FIN 320 CH 11, 12, 16, 18 SB

What is the acronym for the interest rate most international banks charge one another for overnight eurodollar loans?

LIBOR

given V = E + D, if we divide both V and D by _______, we can calculate the capital structure weights

V

an agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called

a forward trade

a flexible short term financing strategy implies surplus cash and little borrowing, but the advantages of such a strategy is

a reduced probability of financial distress

non-committed lines of credit ______

are informal arrangements, generally specify a maximum amount that can be borrowed

the optimal balance of current _________ occurs where the sum of the carrying costs and the shortage costs is at a minimum

assets

the gap between short-term cash inflows and outflows can be filled by ______

borrowing, maintaining a liquidity reserve

dividends paid to common stockholders ________ be deducted from the payer's taxable income for tax purposes

cannot

the opportunity costs of holding current assets are called _______ costs

carrying

the difference between the operating cycle and the accounts payable period is the _________

cash cycle

under a factored receivables arrangement

collection of the receivables is the factor's responsibility

a committed line of credit is a more formal arrangement typically involving a _________

commitment fee

ending accounts receivable equals starting accounts receivable plus ________ minus collections

credit sales

the implicit exchange rate between two currencies when both are quoted in a third currency is called the _______

cross rate

commercial paper is an example of a:

debt security

relative purchasing power parity tells us that the exchange rate will rise if the US inflation rate is lower than that of a foreign country. The foreign currency will ______ in value relative to the US dollar

depreciate

interest rate parity

eliminates covered interest arbitrage opportunities

Total return =

expected return + unexpected return

t/f for publicly traded companies, the component of the dividend yield that must be estimated is the dividend

false

an interest rate swap involves swapping a ______ payment for a _________ payment

fixed rate; floating rate or floating rate; fixed rate

the world's largest financial market is the:

foreign exchange market

short term exposure to exchange rate risk can be reduced by importing raw materials and using _______ contracts

forward

short term cash flows are uncertain because ________

future sales and costs cannot be precisely predicted

a restrictive short term financial policy implies a _________ proportion of short term debt relative to long term debt

high

relative PPP implies that the change in an exchange rate is driven by the difference in the __________ of the two countries involved

inflation rates

with the flexible approach, the firm finances _____________, while with the restrictive approach, the firm finances ___________

internally, externally

the shorter the cash cycle, the lower the firm's investment in _______

inventories, accounts receivable

dividend payments belong to the category of _______

long term financing expenses

a lack of safety reserves can lead to which of the following?

lost sales, lost customer goodwill

systematic risk is also called _______ risk

market

we should use _______ values in the WACC. Because _______ values are often similar to market values for debt, we often use book value for debt and market value for equity

market, book

the foreign exchange market is where ________

one country's currency is traded for another country's currency

carrying costs involve:

opportunity costs

why is it more challenging to manage long term exchange rate risk exposure than to hedge short term risks?

organized forward markets do not exist for long term needs of corporations

a restrictive short term financing strategy implies

possible cash shortages, a small investment in net working capital

the concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as

purchasing power parity

the different types of exchange rate risk include which of the following?

short term exposure, long term exposure, translation exposure

ideally, short term assets are financed with _______

short term liabilities

an agreement to trade currencies within two business days at today's exchange rate is called a

spot trade

the two major elements of a firm's short term financial policy are

the financing of current assets, the size of the firm's investment in current assets

according to the CAPM, what is the expected return on a stock if its beta is equal to zero?

the risk free rate

when a us company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to _____ exposure to exchange rate risk

translation

t/f a stock out occurs if a store runs out of inventory and could result in lost customers

true

beta tells us the amount of __________ risk of an asset or portfolio relative to ________

unsystematic; an average risky asset

the WACC is the overall rate of return the firm must earn on its existing assets to maintain the ________ of its stock

value

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown

the interest rate most international banks charge one another for overnight eurodollar loans is the ________ interbank offer rate

