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MSOM 300


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What is selling, "factoring" accounts receivable?
It is a method of short term borrowing...
What are the main decision tools for capital budgeting?
What is GAAP? How is it applied and who enforces it?
General accounting principles and are enforced for publicly held companies by the SEC
What is SOSAP?
What are footnotes? Why are they needed?
Footnotes are included in finacial statements to give in depth explanations
What is shareholder wealth maximization?
Efforts by firms to increase shareholders wealth through the efficient use of the resources that shareholder provide to a firm
What is agency theory?
What is risk return?
What is the maximum percentage allowed to be save under the republican's SS proposal?
What was president when social security was signed into law?
When was social security signed into law?
What is cash receivable?
What is cash budgeting?
What is operational leverage?
What is financial leverage?
What is a break-even point?
How is a break-even point calculated?
Under what circumstances would it be advisable to borrow money to take a cash discount?
It is advisable to borrow in order to take a cash discount when the cost of borrowing is less than the cost of foregoing the discount. If it cost us 36 percent to miss a discount, we would be much better off finding an alternate source of funds for 8 to 10 percent.
Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?
Larger firms tend to be in a net creditor position because they have the financial resources to be suppliers to credit. The smaller firm must look to the larger manufacturer or wholesaler to help carry the firm's financing requirements.
How have new banking laws influenced competition?
New banking laws allowed more competition and gave banks the right to expand across state lines to create larger, more competitive markets. They also increased bank mergers.
What is the prime interest rate?
The prime rate is the rate that a bank charges its most creditworthy customers.
How does the average bank customer fare in regard to the prime interest rate?
The average customer can expect to pay one or two percent (or more) above prime.
What does LIBOR mean?
LIBOR stands for London Interbank Offered Rate
Is LIBOR normally higher or lower than the U.S. prime interest rate?
it is consistently below the prime rate.
What advantages do compensating balances have for banks? Are
The use of a compensating balance or minimum required account balance allows the banker to generate a higher return on a loan because not all funds are actually made available to the borrower.
Are the advantages to banks necessarily disadvantages to corporations?
This benefit to the lender need not be a disadvantage to the borrower. The borrower may, in turn, receive a lower quoted interest rate and certain gratuitous services because of the compensating balance requirement.
What is the difference between a stated interest rate and an effective interest rate?
Effective is the true cost of borrowing... stated interest rate is unadjusted for time or method of repayment.
What is the stated interest rate?
The stated interest rate is the percentage rate unadjusted for time or method of repayment.
What is the effective interest rate?
The effective interest rate is the true rate and considers all these variables.
What is APR?
It is the effective interest rate is the true rate and considers all these variables.
Why might commercial paper show up on corporate balance sheet as a current asset?
To the extent one corporation purchases another corporation's commercial paper as a short-term investment, it is a current asset.
Why might commercial paper show up on corporate balance sheet as a current liability?
If a corporation issues its own commercial paper, it is a current liability.
Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.
Commercial paper can be either purchased or issued by a corporation.
What are the advantages of commercial paper in comparison with bank borrowing at the prime rate?
1. commercial paper can generally be issued at below the prime rate

2. There are no compensating (minimum) balance requirements as in a bank

3. There is a certain degree of prestige associated with the issuance of commercial paper.
What is a disadvantage of commercial paper?
1. may be an uncertain source of funds
What is factoring accounts receivable?
factoring accounts receivables means they are sold outright to a finance company.
What is pledging accounts receivable?
Pledging accounts receivable means receivables are used as collateral for a loan
What is an asset-backed public offering?
A public offering is backed by an asset (accounts receivable) as collateral.
Three types of lender control used in inventory financing are:
a. Blanket inventory
b. Trust receipt
c. Warehousing
What is:
Blanket inventory?
lien-general claim against inventory or collateral. No specific items are marked or designated.
What is:
Trust receipt?
borrower holds the inventory in trust for the lender.
What is:
the inventory is physically identified, segregated, and stored under the direction of an independent warehouse company that controls the movement of the goods.
What is meant by hedging in the financial futures market to offset interest rate risks?
Hedging means to engage in a transaction that partially or fully reduces a prior risk exposure.
Cost of not taking a cash discount =
Discount %

* 360 / final discount period
What are the basic benefits and purposes of developing pro forma statements and a cash budget?
The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the associated financing that will be required.
Explain how the collections and purchases schedules are related to the borrowing needs of the corporation.
The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid.
With inflation, what are the implications of using LIFO and FIFO inventory methods?
LIFO inventory valuation assumes the latest purchased inventory becomes part of the cost of goods sold, while the FIFO method assigns inventory items that were purchased first to the cost of goods sold.
How do inflation, FIFO and LIFO affect the cost of goods sold?
In an inflationary environment, the LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars recorded at current dollars.
Explain the relationship between inventory turnover and purchasing needs.
The more rapid the turnover of inventory, the greater the need for purchase and replacement.
How might rapid corporate growth in sales and profits can cause financing problems?
Rapid growth in sales and profits is often associated with rapid growth in asset commitment.
What is an advantage of level production schedules in firms with cyclical sales?
allowing for the maintenance of a stable work force and reducing inefficiencies caused by shutting down production during slow periods and accelerating work during crash production periods.
What is a disadvantage of level production schedules in firms with cyclical sales?
a large stock of costly inventory may be accumulated during the slow sales period.
What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?
To the extent that past relationships accurately depict the future, the percent-of-sales method will give values that reasonably represent the values derived through the pro-forma statements and the cash budget.
What are the important administrative considerations in the capital budgeting process?
1. search for and discovery of investment opportunities,

2. the collection of data,

3. evaluation of projects,

4. the reevaluation of prior decisions.
Why does capital budgeting rely on analysis of cash flows rather than on net income?
primary concern is with the amount of actual dollars generated.
What are the weaknesses of the payback method?
a.There is no consideration of inflows after the cutoff period.

b.The concept fails to consider the time value of money.
What is the payback method?
What is normally used as the discount rate in the net present value method?
The cost of capital
What does the term mutually exclusive investments mean?
The selection of one investment precludes the selection of other alternative investments.
How does the modified internal rate of return include concepts from both the traditional internal rate and the net present value methods?
inflows are reinvested at the cost of capital.
What is the modified internal rate of return?
return calls for the determination of the interest rate that equates future inflows to the investment but reinvestment rate assumption of the net present value method
If a corporation has projects that will earn more than the cost of capital, should it ration capital?
a firm should not ration capital.
What is the net present value profile?
The net present value profile allows for the graphic portrayal of the net present value of a project at different discount rates. Net present values are shown along the vertical axis and discount rates are shown along the horizontal axis.
What is net present value?
What is the Internal Rate of Return?
A discounted cash flow method for evaluating capital budgeting... IRR is a discount rate that makes the present calue of cash inflows equal to the present value of the cash outflows
What is a "payback period?"
It is the amount of time that it takes to recoup an investment
What is the "time value" of money?
the value of money adjusted for inflation over time.

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