FIN 300
All else equal, which of the following represents the preferred outcome?
a high ROE with low leverage
All else equal, which of the following represents the preferred outcome?
a high coverage ratio with high profit margins
Provide two reasons why someone might want to set up a c - corporation rather than a limited partnership?
access to funds ease of transferring ownership
retention ratio
addition to retained earnings / net income
Explain how a change in net working capital impacts net cash flow.
an increase in NWC decreases net cash flow a decreases in NWC increases net cash flow
List the main financial statement elements seen on a balance sheet.
assets - current and long term debt - current and long term equity
Financial leverage:
magnifies the potential return or loss to the shareholders
Market to Book Ratio
market value per share/book value per share
two features of a bond
maturity coupon/YTM
earnings per share
net income/shares outstanding
Briefly explain the difference between net profit margin, operating profit margin, and gross profit margin.
net profit margin - net profit generated per dollar of sale =net income/ sales operating profit margin- operating profit per dollar of sales =EBIT/sales Gross Profit Margin- gross profit generated per dollar of sales = gross profit/sales
List the three main sections of the cash flow statement and provide a few examples of cash inflows and outflows for each section.
operations, financing, investing
Price Earnings Ratio
price per share/earnings per share
Price-Sales Ratio
price per share/sales per share
What is double taxation? How does this affect a sole proprietorship?
profits and dividends are taxed
Financial Ratios
relationships determined from a firm's financial information and used for comparison purposes
Hailey, Inc., has sales of $38,530, costs of $12,750, depreciation expense of $2,550, and interest expense of $1,850. If the tax rate is 35 percent, what is the operating cash flow, or CFO?
sales 38530 -costs 12750 - Depr 2550 =EBIT 23230 -Int 1850 =EBT 21380 -Taxes 7483 =NI 13897 CFO = EBIT + Depr - Taxes 23230 + 2550 - 7483 = 18297
Building an Income Statement. Pharrell, Inc., has sales of $634,000, costs of $328,000, depreciation expense of $73,000, interest expense of $38,000, and a tax rate of 35 percent. What is the net income for this firm?
sales 634000 -costs 328000 -Depr 73000 EBIT 233000 -Interest 38000 EBT 195000 -taxes 68250 NI 126750 (195000 * 0.35)
List the main financial statement elements seen on an income statement.
sales, cost of goods sold, operating expense, depreciation, interest, taxes, EBIT, net income
beta
stock
Would you expect stock options or a set salary for the CEO to be better at incenting the CEO to do what is in the shareholders best interest? Why?
stock options
Future Value (FV)
the amount an investment is worth after one or more periods $1 x (1+r)^t
Total asset turnover can be interpreted as ________________.
the amount of sales generated per dollar of assets
present value
the current value of future cash flows discounted at the appropriate discount rate PV= $1/(1+r)^t
compounding
the process of accumulating interest on an investment over time to earn more interest
discount rate
the rate used to calculate the present value of future cash flows
Use the tax rates table 2.3 in chapter 2. You owe a total of $19,729.50 in taxes for this year. Gross income is $120,000. The taxable income is $106,000. What is the marginal tax rate?
24%
Jim just deposited $13,000 into his account at Traditions Bank. The bank will pay 1.3 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 15 years?
244.20
Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?
2911.30
Days' Sales in Inventory
365/inventory turnover
Days' Sales in Receivables
365/receivables turnover
High Yield Bond
<= BB
investment grade
BBB to AAA
IRR
Capital Budgeting
cash ratio
Cash / Current Liabilities
Dividend payout ratio
Cash Dividends/Net Income
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?
General partnership
Which of the following is/are true? I. All else equal, a higher days' payables outstanding is preferred. II. All else equal, a lower days' inventory outstanding is preferred.
I and II
Internal Growth Rate
ROA x b / 1 - ROA x b
Profitability
ROE
Suppose ABC, Inc., paid out $43,000 in cash dividends and generated $126,750 in net income. What is the addition to retained earnings?
Retained Earnings = 126750 - 43000 = 83750
Recievables Turnover
Sales/Accounts Recievable
Total Assets Turnover Formula
Sales/Total Assets
What are the two broad ways to classify assets? Briefly explain the difference between these two types of assets.
long term + short term, ie, current assets
You owe a total of $19,729.50 in taxes for this year. Gross income is $120,000. The taxable income is $106,000. What is the average tax rate?
