SOME NOTES TO READ THROUGH PART 2
PART 2 SEC B
Commercial paper does not usually have an active secondary market.
Negotiable certificates of deposit are less risky than both bankers' acceptances and
commercial paper. Therefore, their interest rate is lower.
A draft is a working capital technique that increases the payable float and, therefore,
delays the outflow of cash.
A more conservative working capital policy means that the company wants to reduce the
risk of not being able to pay its liabilities as they come due i.e., the company will hold
more current assets relative to its level of current liabilities.
The maturity matching approach to financing current assets (also called the hedging or the
self-liquidating approach) matches assets to be financed with financing having the same
maturity.
An annuity is a constant stream of cash either paid or received over a period of time and
at the same point in each period. The present value of an annuity is the value today of
payments to be received in the future.
If the cash is paid or received at the beginning of each period rather than at the end of
each period, the annuity is an "annuity due."
When securities are offered in an initial public offering, there is no current market price to
use as a benchmark. Initial public offering shares are usually offered only to large
institutional investors such as top pension funds, mutual funds, hedge funds, high net
worth individual investors, and long-standing clients of the investment bank handling the
offering. The initial offering price is generally based on what these institutional investors
are willing to pay per share, not on the true net worth of the company.
Debt financing does require the repayment of principal. Bonds and loans have maturity
dates by which the principal must be repaid. In contrast, equity financing does not require
repayment of principal, as the capital raised through the issuance of shares does not need
to be repaid.
In a shelf registration the company registers a large number of shares at one time and
then issues the shares as they are needed. This enables the company to make one
registration and then sell small blocks of those shares over time rather than having to
make a lot of different smaller registrations as they are needed.
A Red Herring registration, or Red Herring prospectus, is a preliminary document filed with
regulatory bodies by a company before an Initial Public Offering (IPO). It provides
investors with key information about the company, its financials, business operations, and
,potential risks, but it does not include the final price or number of shares to be
offered.
A hedge fund is a pooled investment fund that uses aggressive investment strategies to
earn high returns for its investors. Hedge funds are open only to "accredited" (high net
worth or high income) investors, and they are subject to less regulation than are mutual
funds that are open to all retail investors. Hedge funds have high fees, and while they
have outperformed the market at times, many other times they have underperformed the
market for their investors. The high fees impact their returns negatively.
An equity carve-out is a divestiture of a part of a company. Shares in the new company
are sold to the public in an initial public offering. The parent company usually sells only a
portion of the new company's stock and retains most of the stock in the carved-out new
company. The equity carve-out is a form of equity financing and the carved-out company
receives the cash from the sale of its shares.
A corporate spin-off is a form of corporate divestiture. A spin-off results in a subsidiary or a
division of the company becoming an independent company, but the business unit is not
sold for cash or securities. Common stock is issued in the spun-off segment, and usually
the shares in the new company are distributed to existing shareholders of the parent
company on a pro-rata basis.
A transaction in which a buyer of a company borrows a major portion of the purchase
price using the purchased assets as collateral for the borrowing is also known as a
leveraged buyout.
A corporation would receive cash if it enters into an equity carve-out.
A transaction loan is a loan made for a specific purchase. A short-term loan is a loan
with a maturity date of less than one year in the future.
An installment loan is a type of long-term financing, and it would have a maturity date of
at least one year in the future. A term loan is a loan made to a business for long-term
needs. An insurance company term loan, or any term loan no matter who the lender is,
would be used for long-term financing.
Discounted interest and compensating balances both cause the effective interest rate to
be higher than the stated rate for the loan. Therefore, the loan that offers simple interest
and no compensating balance will have a lower effective rate than a loan with
discounted interest and/or a compensating balance requirement.
Effective annual interest rate on a security or loan =
[Discount (+ transaction costs if any) / Net proceeds] * 360/Days to maturity
Market efficiency refers to how well current market prices reflect all available and relevant
information. If a market is efficient, then no single investor can make abnormal profits
,based on information the investor has because everybody trading in the market has that
information, and all that information is already reflected in the market price.
If the stock market is inefficient, information will take time to affect the market prices of
securities.
The strong form of the efficient market hypothesis states that all information in a market,
whether public or private, is accounted for in a stock price. Not even insider information
could give an investor an advantage. (nothing affects the MP now)
Lower-rated bonds, often called "junk bonds," are high-risk securities, have a higher risk of
default, have high yields, and are rated at less than investment grade bonds. Junk bonds
are often issued to raise capital so that the issuer can purchase another company.
Per the requirements associated with a valid lease agreement, the lessor (Bentley) has
the right to replace the equipment with a comparable piece of equipment but only if the
equipment cannot be repaired.
Advantages of issuing debt include tax deductibility of interest payments, lower cost of
capital relative to equity, low-security issuance costs, no dilution of earnings per share
(EPS), and flexibility to retire bonds if callable.
A bond is callable when the issuer has the option to retire or replace the bond before
maturity at a specified price. If interest rates fall, the issuer can call the bond and then
issue new bonds at the lower interest rate. The call provision results in a lower cost for the
company and is, therefore, an advantage to the issuer and a disadvantage to the
bondholder.
