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Chapter 20 and 21 Notes, Questions, and Answers
1
Chapter 20
1.1
Liquidity Raitos
Current
ratio
=
current
assets
currentliabilities
(1)
Quick
ratio
=
cash
+
short
terminvestments
+
receivable
current
liabilities
(2)
Accounts
receivable
turnover
=
credit
sales
Average
Receivables
(3)
Inventory
turnover
=
Costs
of
goods
sold
Average
inventory
(4)
Number
of
days
of
receivables
=
Accounts
receivable
Sales
on
Credit/
365
(5)
Number
of
days
of
inventory
=
Inventory
Cost
of
goods
sold/
365
(6)
1.2
Operating Cycle
operating cycle= number of days of inventory + number of days of receivables
net operating cycle = number of days of inventory + number of days of receivables  number
of days of payables
1.3
Terms of Sale
Eﬀective Annual Rate=(1 +
discount
discount
price
365
/extra
days
credit
)

1
1.4
ShortTerm Borrowing
•
Line of credit
Cost
=
Interest
+
Commitmentfee
LoanAmount
(7)
1
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Banker’s acceptance at an allinclusive rate.
Cost
=
Interest
LoanAmount

Interest
(8)
•
Commercial paper
Cost
=
Interest
+
Dealers
commission
+
Backupcosts
Loan
amount

Interest
(9)
1.5
Credit Analysis
Credit Analysis  Procedure to determine the likelihood a customer will pay its bills.
•
a potential customer.
•
Financial ratios can be calculated to help determine a customers ability to pay its bills.
1.5.1
Multiple Discriminant Analysis
A technique used to develop a measurement of solvency, sometimes called a Z Score. Edward
Altman developed a Z Score formula that was able to identify bankrupt ﬁrms approximately
95% of the time.
2
2
Chapter 21
2.1
Motives
•
Synergy
•
Growth
•
Acquiring unique resources
•
Increasing market power
•
Diversiﬁcation
•
Bootstrapping earnings
2.2
Types of Mergers
•
Statutory
•
Subsidiary
•
Horizontal
•
Vertical
•
Conglomerate
2.3
Form of Acquisition
3
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This note was uploaded on 10/25/2011 for the course FIN 351 taught by Professor Li during the Spring '09 term at S.F. State.
 Spring '09
 LI
 Liquidity

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