cfs short

What is the main advantage of the Baumol model?

It is simple and cost-minimising, making it useful for firms with predictable cash flows.

What is the main weakness of the Baumol model?

It assumes cash steadily falls to zero and ignores uncertainty or cash inflows.

Why is the Miller–Orr model considered more realistic?

It includes cash buffers and control limits, so it can handle random cash flows.

What is a limitation of the Miller–Orr model?

It assumes stable conditions and requires continuous monitoring.

What should firms check when evaluating working capital plans?

They should compare the increase in costs with the expected increase in profit and revenue.

What is factoring?

A firm sells receivables to a third party for immediate cash and outsourced collection.

What is a drawback of factoring?

It is expensive and reduces the firm’s control over customer relationships.

What is invoice discounting?

A loan is taken using receivables as security while the firm still manages collections.

What risk remains with invoice discounting?

The firm still carries the bad debt risk.

What is the purpose of credit insurance?

It protects firms against customer default losses.

Why might credit insurance still be limited?

It adds premium costs and does not improve liquidity directly.

What is a Forward Rate Agreement (FRA)?

An OTC contract used to lock in a future interest rate.

How do futures hedge interest rate risk?

Gains on futures contracts offset higher borrowing costs.

What is an interest rate swap?

An agreement to exchange fixed and floating interest payments.

What does an upward-sloping yield curve suggest?

Markets expect future interest rates to rise.

What is the key difference between FRAs and futures?

FRAs are tailored OTC contracts, while futures are standardised and exchange traded.

What is comparative advantage in swaps?

Firms borrow where they have lower relative costs and then swap cash flows.

Why are currency options flexible hedges?

They give the right but not the obligation to exchange currencies.

What is the trade-off when choosing option strike prices?

Higher strikes give better protection but require higher premiums.

What is the purpose of a currency swap?

It exchanges principal and interest payments in different currencies to reduce FX risk.

What is leading and lagging in FX management?

Adjusting payment timing based on expected exchange rate movements.

What is matching in FX management?

Matching cash inflows and outflows in the same currency to reduce exposure.

What is the difference between aggressive and defensive FX management?

Aggressive strategies speculate on FX movements, while defensive strategies minimise exposure.

What are value-based motives for mergers and acquisitions?

Synergies and bargain buying opportunities.

What are agency motives for takeovers?

Managers may pursue growth for personal goals like empire building.

Why can maintainable earnings valuations be biased?

They rely on past averages which may not reflect future trends.

Why is NAV considered a weak valuation method for some firms?

It does not properly value intangible assets.

What is a major risk in takeovers?

The acquiring firm may overpay for the target company.

What are poison pills?

Defensive tactics designed to make takeovers more difficult or expensive.

What does the Altman Z-score measure?

It predicts corporate failure using accounting ratios.

What is a weakness of the Altman Z-score?

It is based on past data and can be manipulated.

What does the Merton model focus on?

The relationship between a firm’s assets and debt risk.

What is the first stage in Argenti’s failure process?

Management defects.

What is the benefit of qualitative failure models?

They can identify root causes and give earlier warning signs.

What is a limitation of qualitative failure models?

They are subjective and harder to interpret consistently.

What is a Type 1 corporate failure?

A new firm fails because of poor planning.

What is a Type 2 corporate failure?

Rapid growth overwhelms management capabilities.

What is a Type 3 corporate failure?

An established firm fails because it cannot adapt to chang