Lockbox system helps a firm to manage its cash inflows, not cash outflows.
The Max cost a company should pay for lockbox system = GROSS BENEFIT of LBS.
(by this we can justify LBS) that is its BEP!
Inventory management:
EOQ = root of (2*OC*AD)/CC
Average inventory = EOQ/2 + safety stock OR Annual COGS/ITR
Carrying cost = Average inventory * carrying cost per unit
Increase in carrying cost = increase in average inventory* opportunity cost* no. of month
Inventory carrying cost = Average inventory * opportunity cost
Ordering cost = No. of orders * ordering cost per unit
Average A/R = Daily credit sales* ACP
, A/R carrying cost = Avg A/R amt * COGS% * opportunity cost%
Quantity discounts are not included in the basic EOQ model. Purchasing costs can be
affected by discounts for size of purchases, and a quantity discount lost can increase
purchasing costs.
One of the assumptions of the EOQ model is that the required lead time to receive an
order is known and is consistent.
If the cost of running out of stock (a stockout) decreases, the company will hold less safety
stock because the cost of running out is now lower.
The amount of safety stock that a company is required to hold will be affected by: 1) the
variability of the lead time, 2) the variability of the demand for the product, and 3) the cost
of stockout.
Accounts payable (or trade credit) is a spontaneous source of financing because it does
not need to be applied for before the transaction is entered. It is created automatically at
the time of purchase. Trade credit is the largest source of short-term credit for small firms.
Commercial paper is issued only by very large companies.
Production set-up is the equivalent of an ordering cost for a manufacturer. Insurance
and taxes are classified as carrying costs.
Stockout costs include not only the lost revenue from the lost sales, but also potentially
the loss of future sales to those customers. Stockout costs may also include additional
shipping costs to deliver quickly to the customer and the loss of customer goodwill
because of the stockout.
Cash discounts should be offered only if competitors are offering them and thus
customers expect such a discount or if the seller needs cash and is not able to borrow it
elsewhere at a lower rate.
Credit scoring is a method of managing credit policies and extending credit only to
creditworthy customers.
A credit manager considering whether to grant trade credit to a new customer is most
likely to place primary emphasis on the company's liquidity ratios.
A lower discount would presumably motivate fewer customers to take the discount and
pay within the discount period, leading to higher accounts receivable; and a longer
payment period will cause slower collections, which will also lead to a higher accounts
receivable balance.
Discounted interest rate loan
PART 2 SEC B
Commercial paper does not usually have an active secondary market.
Negotiable certificates of deposit are less risky than both bankers' acceptances and
commercial paper. Therefore, their interest rate is lower.
A draft is a working capital technique that increases the payable float and, therefore,
delays the outflow of cash.
A more conservative working capital policy means that the company wants to reduce the
risk of not being able to pay its liabilities as they come due i.e., the company will hold
more current assets relative to its level of current liabilities.
The maturity matching approach to financing current assets (also called the hedging or the
self-liquidating approach) matches assets to be financed with financing having the same
maturity.
An annuity is a constant stream of cash either paid or received over a period of time and
at the same point in each period. The present value of an annuity is the value today of
payments to be received in the future.
If the cash is paid or received at the beginning of each period rather than at the end of
each period, the annuity is an "annuity due."
When securities are offered in an initial public offering, there is no current market price to
use as a benchmark. Initial public offering shares are usually offered only to large
institutional investors such as top pension funds, mutual funds, hedge funds, high net
worth individual investors, and long-standing clients of the investment bank handling the
offering. The initial offering price is generally based on what these institutional investors
are willing to pay per share, not on the true net worth of the company.
Debt financing does require the repayment of principal. Bonds and loans have maturity
dates by which the principal must be repaid. In contrast, equity financing does not require
repayment of principal, as the capital raised through the issuance of shares does not need
to be repaid.
In a shelf registration the company registers a large number of shares at one time and
then issues the shares as they are needed. This enables the company to make one
registration and then sell small blocks of those shares over time rather than having to
make a lot of different smaller registrations as they are needed.
A Red Herring registration, or Red Herring prospectus, is a preliminary document filed with
regulatory bodies by a company before an Initial Public Offering (IPO). It provides
investors with key information about the company, its financials, business operations, and
,potential risks, but it does not include the final price or number of shares to be
offered.
A hedge fund is a pooled investment fund that uses aggressive investment strategies to
earn high returns for its investors. Hedge funds are open only to "accredited" (high net
worth or high income) investors, and they are subject to less regulation than are mutual
funds that are open to all retail investors. Hedge funds have high fees, and while they
have outperformed the market at times, many other times they have underperformed the
market for their investors. The high fees impact their returns negatively.
An equity carve-out is a divestiture of a part of a company. Shares in the new company
are sold to the public in an initial public offering. The parent company usually sells only a
portion of the new company's stock and retains most of the stock in the carved-out new
company. The equity carve-out is a form of equity financing and the carved-out company
receives the cash from the sale of its shares.
