Exam 1
time interest earned ratio
-measures the extent to which operating income (EBIT) can decline before the firm is unable to meet its interest expense -measures how many timers interest could have been paid with operating income
disadvantages of MVA
1. Difficult to use to measure managerial performance in individual divisions of a company because it can only be calculated for the company as a whole 2. calculation measure managerial decisions since the inception of the company 3. cannot be used to measure performance for a given year
benefits of Economic Value Added (EVA)
1. EVA can be used to forecast a firms stock price 2. good measure of addition to shareholders wealth for the year 3. can be used for divisions as well as for the entire company 4. provides a useful basis for managerial compensation 5. EVA considers the cost of equity and net income ignores it
minimum tax rate for long term capital assets
15%
maximum tax on long term gains/losses for individuals who's income falls in the highest tax bracket
20%
long term capital gain/loss
Capital gain or loss from securities held for longer than 1 year
Dividends exclusion rule for corporations (post-TCJA)
Percentage Ownership Exclusion Percentages Less than 20% 50% Between 20%-80% 65% Greater than 80% 100%
Dividends exclusion rule for corporations (pre-2018)
Percentage Ownership Exclusion Percentages Less than 20% 70% Between 20%-80% 80% Greater than 80% 100%
benefit of MVA
allows a measurement as to whether the firm had added value to the shareholders (owners)
what does the time interest earned ratio not consider?
any lease payments that are required for leased assets or paying back the principle of any long term debt-- usually concerns long term debt creditors
another term for days sales outstanding (DSO)
average collection period
do creditors prefer lower or higher debt ratio?
creditors prefer lower debt ratio because it protects creditors of the company dissolves
another term for debt ratio
debt to total asset ratio
tax rule on dividends for corporation
dividends are only partially taxable
problem with fixed asset turnover
does not account for inflation
why are municipal bonds not taxed?
encourages investment in state and local governments
EBITDA coverage ratio
essentially same last TIE except considers lease and principle payments -also measures the coverage of these items before depreciation -usually concerns short term creditors
is it better have a higher or lower total asset turnover?
higher
is it better to have a higher or lower EBITDA coverage ratio
higher
is it better to have a higher or lower current ratio?
higher
is it better to have a higher or lower fixed asset turnover?
higher
is it better to have a higher or lower time interest earning ratio?
higher
is it better to have higher or lower BEP?
higher
is it better to have higher or lower profit margin?
higher, low PM indicates more debt
why would long term capital assets not be taxed?
if the individuals income falls in the lowest two tax brackets
taxable
income that a company makes which the government is concerned regarding taxes. In general, all income is taxable.
market book ratio
indicates how much investors are willing to pay per dollar of a company's book value
capital structure
liabilities + SHE
is it better to have a higher or lower DSO?
lower
total asset turnover
measured how effectively a firm uses all of its assets
current ratio
measures a company's ability to pay short term obligations
fixed asset turnover
measures how effectively the firm uses its plant and equipment
Return on Common Equity
measures how much each dollar or investors investment is earning
book value per share
measures the book value of a firm's equity on a per share basis
debt ratio
measures the percentage of assets that have been provided by creditors (or debt)
Equity Multiplier
measures the ratio of total asset to total common equity
Basic Earning Power
measures the raw earning power of the firm's assets before the effect of taxes and interest
all interest income is taxable except for...
municipal bonds (investments made in local and state governments)
another terms for A/P Accruals
non-interest bearing current liabilities
truer economic profit
operating capital-NOPAT
another term from EBIT
operating income
tax deductible
referring to expenses that are paid that reduce income, thereby reducing tases that will need to be paid. in general, all necessary and normal expenses are deductible.
days sales outstanding
represents the average amount of time that a firm must wait after making a sale to receive the cash on that sale
tax cap for dividends (individuals)
same as capital gains
price earnings ratio
shows how much investors are willing to pay for each dollar of reported profits
Profit Margin
shows how much profit is left or each dollar of sale
Market Value Added (MVA)
shows the cumulative difference between the market value of a company and the equity supplied by investors
do stockholders prefer lower or higher debt ratio?
stockholders prefer higher debt ratio that more earnings are available to each stockholder
another term for EBT
taxable income
operating capital
the dollar amount of all assets employed by the firm that have a cost of borrowing or investment by outside sources
inventory turnover
the number of times per year that inventory is cycled through (purchased then sold to be replaced by more inventory)
Tax deduction for dividends paid
there is none
another term for total assets
total capital
operating capital equation
total capital-A/P Accruals