Details Title: Finance 300 Description: Test 1 Total Flash Cards: 86 Created: 09/22/2009 23:21:36		New Users: To study from this flashcard set, or to create your own your own study flash cards, REGISTER HERE. Existing Users: CLICK HERE. Additional Finance Flashcards
Cards in this set: Term Balance Sheet: Assets Definition Cash + A/R + Inventories = Total CA Gross FA - Dep. = Net FA = Total Assets Term Balance Sheet: Liabilities and Equity Definition Accts Payable + Notes Payable + Accruals = Total CL Long-Term debt + Common stock + Retained earings = Total Equity = Total L & E Term Income Statement Definition Sales - COGS - Other expenses = EBITDA EBITDA - Depr. and Amort. = EBIT EBIT - Interest Exp. = EBT EBT - Taxes = Net Income Term Possible other data: Financial Statements Definition No. of shares EPS DPS Stock price Lease pmts Term Ratios: Definition stardardize numbers and facilitate comparisons Are used to highlight weaknesses and strengths Ratio comparisons should be made through time and with competitors Term Five major categories of ratios Definition Liquidity, Asset management, Debt management, Profitability, Market value Term Liquitidy? Definition Can we make required payments? Term Asset management Definition Right amount of assets vs. sales? Term Debt management Definition Right mix of debt and equity? Term Profitability Definition Do sales prices exceed unit costs and are sales high enough as reflected in PM, ROE and ROA Term Market value Definition Do investors like what they see as reflected in P/E and M/B ratios? Term Current Ratio Definition Current assets/Current liabilites Term Quick Ratio Definition (CA - Inventories) / CL Term Invetory turnover Definition Sales/Inventories Term DSO Definition The average number of days after making a sale before receiving cash DSO = Receivables/(Annual sales/365) Term FA turnover Definition Sales/Net fixed assets Term TA turnover Definition Sales/Total assets Term Debt ratio Definition Total debt/total assets Term TIE Definition Times Interest Earned EBIT/Interest expense Term EBITDA coverage Definition (EBITDA + Lease pmts)/(Interest epense + lease payments + principal payments Term Profit Margin Definition Net income/Sales Term BEP Definition EBIT/Total assets Term ROA Definition Return on assets Net income/Total assets Term ROE Definition Return on Equity Net income / Total common equity Term Effects of debt on ROA and ROE Definition Roa is lowered by debt - interest loweres Net Income, wheich loweres ROA BUT use of debt also loweres equity, hence debt could raise ROE Term Problems with ROE Definition ROE does not consider risk ROE does not consider the amount of capital invested Might encourage managers to make investment decisions that do not benifit shareholders ROE focuses only on return and a better measure would consider risk AND return Term P/E Definition Price/Earnings per share Term P/CF Definition Price/Cash flow per share Term M/B Definition Market price/Book value per share Term P/E ? Definition How much investors are willing to pay for $1 of earnings Term P/CF ? Definition How much investors are willing to pay for $1 of cash flow Term M/B ? Definition How much investors are willing to pay for $1 of book value equity Term Ratios: the higher the number Definition the better! Term P/E and M/B are high if ROE Definition Is high and risk is low Term ROE = Definition Profit margin x Total assets turnover x equity multiplier or (NI/sales) x (sales/TA) x (TA/equity) Term ROE focuses on Definition Expense control (PM), asset utilization (TA TO), and debt utilitzation (Equity multiplier.) Term Potential uses of freed up cash Definition Repurchase stock expand business reduce debt (All would likely improve the stock price) Term Potential problems and limitations of financial ratio analysis Definition Camparison with industry averages is difficult for a conglomerate firm that operates in many different divisions "Average" performance is not necessarily good, perhaps the firm should aim higher Seasonal factors can distort ratios "Window dressing" techniques can make statements and ratios look better Different operating and accounting practices can distort comparisons Sometimes it is hard to tel if a ratio is "good" or "bad" Difficult to tell whether a company is, on balance, in strong or weak position Term qualitatve factors to be considered when evaluating a company's future financial performance Definition Are the firss revenues tied to one key customer , product, or supplier? What percentage of the firm's business is generated overseas? Competition Future prospects Legal and regulatory envirument Term Alternative Forms of Business Organization Definition Proprietorship Partnership Corporation Term Prorietorship and partnership advant. and disadvant Definition Advant - ease of formation, supject to few regulations, no corporate income taxes Disadvant- difficult to raise capital, unlimited liability, limited life Term Corporation advant and disadvant Definition Advantages - Unlimited life, easy transfer