentation and expectations are 3 theories on the reason for differences in yields.
Liquidity preference, market segmentation and expectations are 3 theories on the reason for differences in yields.
derivatives - no net investment, underlying notional amount and net settlement
derivatives - no net investment, underlying notional amount and net settlement
Forwards - negotiated contracts in which two parties agree to purchase and sell an underlying asset at a pre-specified price at a future rate
Forwards - negotiated contracts in which two parties agree to purchase and sell an underlying asset at a pre-specified price at a future rate
Futures - standardized versions of forwards for standardized amounts and dates
Futures - standardized versions of forwards for standardized amounts and dates
Fair value hedge - hedges against changes in the value of an asset or liability that the first has or expects to have
Fair value hedge - hedges against changes in the value of an asset or liability that the first has or expects to have
Cash flow hedge - hedges against fluctuations in future cash flows
Cash flow hedge - hedges against fluctuations in future cash flows
Foreign currency hedges - hedges against the effects of fluctuations in the value of a foreign currency on the value of the assets, liabilities, or cash flows
Foreign currency hedges - hedges against the effects of fluctuations in the value of a foreign currency on the value of the assets, liabilities, or cash flows
Residual income is net income minus required return on investment.
Residual income is net income minus required return on investment.
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Verified questions
ACCOUNTING
A company assigns overhead cost to completed jobs on the basis of 120% of direct labor cost. The job cost sheet for Job 413 shows that $12,000 in direct materials has been used on the job and that$8,000 in direct labor cost has been incurred. A total of 200 units were produced in Job 413. What is the total manufacturing cost assigned to Job 413? What is the unit product cost for Job 413?
ACCOUNTING
Determine which of the following are most likely to be considered as a job and which as a job lot. $$ \begin{matrix} \text{\_\_\_\_\_\_\_ 1. Hats imprinted with company logo}\\ \text{\_\_\_\_\_\_\_ 2. Little League trophies }\\ \text{\_\_\_\_\_\_\_ 3. A handcrafted table}\\ \text{\_\_\_\_\_\_\_ 4. A 90-foot motor yacht}\\ \text{\_\_\_\_\_\_\_ 5. Wedding dresses for a chain of stores}\\ \text{\_\_\_\_\_\_\_ 6. A custom-designed home}\\ \end{matrix} $$
ACCOUNTING
Use the Buffalo Bell Corporation financial statements that follow to answer questions. Buffalo Bell Corporation Consolidated Statements of Financial Position (In millions) $$ \begin{matrix} \quad & \text{December 31,2012} & \text{December 31,2011}\\ \text{Assets:} & \quad & \quad\\ \text{Current Assets } & \quad & \quad\\ \text{Cash and cash equivalents} & \text{\$ 4,333 } & \text{\$ 4,226 }\\ \text{Accounts and notes receivable } & \text{3,400 } & \text{2,403 }\\ \text{Short-term investments } & \text{845} & \text{520}\\ \text{Inventories, at cost} & \text{433} & \text{411}\\ \text{Prepaid expense and other current assets } & \text{1,638 } & \text{1,226 }\\ \text{Total current assets } & \text{10,649 } & \text{8,786 }\\ \text{Property and equipment, net} & \text{1,555 } & \text{907}\\ \text{Investments} & \text{6,804 } & \text{5,199 }\\ \text{Other non-current assets} & \text{303} & \text{155}\\ \text{Total assets} & \text{\$19,311} & \text{\$15,047}\\ \text{Liabilities and stockholders’ equity: } & \quad & \quad\\ \text{Current liabilities } & \quad & \quad\\ \text{Accounts payable} & \text{\$ 7,708 } & \text{\$ 6,009 }\\ \text{Accrued and other liabilities } & \text{3,676 } & \text{3,033 }\\ \text{Total current liabilities } & \text{11,384 } & \text{9,042 }\\ \text{Long-term debt } & \text{304} & \text{305}\\ \text{Other non-current liabilities } & \text{1,701 } & \text{1,179 }\\ \text{Total liabilities } & \text{13,389} & \text{10,526}\\ \text{Stockholders’ equity} & \quad & \quad\\ \text{Preferred stock and capital in excess of \$0.02 par value; shares issued and outstanding: none} & \text{ -} & \text{ -}\\ \text{Common stock and capital in excess of \$0.05 par value; shares authorized: 6,000; shares issued: 2,163 and 1,903, respectively } & \text{7,803 } & \text{7,001 }\\ \text{Treasury stock, at cost: 183 and 123 shares, respectively } & \text{(6,444) } & \text{(4,401) }\\ \text{Retained earnings } & \text{4,676 } & \text{1,990 }\\ \text{Other comprehensive loss } & \text{(79) } & \text{(25}\\ \text{Other} & \text{(34) } & \text{(44) }\\ \text{Total stockholders’ equity } & \text{5,922 } & \text{4,521 }\\ \text{Total liabilities and stockholders’ equity} & \text{\$19,311} & \text{\$15,047}\\ \end{matrix} $$ Buffalo Bell Corporation Consolidated Statements of Income (In millions, except per share amounts) $$ \begin{matrix} \quad & \text{Year ended December 31, 2012} & \text{Year ended December 31, 2011} & \text{Year ended December 31, 2010}\\ \text{Net Revenue} & \text{\$42,666 } & \text{\$35,220 } & \text{\$31,111 }\\ \text{Cost of goods sold } & \text{35,147 } & \text{29,255 } & \text{25,492 }\\ \text{Gross profit } & \text{7,519} & \text{5,965} & \text{5,619}\\ \text{Operating expenses:} & \quad & \quad & \quad\\ \text{Selling, general, and administrative } & \text{3,341 } & \text{3,250 } & \text{2,985 }\\ \text{Research, development, and engineering } & \text{544} & \text{553} & \text{536}\\ \text{Special charges } & \text{ -} & \text{ -} & \text{512}\\ \text{Total operating expenses } & \text{3,885} & \text{3,803 } & \text{4,033 }\\ \text{Operating income } & \text{3,634 } & \text{2,162 } & \text{1,586 }\\ \text{Investment and other income (loss), net } & \text{153} & \text{196} & \text{(30) }\\ \text{Income before income taxes } & \text{3,787 } & \text{2,358 } & \text{1,556 }\\ \text{Income tax expense } & \text{1,136 } & \text{940} & \text{472}\\ \text{Net income } & \text{\$ 2,651} & \text{\$ 1,418} & \text{\$ 1,084 }\\ \text{Earnings per common share: } & \quad & \quad & \quad\\ \text{Basic} & \text{\$ 1.41} & \text{\$ 0.95} & \text{\$ 0.37 }\\ \end{matrix} $$ How many shares of common stock did Buffalo Bell have outstanding, on average, during 2012? a. 1,880 million b. 137.9 million c. 20.1 million d. 35,147 million
ACCOUNTING
Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lori Bart, staff analyst at Andrews, is preparing an analysis of the three projects under consideration by Corey Andrews, the company’s owner. 1. Because the company’s cash is limited, Andrews thinks the payback method should be used to choose between the capital budgeting projects. a. What are the benefits and limitations of using the payback method to choose between projects? b. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Andrews choose? 2. Bart thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end of the year except for initial investment amounts. Calculate the NPV for each project. Ignore income taxes. 3. Which projects, if any, would you recommend funding? Briefly explain why.$ $$ \begin{matrix} \text{A} & \text{B} & \text{C} & \text{D}\\ \text{} & \text{Project A} & \text{Project B} & \text{Project C}\\ \text{Projected cash outflow} & \text{} & \text{} & \text{}\\ \text{Net initial investment} & \text{\$3,000,000} & \text{\$1,500,000} & \text{\$4,000,000}\\ \text{} & \text{} & \text{} & \text{}\\ \text{Projected cash inflows} & \text{} & \text{} & \text{}\\ \text{Year 1} & \text{\$1,000,000} & \text{\$400,000} & \text{\$2,000,000}\\ \text{Year 2} & \text{1,000,000} & \text{900,000} & \text{2,000,000}\\ \text{Year 3} & \text{1,000,000} & \text{800,000} & \text{200,000}\\ \text{Year 4} & \text{1,000,000} & \text{} & \text{100,000}\\ \text{Required rate of return} & \text{10\\\%} & \text{10\\\%} & \text{10\\\%}\\ \end{matrix} $$ $