Financial Leverage Effects
Bargaining Power
Ability to negotiate favorable terms in business transactions
Effective Rate
Actual interest rate paid on accessible money
Size of Investments in Current Assets
Amount allocated to current assets
Temporary Current Assets
Assets needed seasonally or during peak times
Value of Stock
Based on expected future dividends; zero value if never paid.
Levered
Company with debt, fluctuating EBIT, ROE, and EPS
Unlevered
Company without debt, stable EBIT, ROE, and EPS
Interest Rate
Cost of borrowing, lower for short-term rates
Shortage Costs
Costs decreasing with higher current assets levels
Carrying Costs
Costs increasing with higher current assets levels
Net Working Capital (NWC)
Current assets minus current liabilities, represents liquidity
Ex-Dividend Date
Date determining if a stockholder receives a dividend payment.
Leverage
Debt usage affecting financial risk and returns
Date of Record
Determines dividend recipients; holders on record receive payment.
Interest Tax Shield
Difference in cash flow between levered and unlevered due to tax shield on interest.
DCF
Discounted Cash Flow, present value of future cash flows
Stock Dividend
Distribution of additional shares to existing shareholders
Break-Even EBIT
EBIT where EPS remains constant
EPS
Earnings per share distributed to shareholders
Wealth Stay
Equity changes with stock repurchase or cash dividend, wealth remains constant.
Cash Budget
Forecast of cash inflows and outflows
Riskier
Higher standard deviation, more volatile
Capital Structure Theory
In a perfect market, capital structure is irrelevant.
Stock Split
Increase in number of shares outstanding with a decrease in price
Clientele Effect
Investor preference for dividend policies based on tax implications.
Small Stock Dividend
Issuing additional shares as dividends, typically less than 20-25%.
Variation Amplification
Leverage increasing EPS and ROE fluctuations
Variability Increase
Leverage raising ROE and EPS variability
Secured Loans
Loans backed by collateral
Unsecured Loans
Loans without collateral
Flexible Policy
Maintains high current assets to sales ratio
Restrictive Policy
Maintains low current assets to sales ratio
Maturity Hedging
Matching asset and debt maturities
Compensating Balance
Minimum balance required by a bank to offset a loan
Permanent Current Assets
Minimum level of assets needed at all times
Inventory Turnover
Number of times inventory is sold or used in a period
Accounts Payable Turnover
Number of times payables are paid in a period
Accounts Receivable Turnover
Number of times receivables are collected in a period
Cash Cycle Formula
Operating Cycle - Accounts Payable Period
Net Income
Profit after all expenses deducted
Debt-Equity Ratio
Proportion of debt to equity in capital structure
Cash Dividends
Regular, extra, special case, or liquidating payments to stockholders.
ROE
Return on equity, earnings based on equity
Stock Repurchase
Similar to cash dividend, alters equity shares without tax implications.
DOW Jones
Stock market index used to gauge the performance of the market
Cash Cycle
Time between paying suppliers and receiving cash from customers
Operating Cycle
Time from purchasing inventory to receiving cash from sales
Shareholder Value
Value directly related to EPS and ROE
Contingent Claim Valuation
Valuing options based on underlying assets
Date of Payment
When dividend checks are mailed to stockholders.
Declaration Date
When the board declares a dividend, becoming a firm liability.