FIN 3010 CH 1,2,3
Du Pont Identity
Formula which breaks down the return on equity into three component parts ROE = PM x TAT x EM Return on equity ROE Profit Margin PM Total Asset Turnover TAT Equity Multiplier EM
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
How do you calculate Internal Growth Rate
IGR = ROA x b / (1 -[ROA xb]) b is the plowback or retention ratio b = the payout ratio minus 1 ex.) Williams, Inc., has an ROA of 7.7 percent and a payout ratio of 27 percent. b = 1 - .27 = .73 IGR = 7.7% x .27 / (1- [7.7% x.27]) = 5.96
Non-Cash Expense
Any expense that is not an actual cash flow, but is recorded in the financial statements. An example is depreciation.
How do you calculate Cash Flow From Assets
CFA= CFC + CFSH ex.) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. CFC = 12300 --> (8400 - (-3900)) CFSH = 4600 --> (7200 - 2600) CFA = 12300+4600 = 16900
How do you calculate the debt to equity ratio?
D/E= total debt/total equity ex.)
How do you calculate the equity multiplier
EM = Total assets / Total equity
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.
$50 Capital spending = 100-60+40
Four categories of the ratios
1. short-term solvency ratios 2. Asset utilization ratios 3. long-term solvency ratios 4. profitability ratios
what is the purpose of the income statement
to measure performance over a set period of time
How do you calculate the Market-to-book ratio?
Mkt/B = Marekt value per share / book value per share Notice that book value per share is total equity (not just common stock) divided by the number of shares outstanding. Bk value = total equity / number of SH outstanding
How do you calculate net equity issues?
NEI = total retained - total new issues
New Fixed Assets (next year)
NFA = NFA yr 1 + (new FA yr 2 - old FA sold) - DEPN
Net profit margin is
NPM = NI / Sales
How do you calculate Operation cash flow?
OCF= Ebit + depreciation - taxes ex.) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. a. What is the 2016 operating cash flow? 1.) make your income statement sales 153000 -costs 81900 -exps 5200 -DEPN 10900 EBIT = 55,000 2.) OCF= 55,000 + 10900 - 16330 = $49570
Define: Capital Management
budgeting and prioritization that begin with strategy (financial plan, direction) and capital project management Short-term
Net working capital equals
current assets minus current liabilities = NWC
Net capital spending is equal to the change in fixed assets plus:
depreciation NCS= Change in net assets + depreciation Example: Rotweiler Obedience School's December 31, 2015, balance sheet showed net fixed assets of $1,740,000, and the December 31, 2016, balance sheet showed net fixed assets of $2,070,000. The company's 2016 income statement showed a depreciation expense of $324,000. What was the company's net capital spending for 2016? NCS = (2,070,000 - 1,740,000) + 324,000 = $654,000.00
Net working capital will be negative when current assets are
greater than current liabilities NWC = negative when CA > CL
capital spending
money spent by a business for an item that will be used over a long period it is the net spending on fixed assets.
Internal Growth Rate
the maximum growth rate a firm can achieve without external financing of any kind
Define: Capital Structure
the mixture of debt and equity maintained by a firm
Define: Capital Budgeting
the process of planning and managing a firm's long-term investments
What is the main goal of financial management
to maximize current share value or shareholder's wealth
Free cash flow is better described as
total distributable cash flow
One of the important questions in the area of investments includes the potential risks and reward associated with investing in
Financial assets (potential risk)
Return on Assets is
ROA = Net income / Total Assets can also be written as NI / TL + SE
Return on Equity is
ROE = Net income / Stockholders equity
Shareholders Rate of Return is
ROR = % change in wealth
Sustainable Growth Rate (SGR)
SGR = (ROE x b) / (1 - ROE x b) b is the plowback b= RE / NI
How do you calculate Total Asset Trunover (TAT)
TAT = Sales / total assets
How do you calculate Times interest earned ration?
TIE = EBIT / Interest
How do you calculate Taxes from the table
Take the take rate and multiply it by the given number in the table until you reach the bracket that exceeds the companies taxable income. example.) .15 * the first $15,000 ect.
External Growth rate
The growth rate a firm can achieve with external financing
Increasing shareholder wealth means
increasing common stock value
How do you calculate Cash Flow to Creditors CFC
CFC = interest paid - net new borrowing ex) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. What is the Cash Flow to Creditors? CFC = 8400 - (-3900) = 12300
How do you calculate Cash flow to Stockholders
CFSH = Dividends paid - Net new borrowing ex.) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. What is the Cash flow to Stockholders CFSH= 7200 -2600 = 4600
Which of the following are components of Cash Flow From Assets
Change in networking capital Capital spending Operating cash flow
How do you calculate the current ratio
Current Ratio = Current Assets / Current Liabilities example SDJ, Inc., has net working capital of $1,910, current liabilities of $5,610, and inventory of $1,265. what is the current ratio? 1.) need to find current assets NWC = CA - CL so CA = NWC + CL CA = 1910 + 5610 = 7520 2.) CR = 7520 / 5610 = 1.34
Working the Income statement Backwards
Example: You are given the following information for Sookie's Cookies Co.: sales = $51,900; costs = $38,900; addition to retained earnings = $2,950; dividends paid = $970; interest expense = $1,490; tax rate = 30 percent. Calculate the depreciation expense. Depreciation expense $ 5,910 Explanation: Here we need to work the income statement backward. Starting with net income, we know that net income is: Net income = Dividends + Addition to retained earnings Net income = $970 + 2,950 Net income = $3,920 Net income is also the taxable income, minus the taxable income times the tax rate, or: Net income = Taxable income - (Taxable income)(Tax rate) Net income = Taxable income(1 - Tax rate) We can rearrange this equation and solve for the taxable income as: Taxable income = Net income / (1 - Tax rate) Taxable income = $3,920 / (1 - .30) Taxable income = $5,600 EBIT minus interest equals taxable income, so rearranging this relationship, we find: EBIT = Taxable income + Interest EBIT = $5,600 + 1,490 EBIT = $7,090 Now that we have the EBIT, we know that sales minus costs minus depreciation equals EBIT. Solving this equation for EBIT, we find: EBIT = Sales - Costs - Depreciation $7,090 = $51,900 - 38,900 - Depreciation Depreciation = $5,910
How do you calculate Projected Stockholders Equity
Projected SE = Last years SE + NEI + Add RE NEI is the difference in how many issues of stocks are retained and how many were issued Addition to retained earnings = NI - Dividends
Which one of these is an important mechanism used by unhappy stockholders to replace current mgmt?
Proxy Fight
How do you calculate the quick ratio
Quick = (Current Assets - Inventory) / Current Liabilities example: SDJ, Inc., has net working capital of $1,910, current liabilities of $5,610, and inventory of $1,265. CA= 7520 QR= (7520 -1265) / 5610 = 1.12