Exam 1

time interest earned ratio

-measures the extent to which operating income (EBIT) can decline before the firm is unable to meet its interest expense -measures how many timers interest could have been paid with operating income

disadvantages of MVA

1. Difficult to use to measure managerial performance in individual divisions of a company because it can only be calculated for the company as a whole 2. calculation measure managerial decisions since the inception of the company 3. cannot be used to measure performance for a given year

benefits of Economic Value Added (EVA)

1. EVA can be used to forecast a firms stock price 2. good measure of addition to shareholders wealth for the year 3. can be used for divisions as well as for the entire company 4. provides a useful basis for managerial compensation 5. EVA considers the cost of equity and net income ignores it

minimum tax rate for long term capital assets

15%

maximum tax on long term gains/losses for individuals who's income falls in the highest tax bracket

20%

long term capital gain/loss

Capital gain or loss from securities held for longer than 1 year

Dividends exclusion rule for corporations (post-TCJA)

Percentage Ownership Exclusion Percentages Less than 20% 50% Between 20%-80% 65% Greater than 80% 100%

Dividends exclusion rule for corporations (pre-2018)

Percentage Ownership Exclusion Percentages Less than 20% 70% Between 20%-80% 80% Greater than 80% 100%

benefit of MVA

allows a measurement as to whether the firm had added value to the shareholders (owners)

what does the time interest earned ratio not consider?

any lease payments that are required for leased assets or paying back the principle of any long term debt-- usually concerns long term debt creditors

another term for days sales outstanding (DSO)

average collection period

do creditors prefer lower or higher debt ratio?

creditors prefer lower debt ratio because it protects creditors of the company dissolves

another term for debt ratio

debt to total asset ratio

tax rule on dividends for corporation

dividends are only partially taxable

problem with fixed asset turnover

does not account for inflation

why are municipal bonds not taxed?

encourages investment in state and local governments

EBITDA coverage ratio

essentially same last TIE except considers lease and principle payments -also measures the coverage of these items before depreciation -usually concerns short term creditors

is it better have a higher or lower total asset turnover?

higher

is it better to have a higher or lower EBITDA coverage ratio

higher

is it better to have a higher or lower current ratio?

higher

is it better to have a higher or lower fixed asset turnover?

higher

is it better to have a higher or lower time interest earning ratio?

higher

is it better to have higher or lower BEP?

higher

is it better to have higher or lower profit margin?

higher, low PM indicates more debt

why would long term capital assets not be taxed?

if the individuals income falls in the lowest two tax brackets

taxable

income that a company makes which the government is concerned regarding taxes. In general, all income is taxable.

market book ratio

indicates how much investors are willing to pay per dollar of a company's book value

capital structure

liabilities + SHE

is it better to have a higher or lower DSO?

lower

total asset turnover

measured how effectively a firm uses all of its assets

current ratio

measures a company's ability to pay short term obligations

fixed asset turnover

measures how effectively the firm uses its plant and equipment

Return on Common Equity

measures how much each dollar or investors investment is earning

book value per share

measures the book value of a firm's equity on a per share basis

debt ratio

measures the percentage of assets that have been provided by creditors (or debt)

Equity Multiplier

measures the ratio of total asset to total common equity

Basic Earning Power

measures the raw earning power of the firm's assets before the effect of taxes and interest

all interest income is taxable except for...

municipal bonds (investments made in local and state governments)

another terms for A/P Accruals

non-interest bearing current liabilities

truer economic profit

operating capital-NOPAT

another term from EBIT

operating income

tax deductible

referring to expenses that are paid that reduce income, thereby reducing tases that will need to be paid. in general, all necessary and normal expenses are deductible.

days sales outstanding

represents the average amount of time that a firm must wait after making a sale to receive the cash on that sale

tax cap for dividends (individuals)

same as capital gains

price earnings ratio

shows how much investors are willing to pay for each dollar of reported profits

Profit Margin

shows how much profit is left or each dollar of sale

Market Value Added (MVA)

shows the cumulative difference between the market value of a company and the equity supplied by investors

do stockholders prefer lower or higher debt ratio?

stockholders prefer higher debt ratio that more earnings are available to each stockholder

another term for EBT

taxable income

operating capital

the dollar amount of all assets employed by the firm that have a cost of borrowing or investment by outside sources

inventory turnover

the number of times per year that inventory is cycled through (purchased then sold to be replaced by more inventory)

Tax deduction for dividends paid

there is none

another term for total assets

total capital

operating capital equation

total capital-A/P Accruals