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Intro To Finance > Ch 3 > Flashcards

Ch 3 Flashcards

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0
Q

Financial ratios

A

Relationships determined from firm’s financial info

And used for comparison purposes

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1
Q

Common-size statement

A

Standardized financial statement presenting all items
In percentage terms

Balance sheet items are shown as percentage of assets
Income statement items are shown as percentage of sales

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2
Q

5 categories of financial ratios?

A 
1 short term solvency, liquidity ratios
2 Longterm solvency, financial leverage ratios
3 asset management, turnover ratios
4 profitability ratios
5 market value ratios
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3
Q

Current ratio

A

Current ratio= current assets/current liabilities

The higher the better

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4
Q

Suppose a firm were to pay off some of its suppliers and short term creditors, what would happen to its current ratio?

A

It will move away from one

If its greater than 1 it will get bigger
If its less than 1 it will get smaller

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5
Q

Quick ratio AKA Acid test

A

Quick ratio = (current assets - inventory)/current liabilities

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6
Q

Cash ratio

A

A very short term creditor would be interested in the cash ratio

Cash ratio = cash/current liabilities

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7
Q

3 types of short term solvency ratios, purpose?

A

Current ratio, quick ratio, cash ratio

Measure firms ability to pay its bills over short run without
Undue stress

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8
Q

5 Longterm solvency measures, purpose?

A 
1Total debt ratio, 
2debt-equity ratio, 
3equity multiplier
4 times interest earned ratio
5 cash coverage ratio
Address firms long run ability to meet its obligations
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9
Q

Total debt ratio

A

Total debt ratio = (total assets - total equity)/total assets

Ex: a total debt ratio = 0.28 means company has 28%
Debt for every $1 of assets

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10
Q

Debt-equity ratio

A

Debt-equity ratio = total debt/total equity

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11
Q

Equity multiplier

A

Equity multiplier = total assets/ total equity

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12
Q

Times interest earned ratio

A

Times interest earned ratio = EBIT/interest

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13
Q

Cash coverage ratio

A

Cash coverage ratio = (EBIT + depreciation)/interest

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14
Q

EBITD, EBITDA

A

EBITD = EBIT + depreciation

EBITDA = earnings before interest, taxes, depreciation
and amortization

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15
Q

Amortization

A

Non cash deduction similar to depreciation except

Applies to an intangible asset (ex patents)

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16
Q

5 Asset management AKA Turnover ratios, purpose?

A 
1 inventory turnover
2 days' sales in inventory
3 receivables turnover
4 days' sales in receivables
5 total asset turnover

Describe how efficiently/ intensively a firm uses its assets to generate sales

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17
Q

Inventory turnover

A

Inventory turnover = cost of goods sold/inventory

The higher this ratio is, the more efficiently inventory is being managed

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18
Q

Receivables turnover

A

Receivables turnover = sales/accounts receivable

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19
Q

Days’ sales in receivables AKA Average collection period

A

Days sales in receivables = 365/receivables turnovers

20
Q

Total asset turnover

A

Total asset turnover = sales/total assets

Ex. Total asset turnover = $0.64, so for ever $1 in assets
we generate $.64 in sales

21
Q

Capital intensity, define, equation?

A

1/total asset turnover = capital intensity

Ex if capital intensity =$1.56, it takes the company
$1.56 in assets to create $1 in sales

22
Q

Suppose you find a particular company generating $.40 in sales for every $1 of total assets.
How often does the company turnover it’s total assets?

A

Total asset turnover = .4 times per year. It takes

1/.40 = 2.5 years to turn assets over completely

23
Q

3 profitability measures, their purpose?

A

Profit margin, return on assets, return on equity

Measure how efficiently firm uses its assets and
How efficiently firm manages its operations

24
Q

Profit margin

A

Profit margin= net income/sales

25
Q

Return on Assets (ROA)

A

Return on assets = net income/total assets

Measures profit per dollar of assets

26
Q

Return on equity (ROE), 2 equations?

A

Return on equity = net income/total equity
= (net income/sales) x (sales/assets) x (assets/equity)

Profit for every dollar of equity

27
Q

Return on book assets and return on Book equity

A

Measured rates of return of ROA and ROE

28
Q

What does it mean when a company’s ROE exceeds its ROA?

A

The company uses financial leverage

29
Q

6 Market value measures, purpose?

A 
1 EPS
2 PE ratio
3 price-sales ratio
4 Market-to-book ratio
5 enterprise value
6 EBITDA ratio

Measures used to determine the market price per share

30
Q

EPS

A

EPS = net income/shares outstanding

31
Q

PE ratio

A

PE ratio = price per share/earnings per share

32
Q

Price to sales ratio, equation, when is it used?

A

Price-sales ratio = price per share/sales per share

Used when company has negative earnings, so measures
Revenues

33
Q

Market-to-book ratio

A

Market-to-book ratio = market value per share/book value per shr.

34
Q

Book value per share

A

Book value per share = total equity/# shares outstanding

35
Q

Enterprise value, what does it measure?

A

Enterprise value =
Total market value of stock + book value of all liabilities - cash

Measures value of operating assets

36
Q

EBITDA ratio, what does it measure

A

EBITDA ratio = enterprise value/EBITDA

Relates value of operating assets (enterprise value)
To a measure of operating cash flow generated by
Assets (EBITDA)

37
Q

DuPont identity, define, equation?

A

Popular expression breaking ROE into 3 parts:
Operating efficiency, asset use efficiency and
Financial leverage

ROE = profit margin x total asset turnover x equity multiplier

38
Q

What does it mean when google has a higher profit margin and total asset turnover compared to yahoo?

A

Google is able to generate revenues at far

lower costs than yahoo

39
Q

Dividend payout ratio

A

Dividend payout ratio = cash dividends/net income

40
Q

Retention ratio AKA plow back ratio

A

Retention ratio = addition to retained earnings/net income

41
Q

Internal financing

A

What the firm earns and plows back into the business

42
Q

External financing

A

Funds raised from borrowing money or selling stock

43
Q

Internal growth rate, equation, define?

A

Maximum possible growth rate when Firm grows only throw internal financing, so wont borrow or sell stock

Internal growth rate = (ROA X b)/(1 - ROA X b)
Where b is the retention

44
Q

If a firm only relies on internal financing then overtime it’s …

A

Total debt ratio will decline

As assets grow and debt remains the same

45
Q

Sustainable growth rate, equation, define?

A

Sustainable growth rate = (ROE x b)/(1 - ROE x b)

Maximum possible growth rate for a firm that maintains
Constant debt ratio and doesn’t sell stock

46
Q

4 factors of a firm’s ability to sustain growth?

A
  1. Increase profit margin from internal growth
  2. Increase total asset turnover, by increasing
    sales relative to each asset
    3 Financial policy, increase debt-equity ratio
    4 Dividend policy, a decrease in percentage of net income
    Paid as dividends will increase retention rate and internal growth
47
Q

Standard industrial classification code (SIC)

A

US government code to classify firm by its type

Of business operations

Intro To Finance (12 decks)

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