Short-Term Financing and Financial Ratio Analysis
Short-Term Financing Options
- Line of Credit: Offers a maximum loan balance the firm can access for a specific period. Involves interest payments and a commitment fee.
- Commercial Paper: Short-term, unsecured debt issued by large corporations, often a cheaper funding source than short-term bank loans.
- Sale of Short-Term Financial Investments: Financial assets acquired to temporarily invest excess cash flows. Generally very liquid, flexible in amount and maturity, and risk-free.
- Invoice Discounting: The
Derivatives and Hedging: Mock Exam Questions
Mock Exam (Theory)
Hedging and Risk Management
Hedging is used to:
- (a) Reduce risk.
- (b) Speculation.
- (c) Increase exposure to price movements.
Futures vs. Forwards
What is the difference between Futures and Forwards?
- (a) Futures are traded on an organized exchange, and forwards are traded OTC (Over-the-Counter).
- (b) Forwards are traded on an organized exchange, and futures are traded OTC.
- (c) Forwards have daily settlement, and futures settlement at the end of the period.
Bear Spread Payoff
A bear spread:
- (a)
Capital Budgeting: Cash Flow, NPV, and WACC
Chapter 12: Cash Flow in Capital Budgeting Projects
Opportunity Costs
Allocation of a firm’s resources represents lost opportunities.
Sunk Cost
An expense or obligation the firm is compelled to pay regardless of whether a project is undertaken.
Straight-Line Depreciation Method
Depreciation = (Depreciable basis – Ending book value) / Life of asset
Operating Cash Flow (OCF)
OCF = EBIT * (1 – Tax rate) + Depreciation
Gross Fixed Asset Changes
Almost always change at the beginning and end of a project. At the
Read MoreStock Splits, Dividends, and Financial Statement Analysis
Stock Splits and Book Value
Before Action
Common Stock = 60,000 x $12 = $840,000
Retained Earnings: Given as $400,000.
Total Stockholders’ Equity = $840,000 + $400,000 = $1,240,000
Book Value per Share = $1,240,000 / 60,000 = $20.67
After Stock Split
Total Shares = 60,000 x 3 = 180,000
New Par Value: Reduced to $4 per share.
Common Stock: Total par value remains unchanged = $840,000
Total Stockholders’ Equity = $1,240,000
Book Value per Share: $1,240,000 / 180,000 = $6.89
Stock Dividends and Equity
Read MoreUnderstanding Financial Instruments and Investments
Risk Level:
- Blue Chip: High-yield, large-cap.
- Chicharro: Small or medium-sized, high-risk company.
- Cyclical: Benefits tied to economic activity.
Stock Market Admission and Operations
The admission of shares to trading is the responsibility of the governing bodies of the stock exchange. Companies must be S.A. (public limited companies) and have a minimum capital of €1,202,024.21. They need a minimum number of shareholders (100) who hold less than 25% of the social capital. Companies should have shown
Read MoreUnderstanding Corporate Finance: Analysis, Ratios, and Value
Corporate Finance: An Overview
Corporation: A virtual or fictitious entity created by the state. It possesses its own rights and liabilities, enabling it to enter into contracts, buy, sell, or own property, pay taxes, face prosecution for legal violations, and initiate lawsuits. Corporations offer owners protection through limited personal liability.
Objective: To conduct business activities that enhance corporate profit and shareholder gain. This must be done in accordance with the law, with ethical
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