Chapter 1 Flashcards
What is the fundamental principle of financial management?
- Increase Share Price / Dividend payout
- Profit Maximization and EPS Growth
ROCE Ratio
PBIT/CE *100
CE = TALCL
OR Net Profit Margin X Asset Turnover
Net Profit margin Ratio
Net Profit / Revenue *100
Asset Turnover Ratio
Sales Revenue / CE
Gross Profit Margin Ratio
Gross Profit / Sales Revenue *100
Operating Ratio
Expenses / Sales Revenue *100
Working Capital Turnover Ratio
Sales Revenue / Net Working capital
Non Current Asset Turnover Ratio
Sales Revenue / Non - Current Assets
What is Return on Equity and its ratio?
How much profit a company generates for its equity shareholders with the money they have invested in the company
ROE = Profit after tax and Preference dividends/Ordinary share capital + Reserves
*100
What is TSR and its ratio?
TSR Is dividend income and capital growth
DPS + Change in Share Price / Share Price at start of period
DPS = Dividend per share
What is Dividend Yield and its ratio?
Dividend Yield measures the dividend received as a percentage of the share price,
Dividend Yield = DPS /Market price per share
Dividend Per Share
Total Ordinary Dividend / Total Number of shares issued
Earnings Per Share
This is the amount of profit attributable to each ordinary share
Profit after tax and dividend shares / Number of ordinary shares in issue
What is P/E and its ratio?
Price earnings ratio measures a company’s performance from the market’s point of view. It
shows how many years’ worth of earnings are paid for in the share price.
P/E Ratio = Share Price / EPS
What is Dividend Cover and its ratio?
Dividend cover measures how many times the company’s earnings could pay the dividend.
Dividend cover = Profit available for ordinary shareholders (PAT) / Interim + Final Dividend for the year
Debt: Equity Ratio
Long-term debt/ Ordinary share capital + Reserves
Gearing
Long-term debt/ Ordinary share capital + Reserves + Long Term Debt
Interest Cover
PBIT/Interest Payable
The lower the interest cover, the greater the risk that profit will become insufficient to cover
interest payments.
A high level of interest cover may mean that the company is not making ‘good use’ of debt to
fund projects.
What is Interest Yield and its ratio?
Interest yield measures the return on investment for the debt holder
Interest Yield: Interest / MV of Debt
What is Operational gearing and its ratio?
Measures the extent to which a firm’s operating costs are fixed rather than variable
FC/TC or Contribution/PBIT
The higher the proportion of fixed costs, the higher the operating gearing, the greater the variability in the earnings, the riskier the EBIT!
Which of the following statements is NOT correct?
A) ROCE can be defined as profit before interest and tax divided by the sum of shareholders’ funds and prior charge capital
B) ROCE is the product of net profit margin and net asset turnover
C) Dividend yield can be defined as dividend per share divided by the ex dividend share price
D) Return on equity can be defined as profit before interest and tax divided by shareholders’ funds
D) We take Profit after Tax
What is agency theory?
Agency theory: the shareholders employ other parties, the agent being the directors, to perform a task on its behalf. Directors may not always act in a way which increases shareholders wealth. We need to achieve goal congruence
How can we encourage managers to achieve shareholders objectives?
- Performance Related pay (meeting targets)
- Executive share option schemes
- Regulatory requirements : Corporate governance codes and stock exchange listing regulations
What are the 3 E’s for NGO’s
- Economy
- Efficiency
- Effectiveness