19729.50/106000= 18.61%
roe
Profit Margin x Total Asset Turnover x Equity Multiplier
Effective Annual Rate (EAR)
(1+r/m)^m-1 (m- compounding periods)
quick ratio
(Current Assets - Inventory) / Current Liabilities
Cash Coverage Ratio
(EBIT + Depreciation) / Interest
Sustainable Growth Rate
(ROE x b) / (1 - ROE x b)
Total Debt Ratio
(Total Assets - Total Equity) / Total Assets
Equity Multiplier
(total equity + total debt)/Total equity
Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?
132,827.87
common-size statement
A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.
Times intrest earned ratio
EBIT / Intrest
Which of the following are effective means of aligning management goals with shareholder interests?
Employee stock options b. Threat of a takeover c. All of the above
Which of the following is/are true? I. All else equal, a higher average collection period, i.e., days' sales in receivables is preferred. II. Days' payables outstanding, i.e., days costs in payables, indicates how long, on average, a company takes to pay its bills.
II only
Which one of the following best matches the primary goal of financial management?
Increasing the market value of the firm
simple interest
Interest earned only on the original principal amount invested
financial calculator keys
N- number of periods PV- present value FV- future value I/Y- interest rate (r^1) PMT -
profit margin
Net Income/Sales
Return on Assets
Net Income/Total Assets
Return on Equity
Net Income/Total Equity
NPV EBIT EAR ROA CAPM
Net Present Value Earnings before interest and taxes effective annual rate return on assets capital asset pricing model
When ROE exceeds ROA, this reflects _____________ .
The use of financial leverage
Debt to Equity Ratio
Total Debt/Total Equity
Standard Industrial Classification (SIC) code
U.S. government code used to classify a firm by its type of business operations
Purpose of liquidity
be able to pay short term debt keep out of financial distress
Which source of funds has first claim to the firm's cash flows? Also, which source of funds has a residual claim to the firm's cash flows and what does this mean?
bondholders have first claim, shareholders have residual claim
Bear Tracks, Inc., has current assets of $2,030, net fixed assets of $9,780, current liabilities of $1,640, and long-term debt of $4,490. What is the value of the shareholders' equity account for this firm? How much is net working capital?
ca 2030 cl 1640 net fixed A 9780 LT debt 4490 Total assets 11810 Total debt 6130 equity = 11810-6130 = 5680 NWC = 2030 - 1640 =390
discounted cash flow (DCF) valuation
calculating the present value of a future cash flow to determine its value today. The process of valuing an investment by discounting its future cash flows
discount
calculation of the present value of some future amount
Which firm is most capital intensive? a. capital expenditures / operating cash flow = 0.25 b. capital expenditures / operating cash flow = 0.35 c. capital expenditures / operating cash flow = 0.45
capital expenditures / operating cash flow = 0.45
Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's:
capital structure.
Rank the following items in order of liquidity, i.e., 1 is most liquid and 3 is least liquid:
cash accounts receivable copy machine
Measures how efficiently a firm is managing its working capital
cash cycle
efficiency
cash cycle
Inverntory turnover
cost of goods sold/inventory
The __________________ measures the amount of operating profit per dollar of interest expense.
coverage ratio
Net Working Capital
current assets - current liabilities
current ratio
current assets divided by current liabilities
Which of the following ratios is best used to assess the liquidity of a company?
current ratio
Which firm is most liquid? a. current ratio = 1.5 b. current ratio = 1.75 c. current ratio = 2.0
current ratio = 2.0
Using the following table, and assuming net profits were $35, please calculate the current ratio and return on equity.
current ration = current assets / current liabilities Return on equity = net profit / shareholders equity
Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment
d. II and III
. Which firm is most levered? a. Debt to Assets = 0.15 b. Debt to Assets = 0.75 c. Debt to Assets = 0.95
debt to assets = 0.95
Ignoring taxes, which one of the following decreases net income but does not affect the operating cash flow of a firm for the current year?
depreciation
interest rate risk
duration
Effective Annual Rate cc
e^r - 1
compound interest
interest earned on both the principal amount and any interest already earned
interest on interest
interest earned on the reinvestment of previous interest payments
Which of the following ratios is best used to assess the efficiency, i.e., asset utilization, of a company?
inventory turnover
Explain the difference between capital budgeting and capital structure.
investment decisions vs. sources of capital
Which of the following ratios is best used to assess the company's ability to meet debt obligations?
times interest earned ratio
Enterprise Value
total market value of the stock + book value of all liabilities - cash
Shareholders' Equity
total value of assets - total value of liabilities
Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:
working capital.
The daily financial operations of a firm are primarily controlled by managing the:
working capital.
