Finance Chapter 11

Card Set Information

Finance Chapter 11
2011-12-13 01:49:33
Finance Chapter 11

Finance Chapter 11
Show Answers:

  1. What is Working Capital?
    Current Assets - Current Liabilities
  2. What is Net Working Capital?
    Same as working capital; measurement of operating liquidity.
  3. Why is managing working capital important?
    Need for funding, need for sales support, need for liquidity
  4. What are the benefits of holding cash?
    Liquidity for day to day operations.
  5. What are the costs and risks of holding cash?
    Transaction costs, interest costs, agency costs, currency risk, and real options.
  6. How are receivables and inventories managed?
    Trade credit stimulate sales (Marginal profit from incremental sales must be balanced with cost of carrying receivables). For inventories, balance cost of shortages (stock outs) with opportunity costs of carrying inventories
  7. What forms of short-term financing are available through banks?
    Term loans, Inventory loans, Lines-of-credit, receivables factors, Banker’s acceptances, Eurocredit loansdit.
  8. What is factoring of receivables?
    Selling receivables to third parties known as factors. pg.285
  9. Why is it used?
    To receive the funds sooner and avoid the risk of default.
  10. What other forms of short-term financing are available through the money market?
    Securitization, Commercial paper and Euro commercial paper, trade credit.
  11. What are the three working capital financing strategies?
    Maturing matching strategy, aggressive strategy, and conservative strategy.
  12. What is a Maturity Matching strategy?
    Short term financing changes with level of current assets.
  13. What are the benefits/risks of a conservative working capital financing strategy?
    Long-term debt and equity.
  14. What are the benefits/risks of an aggressive working capital financing strategy
    Less cost, more risk Know how to calculate from