BUSI 320 - EXAM 2 - liberty university

if interest is compounded semi annually what do we do

- multiply n by 2

- divide interest rate by 2

the higher the discount,

the lower the present value

when we compound numbers what TVM function are we running

future value

when we discount numbers what TVM function are we running

present value

value given at a future date on a payment today

future value

current dollar of a future amount

present value

an annuity for which the ash flow occurs at the end of the period

ordinary annuity

stream of equal periodic cash flows

annuity

an annuity with an infinite life

perpetuity

is the effective rate or the nominal rate higher whenever compounding occurs more that once a year

the effective rate is higher

controlling assets

matching sales and production

when is the best time to borrow money

before you need it

yield curve

tells the stated rate of government bonds - shows differences in maturities

what do you normally expect to see on the yield curve

and upward sloping curve

what tends to lag with what the economy is doing

stock market

inverted yield curve

accurate predictor of recession within a year

-short term rates are higher than long term rates

falt yield curve

also accurate predictor of recessions

economic order quantity formula

square root of (2 x sales in units x order cost)/(carrying cost)

cash flow cycle

customer - sales - accounts receivable - cash - inventory

operating cycle

time between ordering materials and collecting cash

cash conversion cycle

time between when a firm pays its suppliers (payables) for inventory and collecting

operating cycle formula

average age inventory + average collection period

cash conversion cycle formula

average age inventory + average collection period - average pay period

trade credit

when a business (like a wholesaler) sells to another business on credit

permanent funding

if a firm's sales are constant then its investments in operating assets (long term financing)

seasonal funding

how much extra cash we will need (short term financing )

lower rates for

short term finanacning

larger rates for

long term financing

aggressive strategy relies heavily on

short term financing

float

difference between firm's recorded amount and amount credited to firm by bank

two types of float

mail and clearing

mail float

occurs because of time mail takes to be delivered

clearing float

occurs because of time check takes to be cleared

electronic funds transfer

funds moved between computer terminals

international money management

multinational corporations can shift funds from country to country from regional banks to lead banks

average inventory

EOQ/2 + safety stock

three basic categories of inventory

raw materials, WIP, finished goods

what is least liquid asset under current asset yet should provide highest yield

inventory

carrying costs

average inventory in units x carrying cost per unit

ERP

enterprise resource planning - SAP

JIT management

just in time management - quality production that continually satisfies customer requirements, minimizes inventory - on average JIT reduces inventory to sales ratio by 10%

how much short term financing is in form of accounts payable or trade credit

40%

accounts payable

spontaneous source of funds, grows as business expands, contracts when business declines

Cost of failing to take a cash discount

(discount %/100%-discount %) x (360)/(final due date - discount period)

cash discount policy

allows reduction in price if payments are made within a specified time period

compensating balance

amount to be borrowed = amount needed / 1-c

if percent of not taking cash discount is smaller than percent to takes cash discount you should

give up discount and not take it

effective rate must always

be greater than stated rate

effective interest rate

interest % x loan amount = interest

then

interest/principal = effective interest rate

accounts receivable financing

includes pledging accounts receivable as collateral for loan

advantage of accounts receivable financing

permits borrowing to be tied directly to level of asset expansion at any point in time

disadvantage of accounts receivable financing

relatively expensive way to acquire funds

inventory financing

marketability of pledged goods

what is usually best collateral for stages of production financing

raw materials and finished goods

Hedging

engaging in a transaction that partially reduces a prior risk exposure. Investors hedge themselves by diversifying.

effective rate formula

(interest/principal) x (360/days loan outstanding)

APR

Annual Percentage Rate

Annual percentage rate

A measure of the effective rate on a loan. One uses the actuarial method of compound interest when calculating the APR.

an increase in the interest rate will

decrease the PV and increase the FV

payments for an ordinary annuity are made

are made at the end of each period

payments for an annuity due are made

are made at the beginning of each period

the present value of an annuity due is

greater than the present value of an ordinary annuity

effective rate on installment loan

(2 x annual no. payments x interest) x(total number of payments + 1) x principal

effective rate on discounted loan

(interest/principal - interest) x (360/days outstanding)

effective rate

(interest / principal) x (360/days outstanding)

which rate is equal to the nominal rate?

