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Finance > chapter 4 flashcards > Flashcards

chapter 4 flashcards

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1
Q

what is Market Capitalization?
formula

A

market value of equity=to share price x number of shares outstanding

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2
Q

what is Book Value of Equity ?

A

net worth of the firm according to the balance sheet. the book value measures shareholders’ cumulative investment in the company

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3
Q

Market Value Added?
formula

A

market capitalization - book value of equity

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4
Q

Market to Book Ratio?

A

ratio of market value to book value of equity

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5
Q

what is Cost of Capital?

A

what investors can earn by investing on their own

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6
Q

what does Economic Value Added measure?

A

measures the profit of a firm after deducting all costs including the cost of the capital

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7
Q

EVA or residual i8ncome is a better measure..?

A

of a company performance than accounting profits

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8
Q

what does EVA recognize?

A

that a firm creates value only if it can earn more than its cost of capital

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9
Q

how do we calculate EVA?
formula

A

net income + after tax net finance expense - (cost of capital x total capitalization)

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10
Q

what is Net Operating Profit after Taxes(NOPAT)?

A

the sum of net income and after tax net finance (or interest) expense. it is what the company would earn if it had no debt

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11
Q

how do we calculate Return on Capital?
formula

A

NOPAT / total capitalization

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12
Q

how do we calculate Return on Assets?
formula

A

NOPAT / total assets

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13
Q

how do we calculate Return on Equity ?
formula

A

net income / equity

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14
Q

what are some problems with EVA and Accounting Rates of Return ?

A
  • based on book values for assets, debt, and equity are not market values
  • not all assets appear on the balance sheet
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15
Q

what are Efficiency Ratios?

A

they measure how efficiently a company uses its many types of assets

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16
Q

how do we calculate Asset Turnover?
formula

A

total revenues or total sales / total assets at start of year

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17
Q

how do we calculate Inventory Turnover ?
formula

A

cost of sales / average inventories

18
Q

how do we claulcate Average Days in Inventories ?
formula

A

average inventories / cost of sales (/365)

19
Q

how do we calculate Receivables Turnover ?
formula

A

revenues / average trade receivables

20
Q

how do we calculate Average Collection Period ?
formula

A

average trade receivables / average daily revenues

21
Q

what does the success of a company depend on?

A

it depends not only on the volume of sales but not how much profit is generated from those sales

22
Q

how do we calculate Profit Margin ?
formula

A

net income or earnings / revenues

23
Q

how do we calculate Operating Profit Margin ?
formula

A

NOPAT / revenues

24
Q

what is the DuPont Formula ?

A

some profitability of efficiency ratios can be linked in useful ways. a breakdown of ROA into the product of turnover and margin

25
Q

what are Leverage Ratios?

A

they measure how much financial LEVERAGE (FIXED OBLIGATION) the firm has taken on

26
Q

how do we claulcuate Long-term Debt Ratio?
formula

A

long term debt or non-current liabilities / total assets

27
Q

how do we calculate Longterm debt-to-equtiy ratio?
formula

A

long term debt / total equity

28
Q

how do we calculate Total Debt Ratio ?
formula

A

tota debt / total assets

29
Q

how do we calculate Times Interest Earned (TIE)?
formula

A

EBIT or operating income / interest expense

30
Q

how do we calculate Cash Coverage Ratio?
formula

A

EBIT + depreciation and amortization / interest expense

31
Q

how do we calculate EBITDA?
formula

A

EBIT + depreciation and amortization

32
Q

what is Liquidity ?

A

access to cash or assets that can be turned into cash on short notice

33
Q

how do we calculate Net Working Capital ?
formula

A

current assets - current liabilities

34
Q

how do we calculate Current Ratio?
formula

A

current assets / current liabilities

35
Q

Quick (Acid-Test) Ratio?
formula

A

quick assets / current liabilities

36
Q

Cash Ratio?
formula

A

cash and cash equivalents / current liabilities

37
Q

how do we interpret financial ratios?

A
  • compare to a natural benchmark
  • compare to industry ratios and averages
  • compare to principal competitors
  • compare over time-trend
38
Q

what are the Roles of Financnial Ratios?

A
  • provide a bird’s eye view of the performance of a firm
  • do not tell the whole story
  • transparency
39
Q

why are Return on Capital and Return on Assets better measures of operating performance ?

A

they use net operating profit after taxes

40
Q
A

Finance (11 decks)

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