London

protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called

covered interest arbitrage

the _________ rate is the exchange rate for a non-U.S. currency expressed in terms of another non-U.S. currency

cross

the return an investor in a security receives is __________ ___________ the cost of the security to the company that issued it

equal to

which activities are primary to short term finance?

financing activities, operating activities

users of the foreign exchange market include

foreign exchange brokers who match buy and sell orders, importers who pay for goods using foreign currencies, speculators who try to profit from changes in exchange rates

the exchange rate in an agreement to exchange currency at some time in the future is called the _________ rate

forward

the time it takes to acquire and sell inventory is called the _______ period

inventory

Expected return

it is the return that an investor expects to earn on a risky asset in the future

if a firm issues no debt, its average cost of capital will equal

its cost of equity

what does an inventory period of 111 days mean?

on average, inventory sat for about 111 days before it was sold

the primary concerns in short term finance are the firms short run __________ and financing activities

operating

the rate used to discount project cash flows is known as the

required return, cost of capital, discount rate

the WACC of a firm reflects the ________ and the target capital structure of the firm's existing assets as a whole

risk

either stock out or cash out costs occur when a firm _______

runs out of inventory to sell, runs out of available cash

which of the following are shortage costs?

safety reserve costs, order costs

the return expected on an investment depends only on the asset's _____ risk

systematic

a eurobond refers to a bond

the is issued in the multiple countries, usually denominated in the currency of the issuer's country

t/f the return an investor in a security receives is equal to the cost of the security to the company that issued it

true

for a firm with outstanding debt, the cost of debt will be the _______ on that debt

yield to maturity

the condition that a commodity costs the same regardless of the currency used or where it is purchased is called

absolute purchasing power parity

risk premium

additional compensation for taking risk, over and above the risk-free rate

the two types of accounts receivable financing are _______ and ________

assignment, factoring

a flexible short term financing strategy implies

cash surpluses, a relatively large pool of marketable securities

a foreign bond refers to a bond

that is issued in a single country, denominated in the currency of that country

the time between paying cash for inventory and receiving cash from selling a product is called the _________

cash cycle

t/f the primary disadvantage of the dividend growth model approach is its simplicity

false

what does maturity hedging involve?

financing fixed assets with long term financing and inventories with short term financing

components of the WACC include funds that come from _________

investors

British and ________ governments issue gilts

irish

the main problems with maturity mismatching (financing long-term assets with long term debt) are that it ______

is risky, requires frequent refinancing

carrying costs _______ with the level of investment in current assets

rise

t/f it is possible for the unsystematic risk of a portfolio to be reduced almost to zero

true

the return expected on an investment depends only on the asset's _________ risk

systematic

t/f the growth rate of dividends can be found using the CAPM

false

t/f the net payments receivable equals the cash collections minus the cash disbursements

false

a short term financing policy involving a higher proportion of long term debt then short term debt is classified as a ________ policy

flexible

short term finance is concerned with current assets and current liabilities, whereas long term finance is concerned with ______

capital structure, dividend policy, capital budgeting

t/f if the purchasing power parity did not hold, it would be possible to engage in arbitrage simply by transporting product to other countries

true

t/f the payables turnover equals the cost of goods sold divided by the average payables

true

match the titles with the duties of short term financial managers

cash manager -> marketable securities credit manager -> accounts receivable purchasing manager -> inventory payables manager -> accounts payable

if the firm is all-equity, the discount rate is equal to the firm's cost of ________ capital

equity

in covered interest arbitrage, investors protect themselves against changes in exchange rates by locking in the

forward exchange rate

which of the following are true concerning triangle arbitrage?

it helps keep the currency market in equilibrium, it is a profitable situation involving three separate currency exchange transactions

what are some strategies for hedging long term exchange rate risk?

matching foreign currency inflows and outflows

firms who attempt to match the maturity of assets and liabilities are said to employ ________

maturity hedging

the difference between cash collections and cash disbursements is the predicted ______

net cash inflow

systematic risk will __________ when securities are added to a portfolio

not change

the true risk of any investment comes from

-surprises -unanticipated events

Activity matching

1. buy raw materials -> what is the desired level of inventory 2. sell a product -> should credit be extended 3. make a product -> what technology should be used 4. pay cash for purchases -> should money be borrowed or cash reserves used

inventory period equals _______ days divided by the inventory turnover

365

the _________ period is the time between the receipt of inventory and actually paying for that inventory

accounts payable

which of the following are true?