A corporate spin-off is a form of corporate divestiture. A spin-off results in a subsidiary or a
division of the company becoming an independent company, but the business unit is not
sold for cash or securities. Common stock is issued in the spun-off segment, and usually
the shares in the new company are distributed to existing shareholders of the parent
company on a pro-rata basis.
A transaction in which a buyer of a company borrows a major portion of the purchase
price using the purchased assets as collateral for the borrowing is also known as a
leveraged buyout.
A corporation would receive cash if it enters into an equity carve-out.
A transaction loan is a loan made for a specific purchase. A short-term loan is a loan
with a maturity date of less than one year in the future.
An installment loan is a type of long-term financing, and it would have a maturity date of
at least one year in the future. A term loan is a loan made to a business for long-term
needs. An insurance company term loan, or any term loan no matter who the lender is,
would be used for long-term financing.
Discounted interest and compensating balances both cause the effective interest rate to
be higher than the stated rate for the loan. Therefore, the loan that offers simple interest
and no compensating balance will have a lower effective rate than a loan with
discounted interest and/or a compensating balance requirement.
Effective annual interest rate on a security or loan =
[Discount (+ transaction costs if any) / Net proceeds] * 360/Days to maturity
Market efficiency refers to how well current market prices reflect all available and relevant
information. If a market is efficient, then no single investor can make abnormal profits
,based on information the investor has because everybody trading in the market has that
information, and all that information is already reflected in the market price.
If the stock market is inefficient, information will take time to affect the market prices of
securities.
The strong form of the efficient market hypothesis states that all information in a market,
whether public or private, is accounted for in a stock price. Not even insider information
could give an investor an advantage. (nothing affects the MP now)
Lower-rated bonds, often called "junk bonds," are high-risk securities, have a higher risk of
default, have high yields, and are rated at less than investment grade bonds. Junk bonds
are often issued to raise capital so that the issuer can purchase another company.
Per the requirements associated with a valid lease agreement, the lessor (Bentley) has
the right to replace the equipment with a comparable piece of equipment but only if the
equipment cannot be repaired.
Advantages of issuing debt include tax deductibility of interest payments, lower cost of
capital relative to equity, low-security issuance costs, no dilution of earnings per share
(EPS), and flexibility to retire bonds if callable.
A bond is callable when the issuer has the option to retire or replace the bond before
maturity at a specified price. If interest rates fall, the issuer can call the bond and then
issue new bonds at the lower interest rate. The call provision results in a lower cost for the
company and is, therefore, an advantage to the issuer and a disadvantage to the
bondholder.
Lockbox system helps a firm to manage its cash inflows, not cash outflows.
The Max cost a company should pay for lockbox system = GROSS BENEFIT of LBS.
(by this we can justify LBS) that is its BEP!
Inventory management:
EOQ = root of (2*OC*AD)/CC
Average inventory = EOQ/2 + safety stock OR Annual COGS/ITR
Carrying cost = Average inventory * carrying cost per unit
Increase in carrying cost = increase in average inventory* opportunity cost* no. of month
Inventory carrying cost = Average inventory * opportunity cost
Ordering cost = No. of orders * ordering cost per unit
Average A/R = Daily credit sales* ACP
, A/R carrying cost = Avg A/R amt * COGS% * opportunity cost%
Quantity discounts are not included in the basic EOQ model. Purchasing costs can be
affected by discounts for size of purchases, and a quantity discount lost can increase
purchasing costs.
One of the assumptions of the EOQ model is that the required lead time to receive an
order is known and is consistent.
If the cost of running out of stock (a stockout) decreases, the company will hold less safety
stock because the cost of running out is now lower.
The amount of safety stock that a company is required to hold will be affected by: 1) the
variability of the lead time, 2) the variability of the demand for the product, and 3) the cost
of stockout.
Accounts payable (or trade credit) is a spontaneous source of financing because it does
not need to be applied for before the transaction is entered. It is created automatically at
the time of purchase. Trade credit is the largest source of short-term credit for small firms.
Commercial paper is issued only by very large companies.
Production set-up is the equivalent of an ordering cost for a manufacturer. Insurance
and taxes are classified as carrying costs.
Stockout costs include not only the lost revenue from the lost sales, but also potentially
the loss of future sales to those customers. Stockout costs may also include additional
shipping costs to deliver quickly to the customer and the loss of customer goodwill
because of the stockout.
Cash discounts should be offered only if competitors are offering them and thus
customers expect such a discount or if the seller needs cash and is not able to borrow it
elsewhere at a lower rate.
Credit scoring is a method of managing credit policies and extending credit only to
creditworthy customers.
A credit manager considering whether to grant trade credit to a new customer is most
likely to place primary emphasis on the company's liquidity ratios.
A lower discount would presumably motivate fewer customers to take the discount and
pay within the discount period, leading to higher accounts receivable; and a longer
payment period will cause slower collections, which will also lead to a higher accounts
receivable balance.
Discounted interest rate loan
