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RU - FIN 04423 - Study Guide - Midterm

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RU - FIN 04423 - Study Guide - Midterm

School: Rowan University
Department: OTHER
Course: Financial Management II
Professor: Ozge Uygut
Term: Spring 2018
Tags:
Name: Chapter 15, 21, 14 notes
Description: These note cover the content of the first three chapters.
Uploaded: 02/26/2018
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background image ???Real options –Size and risk of a project’s cash flows are influenced
--It does not obligate its owner to take any action
Differences between Real Options and Financial Options: Financial options Real option Underlying asset that is traded (e.g. 
security)
Underlying asset that is not traded and 
not a security
Payoffs are specified in the contract Payoffs are varied and created inside of 
projects
Types of real options:
1. Investment timing option---under which investment decisions can be 
delayed 
the seller's choice of when in the 
delivery  month to deliver( Treasury  Bond  or  note   futures contract ) 2. Growth options(expansion of existing product line, new products, new  geographic markets) 3. Abandonment options (Contraction, temporary suspension)—an operation  can be closed down if it is more profitable to do so than to continue 4. Flexibility options—input/output can be changed if market conditions  change Five Procedures for valuing real options:
1. DCF analysis of expected cash flows, ignoring the option
Investment timing—we will gain additional info regarding demand if wait 
on year
2. Qualitative assessment of the real option’s value The value of any real option increases if the underlying project is risky or 
there is a long time before you must exercise the option
3. Decision tree analysis (Implement
4. Standard model for a corresponding financial option 
5. Financial engineering techniques
Black-Scholes Model for option to wait
X = strike price = cost to implement 
r
RF   = risk-free rate t = time to maturity
P = current stock price 
= PV of all of stock’s expected future cash flows for both financial and real 
option (P does not include the project’s cost)
σ^2 = variance of stock return---financial option
        = variance of the project’s rate of return
Three ways to estimate σ^2:
1. Judgement (A project is riskier than the film)
2. Direct approach
3. Indirect approach σ^2 = ln(CV^2 +1)/t
Total value = NPV of Original Project + Value of growth option Advantages: Decision Tree Analysis Black-Scholes approach Easy to implement and easy to explain  If actual traded options can be used in 
background image to decision makers the project, the option pricing approach
can produce more accurate results
Doesn’t need to discuss options New traded options are being 
developed every day
Force one to think about the specific 
reasons why options are valuable
Chapter 21 Working capital = total current assets used in operations Net working capital = current assets – current liabilities Net operating working capital (NOWC) = Operating CA- Operating CL       = (Cash + Inv. + A/R) – (Accruals + A/P) Working capital policy—the level of each current assets, how current assets 
are financed
Working capital mgmt. policies:
1. Relaxed WCP
2. Restricted WCP
3. Moderate WCP
Working Capital Financing Policies
Moderate: match the maturity of the assets with the maturity of the financing
Aggressive: Use short-term financing to finance permanent assets
Conservative: Use permanent capital for permanent assets and temporary 
assets
Cash Conversion Cycle
 = Inventory Conversion Period + Average Collection Period  – Payables 
Deferral Period
Inventory Conversion Period = Inventory / Sales per day
Average Collection Period = Days Sales outstanding = Receivables / Sales per
day
Payables Deferral Period = Payables / Purchases per day
Hold cash because:
1. Must have some cash to pay current bills / trade discounts
2. If company has credit line or other holdings of short-term securities
3. Compensating balance for loans or services 
The goal of cash management: Primary goal: minimize the amount of cash the firm must hold for conducting 
its normal business activities while at the same time maintaining a sufficient 
cash reserve to
1. Take trade discounts
2. Pay promptly and maintain its credit rating
3. Meet any unexpected cash needs
Cash Budget: Purpose, timing –forecasts the company’s cash holding to 
exceed targeted cash balance every month, except for October and 
November
Required data:

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School: Rowan University
Department: OTHER
Course: Financial Management II
Professor: Ozge Uygut
Term: Spring 2018
Tags:
Name: Chapter 15, 21, 14 notes
Description: These note cover the content of the first three chapters.
Uploaded: 02/26/2018
5 Pages 25 Views 20 Unlocks
  • Better Grades Guarantee
  • 24/7 Homework help
  • Notes, Study Guides, Flashcards + More!
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