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Business 3 Financial Management Flashcards

1
Q

What is the basic equation for calculating ROE?

A

= NI / Equity

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2
Q

What is the extended DuPont ROE formula (3)?

A

= Profit margin

  • Asset turnover
  • Financial leverage
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3
Q

What is the extended DuPont ROE formula (5)?

A

= Tax burden

  • Interest burden
  • Operating income margin
  • Asset turnover
  • Financial leverage
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4
Q

How do you calculate tax burden?

A

= NI / pretax income

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5
Q

How do you calculate interest burden?

A

= Pretax income / EBIT

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6
Q

How do you calculate operating income margin?

A

= EBIT / Sales

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7
Q

How do you calculate asset turnover?

A

= Sales / average total assets

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8
Q

How do you calculate financial leverage?

A

= Average total assets / equity

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9
Q

True or false.

In analyzing ROE, a lower tax burden is better.

A

False (Retention: the more profits a company retains after paying taxes the better)

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10
Q

In analyzing ROE, is a lower interest burden better?

A

NO (Retention: the more pretax income a company retains after paying interest to debt holders the better)

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11
Q

In analyzing ROE, is a lower operating income margin better?

A

NO (the more company profits earned on sales after paying operating costs the better)

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12
Q

Define tax burden.

A

The extent to which a company retains profits after paying taxes

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13
Q

Define interest burden..

A

Reflects how much in pretax income a company retains after paying interest to debt holders

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14
Q

Define operating income margin

A

A measure of company profits earned on sales after paying operating costs

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15
Q

What is the investment turnover formula?

A

= Sales / AVERAGE investment

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16
Q

What is the investment turnover formula?

A

= Sales / AVERAGE investment

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17
Q

What is the goal of working capital management?

A

Shareholder wealth maximization

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18
Q

Define net working capital.

A

= CA - CL

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19
Q

Define net working capital.

20
Q

How do you calculate the current ratio?

21
Q

What does the current ratio measure?

A
  • the # of times CA exceeds CL
  • Way of measuring ST solvency
  • Demos firm’s ability to generate cash to meet its ST obligations
22
Q

True or false.

In general, a lower current ratio is better.

A

False (higher is better)

23
Q

What does a deteriorating current ratio imply?

A
  • Reduced ability to generate cash
24
Q

What can a deteriorating current ratio be attributable to?

A
  • Increases in ST debt
  • Decreases in CA
  • Combo of both
25
What does an improving current ratio imply?
- Increased ability to pay off CL
26
What can an improving current ratio be attributable to?
- Using LT borrowing to repay ST debt (in cases in which a firm lacks cash to reduce current debts)
27
What can an improving current ratio be attributable to?
- Using LT borrowing to repay ST debt (in cases in which a firm lacks cash to reduce current debts)
28
What is generally considered to be the best single indicator of a company's ability to meet its ST obligations?
Current ratio
29
What is the objective of the EOQ?
- To compute the quantity to order | - Not to comprehensively plan the requirements of production inventories
30
What does EOQ stand for?
Economic order quantity
31
What type of model is EOQ?
- Inventory model | - Attempts to minimize both ordering and carrying cost
32
Is cycle counting an inventory control technique?
- NO | - An inventory auditing procedure
33
What is materials requirements planning (MRP)?
- Inventory management technique | - Projects and plans inventory levels in order to control the usage of raw materials in the production process
34
What does MRP primarily apply to?
- WIP | - Raw materials
35
Why would a firm generally choose to finance temporary assets with ST debt?
Matching the maturities of assets and liabilities reduces risk
36
The amount of inventory a company would tend to hold in stock would increase as what decreases?
As cost of carrying inventory decreases
37
True or false. The amount of inventory that a company would tend to hold in stock would increase as the variability of sales decreases.
False. Amount of inventory would DECREASE as variability of sales DECREASES
38
What working capital financing policy subjects a firm to the greatest risk of being unable to meet the firm's maturing obligations?
Permanent CA with ST debt
39
Which inventory management approach orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost?
EOQ (economic order quantity)
40
Why were JIT (just in time) models developed?
To reduce the lag time b/w inventory arrival and inventory use
41
What does Kanban inventory control prevent?
Prevents either oversupply or interruption of the entire manufacturing process resulting from the lack of a component
42
What effect would a lockbox provide for receivables management?
- lockbox system expedites cash inflows (minimizes collection float) by having a bank receive payments from a company's customers directly
43
True or false. Vacant land sold for less than the NBV would increase the current ratio and decrease net profit.
True Sale of land would increase cash and therefore CA w/o increasing CL (this would increase current ratio) Sale of land at a loss would decrease net profit
44
Do capital budgeting decisions include the financing of ST working capital needs?
NO (these are more operational in nature)
45
What is included in DCF analysis?
- Future operating cash savings - Current asset disposal price - Tax effects of future asset depreciation - Future asset disposal price
46
Should a project be accepted if NPV is negative?
NO
47
In an inflationary environment, future cash flows (except for CF generated from the tax effect of depreciation) should be increased to the extent of what?
Predicted inflation (for internal consistency, an inflationary factor should also be added to the discount rate)

CPA BEC (26 decks)

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