2.3. Internal Financing

Question 1

Selected internal financing | Financing from operating activities

1.
2.

Answer 1

• financing via depreciation
• financing via provisioning

Question 2

Selected internal Financing | Financing from asset reallocation

1.
2.
3.

Answer 2

• divestment
• working capital management
• sale-and-lease back

Question 3

Working Capital Management

1.
2.
3.

Answer 3

• reduction in inventory
• reduction of the receivables portfolio
• increase in trade payables

Question 4

1. Any reduction in working capital requirements generates….
2. Similarly, when evaluating a project, reducting the projects net workinf capital needs over the projects life….

Answer 4

1. …. a positive free cash flow that the firm can distribute immediately to shareholders.
2. reduces the opportunity cost associated with this use of capital

Question 5

Managing wokring capital efficietly will…

Answer 5

…. maximize firm value

Question 6

Receivables Management | Establishing a credit policy involes three steps…

1.
2.
3.

Answer 6

1. establishing credit standards
2. establishing credit terms
3. establishing a collection policy

Question 7

What is an aging shedule?

1.
2.
3.

Answer 7

• categorizes accounts by number of days they have been on the firms books
• can be prepared using either the number of accounts or the dollar amount of the accounts receivable outstanding
• if it gets “bottom-heavy”, i.e. the percentages in the lower half of the schedule begin to increase. the firm will likely need to revisit its credit policy

Question 8

What does it mean if an aging schedule gets bottom heavy?

1.
2.

Answer 8

• means that the precentages in the lower half of the schedule begin to increase
• the firm will likely need to revisit its credit policy

Question 9

Payables Management | Why is it important?

1.
2.

Answer 9

• a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time
• one method is to calculate the accounts payable days outstanding and compare it to the credit terms

Question 10

What does “Stretching the Accounts Payable” mean and what is its impact?

1.
2.
3.

Answer 10

• when a firm ignores the payment due period and pays later
• doing so reduces the direct cost of trade credit because it lengthens the time that a form has use to the funds
• suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (COD) or cash before delivery (CBD)

Question 11

What is COD and CBD?

Answer 11

Cash on delivery
cash before delivery

Question 12

Inventory Management | Why is it important?

1.
2.

Answer 12

• inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production | if firm holds too little inventory, stock-outs (running out of goods) may occur, leading to lost sales
• firms may hold inventory because factors such as seasonality in demand mean that customers purchases do not perfectly match the most efficient production cycle

Question 13

What does Stock-Out mean?

1.
2.

Answer 13

• if a firm holds too little inventory, stock outs may occur, which leads to a loss of sales
• i.e. the situation when a firm runs out of goods

Question 14

What are the three categories of direct costs associated with inventory?

1.
2.
3.

Answer 14

• acquisition costs - the costs of the inventory itself over the period being analyzed (usually a year)
• order costs - total costs placing an order over the period beinf analyzed
• carrying costs - these cost include storage costs, insurance, taxes, spoilage, obsolescence, and opportunity cost of the funds tied up in the inventory

Question 15

1. Minimizing total costs involves…
2. e.g.: if we assume no quantity discounts are available, the lower the level of inventory a firm carries…

Answer 15

… come trade-offs.
… the lower its carrying cost, but the higher its annual order costs, because it need to place more orders during the year

Question 16

What is Just-in-time (JIT) inventory management?

1.
2.

Answer 16

• with JIT, a firm acquires inventory precisely when needed so that its inventory balance is always zero, or very close to it
• an act of seeking to reduce a firms carrying costs as much as possible