Finance 3
maturity matching, or "self-liquidating," approach
a financing policy that matches the maturities of assets and liabilities. this is a moderate policy
DuPont equation
a formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. It shows the relations among asset management, debt management, and profitability ratios.
profitability ratios
a group of ratios that show the combined effects of liquidity, asset management, and debt on operating results
amortization
a noncash charge similar to depreciation except that it represents a decline in value of intangible assets
annual report
a report issued annually by a corporation to its stockholders. it contains basic financial statements as well as management's analysis of the firm's past operations and future prospects
income statement
a report summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter or a year. shows the firm's sales and costs (and thus profits) during some past period-for example, 2014.
statement of cash flows
a report that shows how items that affect the balance sheet and income statement affect the firm's cash flows.shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase or decrease cash.
asset management ratios
a set of ratios that measure how effectively a firm is managing its assets
debt management ratios
a set of ratios that measure how effectively a firm manages its debt
balance sheet
a statement of a firm's financial position at a specific point in time. shows what assets the company owns and who has claims on those assets as of a given date-for example, December 31, 2014
statement of stockholders' equity
a statement that shows by how much a firm's equity changed during the year and why this charge occurred. shows the amount of equity the stockholders had at the start of the year, the items that increased or decreased equity, and the equity at the end of the year
trend analysis
an analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition
liquid asset
an asset that can be converted to cash quickly at fair market value with little or no transaction costs
moderate investment policy
an investment policy that is between the relaxed and restricted policies
basic earning power (BEP) equals EBIT divided by Total assets
basic earning power (BEP) equation
current ratio equals current assets divided by current liabilities
current ratio equation
dso equalsreceivables divided by annual sales divided by 365
days sales outstanding ratio equation
quick ratio equals current assets minus inventories divided by current liabilities
quick, or acid test, ratio equation
market value ratios
ratios that relate the firm's stock price to its earnings and book value per share
liquidity ratio
ratios that show the relationship of a firm's cash and other current assets to its current liabilities
relaxed investment policy
relatively large amounts of cash, marketable securities, and inventories are carried, and a liberal credit policy results in a high level of receivables
retained earnings
they represent the cumulative total of all earnings kept by the company during its life
operating margin
this ratio measures operating income, or EBIT, per dollar of sales
times-interest-earned (TIE) ratio=EBIT/interest charges
times-interest-earned (TIE) equation
tat=sales/total assets
total assets turnover ratio equation
total debt to total capital equals total debt divided by total debt plus equity
total debt to total capital equation
total liabilities equals total debt plus accounts payable plus accruals
total liabilities equation
TOC equals NOWC plus NFA(net fixed assets)
total operating capital (TOC) equation
true
true/false If a firm's total asset turnover ratio is significantly lower than its industry average, this could indicate that it uses its assets very efficiently.
false
true/false NOWC is defined as current assets minus current liabilities
false
true/false Net Cash Flow NCF is defined as NOPAT + depreciation
false
true/false Net Income is a measure of the operating performance of the firm only
true
true/false Net Operating Profit After Taxes NOPAT is defined as EBIT(1-T)
true
true/false Other things held constant, the more debt a firm uses, the higher its profit margin will be.
false
true/false ROA is equal to the total asset turnover ratio (TAT) times return on equity (ROE).
false
true/false a liquid asset is defined as an asset that can quickly be turned into cash
false
true/false a non-traditional view of the Balance Sheet is that Total Assets are equal to Operating Assets plus Net Fixed Assets
true
true/false liquidity is a thing of value because it allows one to avoid costs
false
true/false the rate of return on current assets is typically in the 2-5% range
true
true/false total operating capital is defined as NOWC plus Net Fixed Assets
temporal and cross-sectional
two types of benchmarking
temporal
type of benchmarking that looks across time, compares to historic average for the firm
cross-sectional
type of benchmarking that looks at the industry average and compares to the firm
income
which is the best measurement of performance: cash flow or income?
B
A firm wants to strengthen its financial position. Which of the following actions would make it financially stronger. A. Increase accounts receivable whole holding sales constant. B. Increase EBIT while holding sales and assets constant. C. Increase Notes Payable while holding sales constant. D. Increase inventories while holding sales constant.
