Term
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Definition
Shows the CF for the company (not FCF).
3 Types: CF from Operations, CF from Investments, CF from Financing
Need 2 years worth of data to create STMT of CF |
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Term
| Sources and Uses of Funds |
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Definition
Sources of Funds:
An increase in a liability/equity account OR a decrease in an asset acct
Uses of Funds:
An increase in an asset acct OR a decrease in a liab/equity acct
The sum of the Sources and Uses have to equal/balance |
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Term
| 3 Approaches to Financing (in terms of Sources and Uses) |
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Definition
Matching Principal:
Use ST sources to finance ST Uses
Use LT sources to finance LT Uses
Aggressive Principal:
Use ST Sources to Finance ST & LT Uses
-This is aggressive because by using ST sources you will have to re-finance sooner, thus running the risk of re-financing at a higher interest rate
Conservative Principal:
Use LT sources to finance ST & LT Uses
-This is conservative beccause you won't have to re-finance often, thus locking in the same interest rate for the life of the loan |
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Term
| Examples of CF from Financing Activities |
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Definition
| Issuing ST Debt, LT Debt, and new stock. Also includes paying dividends, stock repurchases, and principal payments on debt |
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Term
| Examples of CF from Operating Activities |
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Definition
| Includes net income, depreciation, changes in current assets and liabilities other than cash, short-term investments, and short-term debt |
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Term
| Examples of CF from Investing Activities |
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Definition
| Includes investments in or sales of fixed assets and short-term financial investments |
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Term
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Definition
| Money available to be paid to all security holders in the company or to make financial investments after paying taxes and spending cash on working capital and LT assets that are necessary to maintain and grow the operations of the company |
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Term
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Definition
1.) Buy ST investments or stock in other companies
2.)Pay dividends
3.)Repay principal on debt
4.)Pay interest on debt
5.)Buy back stock |
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Term
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Definition
The primary goal of most firms is to maximize shareholders’ wealth. This goal obviously benefits shareholders, but it also helps to ensure that scarce resources are allocated efficiently, which benefits the economy. Shareholder wealth is maximized by maximizing the difference between the market value of the firm’s stock and the amount of equity capital that was supplied by shareholders.
To illustrate, consider Coca-Cola. In January 2009, its total market equity value was $103.2 billion while its balance sheet showed that stockholders had put up only $23.7 billion. Thus, Coca-Cola’s MVA was $103.2 − $23.7 = $79.5 billion. This $79.5 billion represents the difference between the money that Coca-Cola’s stockholders have invested in the corporation since its founding—including indirect investment by retaining earnings—and the cash they could get if they sold the business.
The higher its MVA, the better the job management is doing for the firm’s shareholders. |
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Term
| Economic Value Added (EVA) |
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Definition
Whereas MVA measures the effects of managerial actions since the very inception of a company, Economic Value Added (EVA) focuses on managerial effectiveness in a given year.
EVA shows that a firm adds value—that is, has a positive EVA—if its ROIC is greater than its WACC. If WACC exceeds ROIC, then new investments in operating
capital will reduce the firm’s value.
Economic Value Added is an estimate of a business’s true economic profit for the year, and it differs sharply from accounting profit
Typically used to look at a specific division in a company to see if its providing value to the company |
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Term
| Stages of Business based on CF's |
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Definition
Start-up:
-Losing on CF from Operations
-Spending $ on investments
-Getting money from Financing Activities
Growth:
-Generating money on CF from Operations
-Still spending money on Investments and CF from Financing to get money from outside sources
Mature:
-Making money on operations
-Paying back financing
Decline:
-Losing money on Operations
-May have CF Financing Activities if they are taking on debt to try to save the company |
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Term
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Definition
Current Ratio:
=Current Assets/Current Liab
-If your current ratio is too high compared to the market, you could have problems because you have too much AR and Inventory (both part of Current Assets)
-Higher is better
Quick Ratio:
=Current Assets - Inventory/ Current Liabilities
-If there is inventory, the Quick Ratio < Current Ratio
-Higher is better |
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Term
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Definition
Days Sales Outstanding (DSO):
= AR/Average Daily Sales
-Average collection period
-Lower is better
Inventory Turnover Ratio:
=Sales/Inventory
-Answer is in # of times inv turns over
-Higher is better
Total Asset Turnover (TAT):
=Sales/Total Assets
-Measure of the company's overall effectiveness
Fixed Asset Turnover (FAT):
=Sales/Fixed Assets
-FA typically equals Net PPE
-Whole # |
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Term
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Definition
Debt Ratio:
=Total Debt/Total Assets
-Shows % of company financed by debt
-Lower is better
Times Interest Earned:
=EBIT/Interest Expense
-Also called Interest Coverage ratio
-Shows how many times you can pay your interest expense
-Higher is better |
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Term
