Finance 320 exam #1

JB supply has a total debt ratio of .46. What is the equity multiplier?

debt ratio=debt/TA equity ratio=equity/TA equity multiplier=TA/equity .46=.46/1 .54=.54/1 eq multiplier=1/.54=1.85

Ratio categories

-liquidity -profitability -financial leverage -asset management -market value -specific industry

Income statement

A financial statement showing the revenue and expenses for a fiscal period. -Revenues reported first, then deduct expenses for period

What is the present value of $1,500 discounted at %8.75 for 10 years?

N=10 I=8.75 FV=1,500 solve for PV=648.33

breaking down return on assets

ROA= NI/total assets = Profit margin * total asset turnover Op Mgmt (Net income/sales) Asset Mgmt (Sales/Total assets)

Common Size Income Statement

all items on the income statement are expressed as a percentage of revenues

Example of capital management decision

determining to pay cash for a purchase or use the credit offered by the supplier

DuPont Identity

popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage

Cash Flow Statement

reports the impact of a firm's activities on cash flows over a given period of time

Net Income

the difference between total revenue and total expenses -ability to retain your earnings or pay out dividends

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:

transaction was facilitated in the secondary market

Market value

-Price at which assets, liabilities, or equity can currently be bought or sold at -More important in decision making process

Trend analysis

-analyzes a firms's financial information over time -can be used to estimate the likelihood of improvement or deterioration in financial condition -internal and external

Operating cash flow

-cash flow from day to day activities of producing and selling -doesn't include interest expense because that's a finance expense -Doesn't include depreciation because that is "non-cash" Formula = EBIT+depreciation -taxes

capital spending

-cash spent on fixed assets less any money received from the sale of fixed assets formula: NCS=ending FA + depreciation

Change in working capital

-change in current assets and current liabilities -(working capital= current assets less current liabilities) Change in NWC=end NWC-Beginning NWC

net working capital

-current assets - current liabilities -positive when the cash that will be received over the next 12 months exceeds the cash that'll be paid out -positive in a healthy firm

Book value

-provided on balance sheet for assets, liabilities, and equity -Original price at which company bought or sold item (typically decreases after transaction)

what is the future value of $350,450 compounded annually at %7.5 for 25 years?

N=25 I=7.5 PV=350,450 Solve for FV=2,137,163.12

3 elements of cash flow

1. Operating cash flow 2. capital spending 3. change in net working capital

Example of decreasing the value of a firm's net working capital

Selling inventory at a loss

A firm has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is common-size statement value of interest expense?

Since this is income statement, everything is divided by sales to find common-sized value therefore: 65/4,300= %1.5

JB industries has ending inventory of $302,800 and cost of goods sold for the year just ended was $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold?

inventory turnover=COGS/inventory Day's sales in inventory=365 days/inventory turnover Inventory turnover=1,410,000/302,800=4.66 Day's sales inventory = 365/4.66=78.38 days

retained earnings statement

shows the amounts of a firm's earnings were retained rather than paid out as dividends *add net income *less dividends paid

ratio analysis

the assessment of a firm's financial condition using calculations and interpretations of financial ratios developed from the firm's financial statements -used both internally and externally -highlight weaknesses and strengths

external uses of evaluating financial statements

Creditors Suppliers Customers Stockholders

Why should financial managers strive to maximize the current value per share of the existing stock?

Because they've been hired to represent the interests of the current shareholders

Hungry Lunch has net income of $68,710, a price-earnings ratio of 13.7, and earnings per share of $.24. How many shares of stock are outstanding?

EPS=NI/number of shares outstanding Price-earnings ration=Current price/EPS 0.24=68,710/shares outstanding shares outstanding=$286,292

Corporate Finance

Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a finance decision

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

18,700

What is the goal of a corporation in finance?

Maximize the value of the business; increase the stock price

common size balance sheet

All items in the balance sheet are expressed as a percentage of total assets

Financial statement relationships

Income statement (earning activitiy)=> Balance sheet (end of period)=> Statement of cash flow (Cash related activities to earning activities; finance and investing activities)=>Balance sheet (end of period)

internal uses of evaluating financial statements

Performance evaluation - compensation and comparison between divisions Planning for the future - guide in estimating future cash flows

A firm has annual sales of $416,000, a market price of $25, and a profit margin of %3.7. There are 12,000 shares of stock outstanding. What is the price-earnings ratio?

Profit margin=NI/sales Price earnings ratio=market price/EPS %3.7=NI/416,000 NI=15,392 EPS = 15,392/12,000=1.283 P/E ratio=25/1.283=19.5 (answer)

JB's garage has cash of $68, AR of $142, AP of $235, and inventory of $318. What is the value of quick ratio?

Quick ration=(cash+AR)/AP =(68+142)235 =.89

TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets?

ROA=NI/total assets Total assets= total debt+total equity Profit margin=Net income/sales TA=176,000+395,000=571,000 NI=813,200*5.63=45,783.16 Answer(ROA)=45,783.16/571,000=%8.02

breakdown of return on equity

ROE=NI/Common equity = profit margin* total asset turnover* Equity multiplier Op mgmt (NI/Sales) Asset mgmt (Sales/Total assets) Debt utilization (total assets/common equity)