# AGB 308 Midterm 1

Times interest earned ratio

EBIT/int expense

Will FV be larger or smaller with non-annual compounding?

FV will always be larger with non-annual compounding, because as you increase # of compounding periods, you're going to increase what you earn.

Present Value

FV/(1+r)^n

What if the P/E ratio increases ?

If the p/e ratio increases by 4.09 in year 9, it indicates that the stock price is more expensive per dollar of earnings in year 9 than year 8.

Which ratio provides information on the efficiency with which the business generates cash?

Inventory turnover

Is high leverage good or bad? is the company a good investment?

Its ROE is higher than the industry average, making it an appealing investment. Also, it is leveraged lower than industry averages, meaning the risk to reward is not very high. The company is not relying on borrowing as much as other industry companies to finance its assets, meaning it is not relying on ROA being higher than interest on their loan. Overall, it is a safe investment.

Statement of Cash Flows

Net Inc - increase in A/R + increase in A/P

Dividends paid formula

Net inc + beg ret earnings - end ret earnings

Earnings per share

Net income / number of shares

What do these ratios tell us?

Tells us how much we've borrowed in relation to the size of the company

If debt ratio decreases, what can this tell us about equity? (#5)

This means equity increased. We know that the debt-to-asset ratio is total liabilities/total assets. And since A=L+E, and assets didn't change, the only reason the ratio decreased is from a decrease in liabilities. If liabilities decreased, then equity must have increased to even out the asset formula.

Liquidity ratios provide information on the firm's:

ability to make their debt payments

Common sized income statement

an income statement in which each account in expressed as a percent of total sales

Inventory turnover

cogs/inventory

In cross-sectional analysis, a firm's financial ratios are

compared to the ratios of other firms in the industry

Current Ratio

current assets / current liabilities

Common sized financial statements

financial statements that display all items as a percentage of a common base figure. These are useful because they allow for easy analysis between companies, industry averages, or between time periods of a company.

Gross profit margin

gross profit/sales gross profit = sales - cogs

The EIR ____ with an increase in the number of compounding periods per year and _____ with an increase in the length of the investment term.

increases, doesn't change

The future value of a dollar ____ as the interest rate increases and ____ the further in the future the amount is to be received

increases, increases

Return on Assets ROA

net income/total assets

Return on Equity

net income/total equity (tells us how much money company is earning in terms of net income)

DuPont ROE

net profit * asset turnover ratio * 1/1-debt-to-asset ratio (equity multiplier is last part)

Net profit margin

net profit/revenue

operating profit margin

operating profit/sales operating profit = gross inc - operating exp - depreciation & amortization

Compared to industry average

profit margin the same, indicating the company is just as profitable as the average company. The asset turnover is higher, telling us that the company is more efficient in selling its products, or turns over its products at a faster rate than the industry. The equity multiplier is lower, indicating that the average company is slightly more leveraged than ACME.

Relationship between leverage and profitability

profitability is the return on the company's total assets, so in theory, highly profitable companies tend to reduce their borrowing or leveraging, which signals to investors and creditors that a company has low bankruptcy risk. Also, highly profitable companies can issue debt at low rates of interest because since they are seen as less risky.

Most people prefer to receive money today rather than ten years from now because

receiving cash today enables one to take advantage of current investment opportunities

A/R Turnover

sales or rev/AR

Asset Turnover Ratio

sales or revenue/total assets

Book value per share

total common equity / number of shares

Debt Ratio (debt-to-asset)

total liabilities/total assets

Debt to equity ratio

total liabilities/total stockholder's equity

market to book ratio

year end stock price / book value per share

Price to earnings ratio

year end stock price / earnings per share

Quick Ratio

(Current assets - inventories) / current liabilities

Average collection period

365/receivables turnover

Decline in asset turnover favorable or unfavorable?

Asset turnover ratio tells us the ratio of the value of a company's sales generated relative to the value of its assets. A decline in this ratio is unfavorable b/c this ratio tells us how efficient a company is in deploying its assets. A decline in the ratio can be contributed to by an increase in total assets or a decrease in sales.

When would the return on equity equal the return on assets?

Whenever the debt ratio is zero