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Definition
Return on Sales =Net Income/Sales
Return on Assets = NI/Total Assets
Return on Equity = NI/Common Equity
Operating Profit Margin = EBIT/Sales
Gross PM = Gross Profit/Sales
Basic Earning Power = EBIT/Total Assets
DuPont Analysis:
= Return on Equity = NI/Common Equity
1.) Net Income/Sales
2.) Sales/Total Assets
-# 1 & 2 focus on Operations
-Multiply #1&2 together to get ROA
-Positive relationship with ROE: If you increase the equity multiplier, you’ll increase the ROE
3.) Total Assets/Equity
-Focuses on Financing
-Also called the equity multiplier
-Positive relationship with ROE: If you increase the equity multiplier, you’ll increase the ROE |
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Term
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Definition
P/E = Market Price of stock/Earnings per share
-EPS = Last 4 quarters of earnings
Dividend Yield = Dividend per share/Market price per share
-If you are younger and want the stock to grow (capital gains), you want low to no dividends so that the money is re-invested back into the company to gain value through the growth of the company/stock price
-Older people want higher dividend yield because they can’t wait for the “long haul”
Retention Rate = 1 – Dividend payout ratio
Div Payout Ratio = Div per share/EPS
-Capital gains focused investors (younger) want low to no dividend payout |
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Term
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Definition
Forecast or estimates for new environment including mergers, new equipment, etc…
-Income Statement
-Balance Sheet
-Statement of Cash Flows |
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Term
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Definition
=Assets/Sales
-Typical relationship between assets and sales
-Need to use a Common Sized BS:
Take everything in the balance sheet and divide by sales. Called the percentage of sales approach. Gives you an idea of where all categories are (A/R, Inv, etc...) and how it will need to change based on your desire to increase sales |
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Term
| Spontaneous Financing vs. Negotiated Financing |
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Definition
Spontaneous Financing = Accounts Payable, Accruals
Negotiated Financing = Notes Payable, Common Stock, Long Term debt |
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Term
| Factors affecting Bond Rating and Default Risk |
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Definition
1.)Financial Ratios - Debt Ratio, Coverage Ratios, profitability Ratios, and Current Ratios
2.) Secured vs Unsecured Debt
Secured = Collateral
Unsecured Debt = No Collateral. There are debentures (general claim) and then subordinated debentures (lower than general debentures)
3.) Call Provision - Company can buy the debt back from the bond holder at will; bond holder has no say
4.) Bond Maturity
5.) Sinking Fund provision |
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Term
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Definition
| Bond holder can sell bonds back to the issuer if the company violates certain covenants |
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Term
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Definition
Promise made by bond issuers to bond holders not to do something
Affirmative Covenant:
Things the company agrees to do. Usually consist of things the bond holder would have done anyways, i.e. Maintain assets, create financial stmts, etc...
Negative Covenants:
Things the bond issuer promises not to do |
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Term
| Maturity Risk Premium (MRP)/Interest Rate Risk |
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Definition
How price sensitive is the interest rate to the length of the bond?
-Longer term bonds are more price sensitive than shorter term bonds
-There is an inverse relationship between interest rate and price of the bond |
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Term
| Fed Directly Controls 2 types of Rates |
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Definition
1.) Federal Funds Rate
-Bank to Bank, Ex: 5/3 to Huntington
2.) Discount Rate |
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Term
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Definition
1.) Par Value = Stated Value, Face Value, Maturity Value
2.)Coupon Interest Rate = Stated interest rate on debt (% of interest paid each year). Coupon Rate x Face Value = Annual Pymt
3.) Maturity = Years until bond must be repaid
4.) Default Risk = Risk the issuer will not make interest or principal payment to bond holders |
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Term
| Relationships Between Bond Value and Interest Rates |
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Definition
When the interest rate goes down (Rd), the bond price (face value) goes up.
When the coupon rate and the required rate of return (Rd) are equal, the present value is the same as the future value |
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Term
| Bond sensitivity based on coupon rates |
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Definition
Lower coupon bonds are more price sensitive to changes in interest rates
Bonds with zero coupon rate are the most price sensitive |
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Term
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Definition
| The rate of return you would earn by holding the bond until maturity AND then taking the interest earned and re-investing at the same rate of return |
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Term
| Call Provision (Yield to Call) |
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Definition
A premium is paid to the bond holder to compensate for the call provision
Generally the premium is 1 YR Interest |
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Term
| Bond Premiums vs Discounts |
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Definition
If the value of the bond is trading above the face value, it is trading at a premium
If the value of the bond is trading below the face value, it is trading at a discount
• When bonds trade at a premium (Cost more than face value), you record your earnings as a capital loss because the value decreases over time. However, you get a larger coupon rate than other bonds not trading at a premium |
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