Finance Exam 1 (Chapters 1-4)
5 Major Categories of Ratios
- Liquidity - Solvency - Efficiency - Profitability - Valuation
What is the Goal of Financial Management?
-Maximize the current value per share of the companies stock - Maximize the value of the existing owners' equity
4 Determinants of Growth
-Profit Margin (operating efficiency) -Total Asset Turnover (asset use efficiency) -Financial Leverage (choice of optimal debt) -Dividend Policy (how much to pay to shareholders vs. reinvesting in the firm)
GAAP Matching Principle
-Recognize revenue when it is fully earned -Match expenses required to generate revenue to the period of recognition
Days' of Inventory
365 Days / Inventory Turnover how long it takes a company to turn its inventory into money
Days' of Payables
365 Days / Payable Turnover The average number of days a company takes to pay its suppliers
Days' of Receivables
365 Days / Receivables Turnover The average number of days that a company takes to collect revenue after a sale has been made
Common-Size Balance Sheets
All accounts = percent of total assets (%TA)
Common-Size Income Statements
All line items = percent of sales or revenue (%SLS)
Balance Sheet Identity (Equation)
Assets = Liabilities + Shareholders' Equity
Book Value vs. Market Value
Book Value: The BALANCE SHEET value Market Value: The TRUE value in the market
Payables Turnover
COGS / Accounts Payable How quickly are they paying off their suppliers
Cash Ratio
Cash / Current Liabilities Cash and near cash in comparison to their liabilites
Cash Flow (Equation)
Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Creditors
Financial Institutions
Companies that specialize in financial matters. - Banks - Brokerage Firms - Insurance Companies
What is the Agency Problem
Conflicts between the Principal (Stockholder) and Agent (Managers)
Problems with Financial Statement Analysis
Conglomerates -No readily available comparables Global competitors Different accounting procedures Different fiscal year ends Differences in capital structure Seasonal variations and one-time events
4 Basic Areas of Finance
Corporate Finance Financial Institutions Investments International Finance
Inventory Turnover
Cost of Goods Sold / Inventory A measure of the number of times inventory is sold or used in a time period such as a year
Net Working Capital
Current Assets - Current Liabilities
Quick (Acid Test) Ratio
Current Assets - Inventory / Current Liabilities How quickly could they retire their current liabilies with what they have
Current Ratio
Current Assets / Current Liabilities Do they have resources to pay their debts over the next 12 months
Cash Coverage Ratio
EBIT + Depreciation / Interest A ratio of the cash available to the amount of interest to be paid. To show a sufficient ability to pay, the ratio should be substantially greater than 1:1.
Times Interest Earns Ratio
EBIT / Interest A measure of a company's ability to honor its debt payments
Noncash Items
Expenses charged against revenue that do not affect cash flow AKA Depreciation
Working Capital Management Decision
How do we manage the day-to-day finances of the firm?
Capital Structure Decision
How should we pay for your assets? Debt or Equity?
What is another name for Agent
Manager
Marginal vs. Average tax rates
Marginal - % tax paid on the next dollar earned Average - total tax bill / taxable income
What is the income statement?
Measured performance over a specidied period of time
Cash Conversion Cycle (CCC)
Measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales
Profit Margin
Net Income / Sales Amount by which revenue from sales exceeds costs in a business
Return on Assets
Net Income / Total Assets The percentage of profit a company earns in relation to its overall resources
Return on Equity
Net Income / Total Equity The amount of net income returned as a percentage of shareholders equity
Income Statement Equation
Net Income = Income - Expenses
Operating Margin
Operating Income / Revenue Proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc
Price - Earnings Ratio
Price Per Share / Earnings Per Share
Price-Sales Ratio
Price Per Share / Sales Per Share
DuPont Identity
Profit Martin (How well do they manage their costs) x Total Asset Turnover (How well do they manage their assets) x Equity Multiplier (Financial Leverage)
Receivables Turnover
Sales / Accounts Receivable Used to measure a firm's effectiveness in extending credit as well as collecting debts
Total Asset Turnover
Sales / Total Assets The higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets.
Debt vs. Equity (Equation)
Shareholders' Equity = Equity - Liabilities
What is the Balance Sheet?
Snapshot of the firms Assets and Liabilities at any given point
3 Forms of Business Organization
Sole Proprietorship Partnership Corporation
What is Liquidity?
Speed and ease of conversion to CASH
What is another name for Principal?
Stockholder
What is involved in the Investments side of Finance?
Stocks and Bonds Valuing Financial Assets
Total Debt Ratio
Total Assets - Total Equity / Total Assets Percentage of companies assets that are financed by debt
Equity Multiplier
Total Assets / Total Equity Measurement of their financial leverage. High means that a larger portion of their assets are financed through debt
Enterprise Value
Total Market Value of the Stock + Book Value of all Liabilities - CASH
Capital Budgeting Decision
What long-term investments should the business take on?
