FNCE371 ASSIGNMENT 2 CASE 1: INTERNATIONAL CAPITAL BUDGETING, CASE 2: LEASING, CASE 3: MERGERS & ACQUISITIONS
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FNCE371
FNCE371 ASSIGNMENT 2 CASE 1: INTERNATIONAL CAPITAL BUDGETING, CASE 2: LEASING, CASE 3: MERGERS & ACQUISITIONS
Net working Capital - CORRECT ANSWER-= (Cash + other current assets) - CL
Difference between NWC and Cashflow - CORRECT ANSWER-Working capital provides a snapshot off company, cash fl...
FNCE371 ASSIGNMENT 2 CASE
1: INTERNATIONAL CAPITAL BUDGETING, CASE
2: LEASING, CASE 3: MERGERS & ACQUISITIONS
Net working Capital - CORRECT ANSWER-= (Cash + other current assets) - CL
Difference between NWC and Cashflow - CORRECT ANSWER-Working capital
provides a snapshot off company, cash flow shows how much cash you can
generate over a period of time
Operating Cycle - CORRECT ANSWER-The time period between the acquisition of
inventory and when cash is collected from recievables
Inventory period - CORRECT ANSWER-the time it takes to acquire and sell
inventory
Receivable Period - CORRECT ANSWER-Time between sale of inventory and
collection of recievable
Accounts Payable Period - CORRECT ANSWER-the time between receipt of
inventory and payment for it
In order to calculate Cash Cycle - CORRECT ANSWER-We already have Op cycle
so just need payable period
Short term Financial Policy - CORRECT ANSWER-is based off
The size of the firm's investment in current assets.
- measured relative to the firm's level of total operating revenues.
Short Term Financial Policy - Flexible - CORRECT ANSWER-High ratio of current
asset to sales
less st debt more longterm debt
actions such as:
1. Keeping large balances of cash and marketable securities.
2. Making large investments in inventory.
3. Granting liberal credit terms, which result in a high level of accounts receivable.
Short Term Financial Policy - Restricted - CORRECT ANSWER-High Short term
debt low long term debt
low ratio of current assets to sales
Restrictive short-term financial policies would just be the opposite of these:
,1.Keeping low cash balances and little investment in marketable securities.
2.Making small investments in inventory.
3.Allowing little or no credit sales, thereby minimizing accounts receivable.
Carrying Costs - CORRECT ANSWER-costs that rise with increases in the level of
investment in current assets
Shortage costs - CORRECT ANSWER-costs that fall with increases in the level of
investment in current assets
2 Types
Two types of Shortage Costs - CORRECT ANSWER-1) Trading or order costs.
Order costs are the costs of placing an order for more cash (brokerage costs, for
example) or more inventory (production set-up costs, for example).
2. Costs related to lack of safety reserves. These are costs of lost sales, lost
customer goodwill, and disruption of production schedule
What to consider when choosing Financial Policy - CORRECT ANSWER-Cash
Reserves
- flexible financial policy implies surplus cash and little short-term borrowing.
reduces the probability that a firm would experience financial distress.
Firms may not have to worry as much about meeting recurring, short-run obligations.
However, this higher level of liquidity comes at a price. Investments in cash and
marketable securities generally produce lower returns than investments in real
assets.
Maturity hedging. Most firms attempt to match the maturities of assets and liabilities.
They finance inventories with short-term bank loans and fixed assets with long-term
financing.
Relative interest rates. Short-term interest rates are usually lower than long-term
rates. This implies that it is, on the average, more costly to rely on long-term
borrowing as compared to short-term borrowing.
Primary tool of ST financial PLannign - CORRECT ANSWER-Cash Budget
Cash Budget - CORRECT ANSWER-A forecast of cash receipts and disbursements
for the next planning period.
Categories of Cash out Flows - CORRECT ANSWER-1) Payments of accounts
payable. These are payments for goods or services rendered from suppliers, such as
raw materials. Generally, these payments are made sometime after purchases.
2. Wages, taxes, and other expenses. This category includes all other regular costs
of doing business that require actual expenditures. Depreciation, for example, is
, often thought of as a regular cost of business, but it requires no cash outflow and is
not included.
3. Capital expenditures. These are payments of cash for long-lived assets.
4. Long-term financing expenses. This category, for example, includes interest
payments on long-term
outstanding debt and dividend payments to shareholders.
Lesson 3 - CORRECT ANSWER-
AR Financing - CORRECT ANSWER-A secured short-term loan that involves either
the assignment or factoring of receivables.
Components of Credit policy - CORRECT ANSWER-Terms of sale
- conditions on which they sell the goods (Cash or Credit)
Credit Analysis
- the process of determining the probability of customers to pay or not pay
Collection Policy
- Procedures they follow to collect the AR
Terms of Sale made of 3 things - CORRECT ANSWER-1) Period for which credit is
granted
2) Cash discount and the discount period
3) The type of credit instrument
Basic for 2/10 net 60 - CORRECT ANSWER-What this mean
- Customer has 60 days to pay, but if he pays within 10 days he gets a 2% discount
Credit period - CORRECT ANSWER-basic length of time for which credit is granted
Factors affecting length of credit period - CORRECT ANSWER-- Buyers inventory
period and operating cycle
Operating Cycle has 2 components - CORRECT ANSWER-Inventory Period
-time it takes to aquire inventory process and sell it
Receivables Period
amount of time it takes buyer to collect on sale
Length of buyers operating cycle is the upper limit of credit period - CORRECT
ANSWER-
Other factors influencing Credit Period - CORRECT ANSWER-1) Perishability and
collateral Value
- perishable items have rapid turnover and low collateral value
2) Consumer Demand
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