Term
|
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
|
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
|
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
|
Definition
| Can we make required payments? |
|
|
Term
|
Definition
| Right amount of assets vs. sales? |
|
|
Term
|
Definition
| Right mix of debt and equity? |
|
|
Term
|
Definition
| Do sales prices exceed unit costs and are sales high enough as reflected in PM, ROE and ROA |
|
|
Term
|
Definition
| Do investors like what they see as reflected in P/E and M/B ratios? |
|
|
Term
|
Definition
| Current assets/Current liabilites |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
The average number of days after making a sale before receiving cash
DSO = Receivables/(Annual sales/365) |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
Times Interest Earned
EBIT/Interest expense |
|
|
Term
|
Definition
| (EBITDA + Lease pmts)/(Interest epense + lease payments + principal payments |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
Return on assets
Net income/Total assets |
|
|
Term
|
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
|
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
|
Definition
|
|
Term
|
Definition
| Price/Cash flow per share |
|
|
Term
|
Definition
| Market price/Book value per share |
|
|
Term
|
Definition
| How much investors are willing to pay for $1 of earnings |
|
|
Term
|
Definition
| How much investors are willing to pay for $1 of cash flow |
|
|
Term
|
Definition
| How much investors are willing to pay for $1 of book value equity |
|
|
Term
| Ratios: the higher the number |
|
Definition
|
|
Term
| P/E and M/B are high if ROE |
|
Definition
|
|
Term
|
Definition
Profit margin x Total assets turnover x equity multiplier
or (NI/sales) x (sales/TA) x (TA/equity) |
|
|
Term
|
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
|
Definition
| a stocks equilibrium or true vale |
|
|
Term
|
Definition
Show the timeing of cash flows
Tick marks occur at the end of periouds
ex. today = 0 |
|
|
Term
|
Definition
| finding the FV of a cash flow |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
| Ordinary annuity dif from FV/PV ? |
|
Definition
|
|
Term
| Annuity due diff. from ordinary annuity |
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
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
|
Definition
amount of interest charged each period
Iper = Inom/M where M is the number of compounding periods per year |
|
|
Term
|
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
|
Definition
| used to compare returns on investements with different payments per year. Used in calculations when annuity payments dont match compounding periods |
|
|
Term
|
Definition
|
|
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
|
Definition
| provides a snapshot of a firms financial position at one point in time |
|
|
Term
|
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
|
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
|
Definition
| Operating activities = net income = sources of cash - uses of cash = net cash |
|
|
Term
|
Definition
Net operating profit after taxes
EBIT(1-Tax rate) |
|
|
Term
|
Definition
Net operating working capital
Operating current assets - no interest bearing CL |
|
|
Term
|
Definition
|
|
Term
|
Definition
Net Cash Flow
NI + Depreciation |
|
|
Term
|
Definition
Operating Cash flow
NOPAT + Depreciation and amortization |
|
|
Term
|
Definition
Free Cash Flow
(EBT(1-T) + Dep and Amort) - (Capital expenditures + change in NOWC |
|
|
Term
|
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
|
Definition
| Market value of equity - equity capital supplied |
|
|
Term
| Corporate AND Personal Taxes |
|
Definition
| Both have a progressive structure |
|
|
Term
|
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
|
Definition
Rates begin at 10% and rise to 35% for individuals with income over 319,100
May be subject to state tax |
|
|
Term
|
Definition
| Tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception |
|
|
Term
|
Definition
| usually fully taxable (an exception being interest from a "muni") |
|
|
Term
|
Definition
| paid out of after-tax income |
|
|
Term
|
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
|
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
|
Definition
| Earnings before interest and taxes |
|
|
Term
|
Definition
| Earnings before Interest, taxes, depreciation and amortization |
|
|