of ownership, limited liability, ease of raising capital Disadvant - double taxation, cost of set-up and report filing Term Factors that affect stock price Definition Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows Term Intrinsic value Definition a stocks equilibrium or true vale Term Time Lines Definition Show the timeing of cash flows Tick marks occur at the end of periouds ex. today = 0 Term compounds Definition finding the FV of a cash flow Term FV Definition PV(1 + I)^N Term Discounting Definition Finding PV Term PV Definition FV/(1+I)^N Term Ordinary annuity dif from FV/PV ? Definition PV = 0 and you use PMT Term Annuity due diff. from ordinary annuity Definition Set calc to Begin Term Perpetuity Definition PV = PMT/I Term Uneven cash flow stream Definition CFLO Term Nominal rate Definition also called the quoted or stated rate. An annual rate that ignores compounding effects. Is stated in contracts and periods mus also be given Term Periodic rate Definition amount of interest charged each period Iper = Inom/M where M is the number of compounding periods per year Term Effective Annual Rate Definition EAR = EFF% - the annual rate of interest actually being earned, accounting for compounding EFF% = (1 + Inom/M)^m -1 Term Why is it important to consider effective rates of return Definition Investments with different compounding intervals provide diffeent effective returns To compare investments with different compounding intervals, you must look at the effectve returns Term EAR Definition used to compare returns on investements with different payments per year. Used in calculations when annuity payments dont match compounding periods Term FV with compounding Definition PV(1+Inom/M)^Mxn Term Can the effective rate ever be equal to the nominal rate? Definition Yes, but only if annual compuonding is used i.e. if M=1 Term What if the payments occur annual but compounding doesnt? Definition Find the EAR and treat as annuity Term Balance Sheet Definition provides a snapshot of a firms financial position at one point in time Term Income statement Definition summarizes a firms revenues and expenses over a given period of time Term Statement of retained earnings Definition shows how much of the firms earnings were retained rather than paid out as dividends Term Statement of cash flows Definition reports the impact of a firms activites on cash flows over a given period of time Term Statement of retained earnings Definition Balance of retained earnings + net income - dividends paid Term Statement of Cash Flows Definition Operating activities = net income = sources of cash - uses of cash = net cash Term NOPAT Definition Net operating profit after taxes EBIT(1-Tax rate) Term NOWC Definition Net operating working capital Operating current assets - no interest bearing CL Term Operating Capital Definition NOWC + Net fixed Assets Term NCF Definition Net Cash Flow NI + Depreciation Term OFC Definition Operating Cash flow NOPAT + Depreciation and amortization Term FCF Definition Free Cash Flow (EBT(1-T) + Dep and Amort) - (Capital expenditures + change in NOWC Term EVA Definition Economic value Added EVA = NOPAT - Annual dollar cost of capital In order to generate positve EVA, a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital EVA takes into account the total cost of capital, which includes the cost of equity Term MVA Definition Market value of equity - equity capital supplied Term Corporate AND Personal Taxes Definition Both have a progressive structure Term Corporate Taxes Definition RAtes begin at 15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18.33 million pay a marginal tax rate of 38% Also subject to state tax Term Personal Taxes Definition Rates begin at 10% and rise to 35% for individuals with income over 319,100 May be subject to state tax Term Interest paid Definition Tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception Term Interest earned Definition usually fully taxable (an exception being interest from a "muni") Term Dividends paid Definition paid out of after-tax income Term Dividends received Definition Most investors pay 15% taxes Investors in the 10% tax bracket pay 5% on dividends Dividends are paid out of net income which has alread been taxed at corporate level, this is a form of "double taxation" A portion of dividends received by corporations is tax excludable, in order to avoid "triple taxation" Term Tax loss carry-back and carry-forward Definition since corporate incomes can fluctuate widely, the tax code allows firms to carry losses back to ofset profits in previous years or forward to offset profits in the future Term Capital gains Definition defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gaines for individuals are generally taxed as ordinary income if held for less than a year, at the capital gains rate if held for more than a year. corporations face somewhat different rules Term EBIT Definition Earnings before interest and taxes Term EBITDA Definition Earnings before Interest, taxes, depreciation and amortization