on 03-Jan-2019 (Thu)

We want to place n balls at random into n cells. Find the probability that exactly one cell remains empty. Explain each count of the probability in detail.

The greater a company's variability of EBIT, the higher its business risk. A higher debt-to-equity ratio indicate higher financial leverage. Variability in profitability (EPS) due to fixed interest expense is a financial risk and not a business risk.

When the economy is expected to see positive growth, a company can increase both its operating and financial leverage in order to make higher profits. An increase in sales will outweigh an increase in both fixed costs and financial costs. Operating leverage is the trade off between fixed and variable costs. Higher operating leverage typically is indicative of a company with higher levels of risk (greater income variance).

Financial leverage results in increased variability in earnings per share (net income) due to the increase of fixed interest payment costs. Stable net income will result from low (not high) leverage. Higher financial leverage is likely to reduce taxes due to the tax deductibility of interest payments.

If a company has more of its costs as fixed, the operating leverage will be higher. With a higher operating leverage, the company's ability to survive a downturn in the business cycle or a recession will be limited.

If Ceteris Paribus, a company with high operating leverage will have a large change in operating income for a small rise in sales. Therefore, during times of expansionary growth levels, a highly leveraged company will have higher earnings growth than a company with less leverage. The opposite will be the case during an economic contraction.

Lower inventory on hand need not always indicate better management, for it could lead to stock outages and lose customers. At the same time, a higher inventory days on hand could indicate poor sales and an accumulation of obsolete items.

Current assets includes cash, account receivables, inventories, prepaid expenses and short-term marketable securities. Inventories are less liquid than any other current assets and accordingly will have an effect on the company's ability to remain solvent in the short term.

Secondary sources of liquidity include negotiating debt contracts, liquidating assets, and filing for bankruptcy protection and reorganization. Primary sources of liquidity include ready cash balances, short-term funds (e.g. trade credit and bank lines of credit), and cash flow management.

A high portion of inventories in current assets could indicate that the quick ratio is less than peers. This will mean that the company will have to depend heavily on sales to meet its short-term obligations.

Receivables turnover indicates the average number of times a company creates receivables and realizes them back. This will help the company to estimate when it can receive enough cash from debtors to maintain sufficient liquidity for operations.

An investment policy statement is a high-level document that consists of:
1. The purpose and objective of the portfolio
2. General guidelines about the strategy
3. The types of securities that will be used
4. The people responsible for the portfolio's management
5. The corrective steps to be taken if any violations occur
6. The limitations of the portfolio. (Individual asset class limit may not be mentioned in the IPS.)

Commercial papers are mostly issued by large, creditworthy companies as they can get the lowest cost of financing by issuing such paper. Small companies with poor credit quality usually raise money by selling receivables. Receivables securitization is a higher cost of funds used by companies with poor credit quality. Commercial papers are usually used by non-banking corporates.

If the receivables turnover is significantly higher than the industry average, the number of days it takes the receivables to convert cash should be very low. This is an indication that the company's credit policy may be too strict and that sales are being lost to peers because of this. The average days of receivables are only one component of the cash conversion cycle that is related to the credit terms of the company.

BEY uses the 365-days convention and should be used to evaluate the performance of the security. It allows fixed-income securities whose payments are not annual to be compared with securities with annual yields. MMY uses the 360-dasy convention to annualize the HPY.

Companies with working capital requirements that fluctuate due to seasonal demand are likely to experience short-term shortages of cash and must forecast them to manage their net daily cash positions. They could arrange for a bank credit lines or a capital borrowing program that allows them to raise debt and, once peak season is passed, the company can repay the borrowings using the cash generated from high sales during the peak season.

Discount yield is based on the discount calculated using the face value in the denominator. Money market yield and bond equivalent yield are calculated using the holding period yield, which has price (lower value) in the denominator. So the discount yield is lower than all yields when the security is trading at a discount. The money market yield is the holding period yield times 360 / days to maturity and the bond equivalent yield is holding period yield times 365 / days to maturity. So BEY will be higher than the MMY.

Cash conversion cycle = operating cycle – average days payables outstanding. If the cash conversion cycle has decreased, the company's average days of payables must have increased; this could mean that the company is relying more heavily on credit from its suppliers. This could mean that the payables have increased and ultimately leading to lower payables turnover ratio (purchases/average payable).

Publicly-listed securities should be invested for long periods to make a meaningful return. For short-term investment purposes, bank certificates of deposit and time deposits and other money market instruments can be used.

A revolving line of credit is typically for a longer period and involves an agreement to lend funds in the future up to some maximum amount. Accordingly it is one of the strongest and larger forms of credit for companies. Non-banking finance companies are considered as smaller and of weak credit.

Given the seasonal requirement for cash, it's better for the company to invest in short-term securities that mature in August. Highly safe and highly liquid investments may not generate any return for the company and will not be an effective working capital management strategy.