the stated rate

which rates are interchangeable?

true and effective rate

which rates will always be greater than or equal to the stated rate?

the true and effective rates

What happens when we payoff a martgage?

with each payment, the account balance goes down, the interest goes down, but the principle goes up more

effective rate with compensating balances

(interest/principle-compensating balance in dollars)*(Days in the year (360)/days loan is outstanding)

Example of carrying costs

When apple needs to store their iphones for release day and they need to spend money on warehouses, insurance, and overhead.

what is economic order quantity also referred to?

Optimal order quantity

What is factoring?

selling accounts receivable to a company or a bank

Working capital management

financing and managing the current assets of a firm

Self-liquidating assets

Assets that are converted to cash within the normal operating cycle of the firm. An example is the purchase and sale of seasonal inventory.

permanent current assets

current assets that will not be reduced or converted to cash within the normal operating cycle of the firm

temporary current assets

Current assets that will be reduced or converted to cash within the normal operating cycle of the firm.

Level production

Equal monthly production used to smooth out production schedules and employ manpower and equipment more efficiently and at a lower cost.

Term structure of interest rates (yield curve)

The term structure shows the relative level of short-term and long-term interest rates at a point in time.

Point-of-sales terminals

Computer terminals in retail stores that either allow digital input or use optical scanners. The terminals may be used for inventory control or other purposes.

Liquidity premium theory

This theory indicates that long-term rates should be higher than short-term rates.

market segmentation theory

A theory that Treasury securities are divided into market segments by various financial institutions investing in the market. The changing needs, desires, and strategies of these investors tend to strongly influence the nature and relationship of short-term and long-term interest rates.

expectations hypothesis

The hypothesis maintains that the yields on long-term securities are a function of short-term rates. The result of the hypothesis is that, when long-term rates are much higher than short-term rates, the market is saying that it expects short-term rates to rise. Conversely, when long-term rates are lower than short-term rates, the market is expecting short-term rates to fall.

basis points

One basis point equals 1/100 of 1 percent.

tight money

A term to indicate time periods in which financing may be difficult to find and interest rates may be quite high by normal standards.

expected value

A representative value from a probability distribution arrived at by multiplying each outcome by the associated probability and summing up the values.

Check 21 Act

A 2003 law that allows banks and others to electronically process checks.

lock box system

A procedure used to expedite cash inflows to a business.

Cost-benefit analysis

a study of the incremental costs and benefits that can be derived from a given course of action.

automated clearinghouses (ACHs)

An ACH transfers information between one financial institution to another and from one account to another via computer tape.

International electronic funds transfer

The movement of funds across international boundaries. It is mainly carried out through SWIFT (Society for Worldwide Interbank Financial Telecommunications).

Sweep account

An account that allows companies to maintain zero balances with all excess cash swept into an interest-earning account.

Treasury Bills

short-term obligations of the federal government

Federal agency securities

Securities issued by agencies such as the Federal Home Loan Banks and the Federal Land Bank.

Certificates of Deposit (CDs)

A certificate offered by banks, savings and loans, and other financial institutions for the deposit of funds at a given interest rate over a specified time period

commercial paper

An unsecured promissory note that large corporations issue to investors. The minimum amount is usually $25,000.

Banker's Acceptance

short-term securities that frequently arise from foreign trade.

Eurodollar certificate of deposit

A certificate of deposit based on U.S. dollars held on deposit by foreign banks

passbook savings account

A savings account in which a passbook is used to record transactions. It is normally the lowest yielding investment at a financial institution.

Money market fund

A fund in which investors may purchase shares for as little as $500 or $1,000. The fund then reinvests the proceeds in high-yielding $100,000 bank CDs, $25,000-$100,000 commercial paper, and other large-denomination, high-yielding securities. Investors receive their pro rata portion of the interest proceeds daily as a credit to their shares.