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