Finance Exam 1 (Chapters 1-4)

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5 Major Categories of Ratios

- Liquidity - Solvency - Efficiency - Profitability - Valuation

What is the Goal of Financial Management?

-Maximize the current value per share of the companies stock - Maximize the value of the existing owners' equity

4 Determinants of Growth

-Profit Margin (operating efficiency) -Total Asset Turnover (asset use efficiency) -Financial Leverage (choice of optimal debt) -Dividend Policy (how much to pay to shareholders vs. reinvesting in the firm)

GAAP Matching Principle

-Recognize revenue when it is fully earned -Match expenses required to generate revenue to the period of recognition

Days' of Inventory

365 Days / Inventory Turnover how long it takes a company to turn its inventory into money

Days' of Payables

365 Days / Payable Turnover The average number of days a company takes to pay its suppliers

Days' of Receivables

365 Days / Receivables Turnover The average number of days that a company takes to collect revenue after a sale has been made

Common-Size Balance Sheets

All accounts = percent of total assets (%TA)

Common-Size Income Statements

All line items = percent of sales or revenue (%SLS)

Balance Sheet Identity (Equation)

Assets = Liabilities + Shareholders' Equity

Book Value vs. Market Value

Book Value: The BALANCE SHEET value Market Value: The TRUE value in the market

Payables Turnover

COGS / Accounts Payable How quickly are they paying off their suppliers

Cash Ratio

Cash / Current Liabilities Cash and near cash in comparison to their liabilites

Cash Flow (Equation)

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Creditors

Financial Institutions

Companies that specialize in financial matters. - Banks - Brokerage Firms - Insurance Companies

What is the Agency Problem

Conflicts between the Principal (Stockholder) and Agent (Managers)

Problems with Financial Statement Analysis

Conglomerates -No readily available comparables Global competitors Different accounting procedures Different fiscal year ends Differences in capital structure Seasonal variations and one-time events

4 Basic Areas of Finance

Corporate Finance Financial Institutions Investments International Finance

Inventory Turnover

Cost of Goods Sold / Inventory A measure of the number of times inventory is sold or used in a time period such as a year

Net Working Capital

Current Assets - Current Liabilities

Quick (Acid Test) Ratio

Current Assets - Inventory / Current Liabilities How quickly could they retire their current liabilies with what they have

Current Ratio

Current Assets / Current Liabilities Do they have resources to pay their debts over the next 12 months

Cash Coverage Ratio

EBIT + Depreciation / Interest A ratio of the cash available to the amount of interest to be paid. To show a sufficient ability to pay, the ratio should be substantially greater than 1:1.

Times Interest Earns Ratio

EBIT / Interest A measure of a company's ability to honor its debt payments

Noncash Items

Expenses charged against revenue that do not affect cash flow AKA Depreciation

Working Capital Management Decision

How do we manage the day-to-day finances of the firm?

Capital Structure Decision

How should we pay for your assets? Debt or Equity?

What is another name for Agent

Manager

Marginal vs. Average tax rates

Marginal - % tax paid on the next dollar earned Average - total tax bill / taxable income

What is the income statement?

Measured performance over a specidied period of time

Cash Conversion Cycle (CCC)

Measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales

Profit Margin

Net Income / Sales Amount by which revenue from sales exceeds costs in a business

Return on Assets

Net Income / Total Assets The percentage of profit a company earns in relation to its overall resources

Return on Equity

Net Income / Total Equity The amount of net income returned as a percentage of shareholders equity

Income Statement Equation

Net Income = Income - Expenses

Operating Margin

Operating Income / Revenue Proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc

Price - Earnings Ratio

Price Per Share / Earnings Per Share

Price-Sales Ratio

Price Per Share / Sales Per Share

DuPont Identity

Profit Martin (How well do they manage their costs) x Total Asset Turnover (How well do they manage their assets) x Equity Multiplier (Financial Leverage)

Receivables Turnover

Sales / Accounts Receivable Used to measure a firm's effectiveness in extending credit as well as collecting debts

Total Asset Turnover

Sales / Total Assets The higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets.

Debt vs. Equity (Equation)

Shareholders' Equity = Equity - Liabilities

What is the Balance Sheet?

Snapshot of the firms Assets and Liabilities at any given point

3 Forms of Business Organization

Sole Proprietorship Partnership Corporation

What is Liquidity?

Speed and ease of conversion to CASH

What is another name for Principal?

Stockholder

What is involved in the Investments side of Finance?

Stocks and Bonds Valuing Financial Assets

Total Debt Ratio

Total Assets - Total Equity / Total Assets Percentage of companies assets that are financed by debt

Equity Multiplier

Total Assets / Total Equity Measurement of their financial leverage. High means that a larger portion of their assets are financed through debt

Enterprise Value

Total Market Value of the Stock + Book Value of all Liabilities - CASH

Capital Budgeting Decision

What long-term investments should the business take on?


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