- Ideally, we should use market values in the WACC - Book values are often similar to market values for debt.

the computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step.

1. calculate the expected return 2. calculate the deviation of each return from the expected return 3. square each deviation 4. calculate the average squared deviation

receivables period equals ________ days divided by the receivables turnover

365

a security issued in the United States representing shares of a foreign stock is call a

American depository receipt

if US dollars are deposited in banks outside the US banking system, they are referred to as:

Eruodollars

which of the following increase the cash cycle?

a longer inventory period, a longer receivables period

the cash cycle is equal to the operating cycle minus _______ period

accounts payable

the time from the acquisition of inventory to when the inventory is paid for is called the ______ period

accounts payable

the operating cycle is composed of which periods?

accounts receivable period, inventory period

using an analyst's forecast for a firm's earning growth and stock's dividend yield, you can find the cost of equity by

adding these two components

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:

already knew about most of the news item

what does a receivables turnover ratio of 57 mean?

customers took, on average, 57 days to pay

t/f according to the CAPM, if the market risk premium is zero, then the expected return on a stock is equal to the required return

false

t/f the discount rate is also. known as the expected return

false

t/f the surprise part of any announcement is the information the market uses to form the expectation of the return on the stock

false

the marketing manager may want easier credit terms to increase sales, but the credit manager may worry about ______

higher receivables and bad debt risk

the growth rate of dividends can be found using

historical dividend growth rates, security analysts' forecast

find a firm's overall cost of equity is difficult because

it cannot be observed directly

the most appropriate weights to use in the WACC are the ________ weights

market value

the cost of capital depends primarily on the _______ of fund, not the _________

use; source

if the Japanese Yen is less expensive in the forward market than it is today, it is said to be selling at a

discount

what are the advantages of the SML approach

does not require the company to pay a dividend, adjusts for risk

t/f the collection cycle is the difference between disbursement and collection of cash

false

which short term financial managers are involved with selling on credit and are directly responsible to the Vice President of finance?

the credit manager, the controller

conditions that must be present for absolute purchasing power to exist include which of the following?

there must be no trade barriers, the goods must be identical

t/f an interest rate swap occurs when two parties exchange a sub-par loan for a market rate loan

false

t/f discounting a news item is the same as taking the present value of that item

false

t/f finding the cost of equity is fairly straightforward

false

t/f the SML approach is advantageous because all it requires is estimation of beta

false

t/f the calculation of the portfolio beta is similar to the calculation of the portfolio weights

false

to estimate the dividend yield of a particular stock, we need:

the current stock price, forecasts of the dividend growth rate g, the last dividend paid

currently, the spot exchange rate for the Swiss franc is SF 1 = $1.10 or SF = $1.12 90 days forward. Which of the following is true?

the dollar is selling at a discount to the Swiss franc, the Swiss franc is at a forward premium

the difference between the _______ cycle and the accounts payable period is the _________ cycle

operating, cash

preferred stock

pays a constant dividend, pays dividends in perpetuity

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:

positive

what are the disadvantages of the SML approach

requires estimation of the market risk premium, requires estimation of beta

being low on cash can force a firm to ________

sell marketable securities, borrow money, default on debt

historical return data indicated that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio:

declines

money deposited in a financial center outside the country whose currency is involved is called _______

eurocurrency

the financing of current assets is measured by the proportion of:

short term debt and long term debt used to finance current assets

variance

standard deviation is the square root of ______, _______ is a measure of the squared deviations of a security's return from it expected return

to estimate a firm's equity cost of capital using the CAPM, we need to know the ________

stock's beta, market risk premium, risk free rate

the systematic risk principle argues that the market does not reward risks:

that are borne unnecessarily, that are diversifiable, that are systematic

a cross rate between two foreign currencies is usually quoted in what currency?

the US dollar