ROE equals ROA times the Equity multiplier equals profit margin times total assets turnover times equity multiplier
DuPont equations (ch 4 and 15)
profit margin equals net income divided by sales
profit margin equation
negative number of days
best length of time for CCC?
book value per share equals common equity divided by shares outstanding
book value per share equation
ccc equals inventory period plus accounts receivable period or DSO minus Accounts payable period, which is also equal to inventory divided by COGS over 365 plus accounts receivable divided by sales over 365 minus Accounts payable divided by COGS over 365
cash conversion cycle equation
cash, marketable securities, accounts receivable, and inventories
current asset examples
working capital
current assets
current assets=permanent current assets + temporary current assets
current assets equals
permanent current assets
current assets that a firm must carry even at the trough of its cycles
temporary current assets
current assets that fluctuate with seasonal or cyclical variations in sales
accounts payable, accrued wages and taxes, and short-term notes payable to its bank
current liabilities examples
EBITDA
earning before interest, taxes, depreciation, and amortization
operating income
earning from operations before interest and taxes (EBIT)
notes payable, long term liabilities, equity
financial liabilities (do require a rate of return) consist of
fixed assets turnover ratio equals sales divided by net fixed assets
fixed assets turnover ratio equation
free cash flow (FCF) equals in brackets, EBIT times 1 minus T plus depreciation and amortization minus in brackets, capital expenditures plus change in net operating working capital] or FCF equals EBIT times 1 minus T minus- change in TOC
free cash flow (fcf) equation
market/book
gives indication of how investors regard the company. low risk and high growth have high blank ratio
restricted investment policy
holdings of cash, marketable securities, inventories, and receivables are concerned
basic earning power (BEP)
indicates the ability of the firm's assets to generate operating income
days sales outstanding ratio
indicates the average length of time the firm must wait after making a sale before it receives cash
current ratio
indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future
Inventory turnover equals sales divided by inventories
inventory turnover ratio equation
stockholders' equity
it represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination
market/book equals market price per share divided by book value per share
market/book equation
return on common equity (ROE)
measure the rate of return on common stockholders' investment
return on invested capital (ROIC)
measure the total return that the company has provided for its investors
fixed assets turnover ratio
measures how effectively the firm uses its plant and equipment
profit margin
measures net income per dollar of sales
times-interest-earned (TIE)
measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs
total debt to total capital
measures the percentage of the firm's capital provided by debtholders
total assets turnover ratio
measures the turnover of all of the firm's assets
net cash flow equals net income plus depreciation and amortization
net cash flow equation
net operating working capital (NOWC) equals current assets minus current liabilities minus notes payable
net operating working capital (nowc)
net sales equals price times quantity
net sales=
net working capital equals current assets minus current liabilities
net working capital equation
operating cash flow equals EBIT times 1 minus T plus depreciation and amortization
operating cash flow equation
operating income or EBIT equals sales revenues minus operating costs
operating income (or EBIT)
accounts payable and accruals
operating liabilities (don't require a rate of return) consist of
operating margin equals EBITdivided by sales
operating margin equation
price/earning (P/E) equals price per share divided by earnings per share
price/earning (P/E)
return on common equity (ROE) equals net income divided by common equity
return on common equity (ROE) equation
return on invested capital(ROIC) equals EBIT times 1 minus T over the total invested capital
return on invested capital (ROIC) equation
return on total assets (ROA) equals net income divided by total assets
return on total assets (ROA) equation
price/earning (P/E)
shows the dollar amount investors will pay for $1 of current earnings
stockholder's equity equals paid in capital plus retained earnings equals total assets minus total liabilities
stockholders' equity equations
"window dressing" technique
techniques employed by firms to make their financial statements look better than they are
free cash flow (FCF)
the amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows
payables deferral period
the average length of time between the purchase of materials and labor and the payment of cash for them
average collection period (acp)
the average length of time required to convert the firm's receivables into cash to collect cash following a sale
inventory conversion period
the average time required to convert raw materials into finished goods and then to sell them
depreciation
the charge to reflect the cost of assets depleted in the production process.
cash conversion cycle (CCC)
the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital
current assets financing policy
the manner in which current assets are financed
benchmarking
the process of comparing a particular company with a subset of top competitors in their industry
net operating profit after taxes (NOPAT)
the profit a company would generate if it had no debt and held only operating assets