FIN 3010 CH 1,2,3

Du Pont Identity

Formula which breaks down the return on equity into three component parts ROE = PM x TAT x EM Return on equity ROE Profit Margin PM Total Asset Turnover TAT Equity Multiplier EM

Which of these questions can be answered by reviewing a firm's balance sheet?

How much debt is used to finance the firm? What is the total amount of assets the firm owns?

How do you calculate Internal Growth Rate

IGR = ROA x b / (1 -[ROA xb]) b is the plowback or retention ratio b = the payout ratio minus 1 ex.) Williams, Inc., has an ROA of 7.7 percent and a payout ratio of 27 percent. b = 1 - .27 = .73 IGR = 7.7% x .27 / (1- [7.7% x.27]) = 5.96

Non-Cash Expense

Any expense that is not an actual cash flow, but is recorded in the financial statements. An example is depreciation.

How do you calculate Cash Flow From Assets

CFA= CFC + CFSH ex.) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. CFC = 12300 --> (8400 - (-3900)) CFSH = 4600 --> (7200 - 2600) CFA = 12300+4600 = 16900

How do you calculate the debt to equity ratio?

D/E= total debt/total equity ex.)

How do you calculate the equity multiplier

EM = Total assets / Total equity

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.

$50 Capital spending = 100-60+40

Four categories of the ratios

1. short-term solvency ratios 2. Asset utilization ratios 3. long-term solvency ratios 4. profitability ratios

what is the purpose of the income statement

to measure performance over a set period of time

How do you calculate the Market-to-book ratio?

Mkt/B = Marekt value per share / book value per share Notice that book value per share is total equity (not just common stock) divided by the number of shares outstanding. Bk value = total equity / number of SH outstanding

How do you calculate net equity issues?

NEI = total retained - total new issues

New Fixed Assets (next year)

NFA = NFA yr 1 + (new FA yr 2 - old FA sold) - DEPN

Net profit margin is

NPM = NI / Sales

How do you calculate Operation cash flow?

OCF= Ebit + depreciation - taxes ex.) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. a. What is the 2016 operating cash flow? 1.) make your income statement sales 153000 -costs 81900 -exps 5200 -DEPN 10900 EBIT = 55,000 2.) OCF= 55,000 + 10900 - 16330 = $49570

Define: Capital Management

budgeting and prioritization that begin with strategy (financial plan, direction) and capital project management Short-term

Net working capital equals

current assets minus current liabilities = NWC

Net capital spending is equal to the change in fixed assets plus:

depreciation NCS= Change in net assets + depreciation Example: Rotweiler Obedience School's December 31, 2015, balance sheet showed net fixed assets of $1,740,000, and the December 31, 2016, balance sheet showed net fixed assets of $2,070,000. The company's 2016 income statement showed a depreciation expense of $324,000. What was the company's net capital spending for 2016? NCS = (2,070,000 - 1,740,000) + 324,000 = $654,000.00

Net working capital will be negative when current assets are

greater than current liabilities NWC = negative when CA > CL

capital spending

money spent by a business for an item that will be used over a long period it is the net spending on fixed assets.

Internal Growth Rate

the maximum growth rate a firm can achieve without external financing of any kind

Define: Capital Structure

the mixture of debt and equity maintained by a firm

Define: Capital Budgeting

the process of planning and managing a firm's long-term investments

What is the main goal of financial management

to maximize current share value or shareholder's wealth

Free cash flow is better described as

total distributable cash flow

One of the important questions in the area of investments includes the potential risks and reward associated with investing in

Financial assets (potential risk)

Return on Assets is

ROA = Net income / Total Assets can also be written as NI / TL + SE

Return on Equity is

ROE = Net income / Stockholders equity

Shareholders Rate of Return is

ROR = % change in wealth

Sustainable Growth Rate (SGR)

SGR = (ROE x b) / (1 - ROE x b) b is the plowback b= RE / NI

How do you calculate Total Asset Trunover (TAT)

TAT = Sales / total assets

How do you calculate Times interest earned ration?

TIE = EBIT / Interest

How do you calculate Taxes from the table

Take the take rate and multiply it by the given number in the table until you reach the bracket that exceeds the companies taxable income. example.) .15 * the first $15,000 ect.

External Growth rate

The growth rate a firm can achieve with external financing

Increasing shareholder wealth means

increasing common stock value

How do you calculate Cash Flow to Creditors CFC

CFC = interest paid - net new borrowing ex) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. What is the Cash Flow to Creditors? CFC = 8400 - (-3900) = 12300

How do you calculate Cash flow to Stockholders

CFSH = Dividends paid - Net new borrowing ex.) Weiland Co. shows the following information on its 2016 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2016 and redeemed $3,900 in outstanding long-term debt. What is the Cash flow to Stockholders CFSH= 7200 -2600 = 4600

Which of the following are components of Cash Flow From Assets

Change in networking capital Capital spending Operating cash flow

How do you calculate the current ratio

Current Ratio = Current Assets / Current Liabilities example SDJ, Inc., has net working capital of $1,910, current liabilities of $5,610, and inventory of $1,265. what is the current ratio? 1.) need to find current assets NWC = CA - CL so CA = NWC + CL CA = 1910 + 5610 = 7520 2.) CR = 7520 / 5610 = 1.34

Working the Income statement Backwards

Example: You are given the following information for Sookie's Cookies Co.: sales = $51,900; costs = $38,900; addition to retained earnings = $2,950; dividends paid = $970; interest expense = $1,490; tax rate = 30 percent. Calculate the depreciation expense. Depreciation expense $ 5,910 Explanation: Here we need to work the income statement backward. Starting with net income, we know that net income is: Net income = Dividends + Addition to retained earnings Net income = $970 + 2,950 Net income = $3,920 Net income is also the taxable income, minus the taxable income times the tax rate, or: Net income = Taxable income - (Taxable income)(Tax rate) Net income = Taxable income(1 - Tax rate) We can rearrange this equation and solve for the taxable income as: Taxable income = Net income / (1 - Tax rate) Taxable income = $3,920 / (1 - .30) Taxable income = $5,600 EBIT minus interest equals taxable income, so rearranging this relationship, we find: EBIT = Taxable income + Interest EBIT = $5,600 + 1,490 EBIT = $7,090 Now that we have the EBIT, we know that sales minus costs minus depreciation equals EBIT. Solving this equation for EBIT, we find: EBIT = Sales - Costs - Depreciation $7,090 = $51,900 - 38,900 - Depreciation Depreciation = $5,910

How do you calculate Projected Stockholders Equity

Projected SE = Last years SE + NEI + Add RE NEI is the difference in how many issues of stocks are retained and how many were issued Addition to retained earnings = NI - Dividends

Which one of these is an important mechanism used by unhappy stockholders to replace current mgmt?

Proxy Fight

How do you calculate the quick ratio

Quick = (Current Assets - Inventory) / Current Liabilities example: SDJ, Inc., has net working capital of $1,910, current liabilities of $5,610, and inventory of $1,265. CA= 7520 QR= (7520 -1265) / 5610 = 1.12