chapter 4 flashcards
what is Market Capitalization?
formula
market value of equity=to share price x number of shares outstanding
what is Book Value of Equity ?
net worth of the firm according to the balance sheet. the book value measures shareholders’ cumulative investment in the company
Market Value Added?
formula
market capitalization - book value of equity
Market to Book Ratio?
ratio of market value to book value of equity
what is Cost of Capital?
what investors can earn by investing on their own
what does Economic Value Added measure?
measures the profit of a firm after deducting all costs including the cost of the capital
EVA or residual i8ncome is a better measure..?
of a company performance than accounting profits
what does EVA recognize?
that a firm creates value only if it can earn more than its cost of capital
how do we calculate EVA?
formula
net income + after tax net finance expense - (cost of capital x total capitalization)
what is Net Operating Profit after Taxes(NOPAT)?
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
how do we calculate Return on Capital?
formula
NOPAT / total capitalization
how do we calculate Return on Assets?
formula
NOPAT / total assets
how do we calculate Return on Equity ?
formula
net income / equity
what are some problems with EVA and Accounting Rates of Return ?
- based on book values for assets, debt, and equity are not market values
- not all assets appear on the balance sheet
what are Efficiency Ratios?
they measure how efficiently a company uses its many types of assets
how do we calculate Asset Turnover?
formula
total revenues or total sales / total assets at start of year
how do we calculate Inventory Turnover ?
formula
cost of sales / average inventories
how do we claulcate Average Days in Inventories ?
formula
average inventories / cost of sales (/365)
how do we calculate Receivables Turnover ?
formula
revenues / average trade receivables
how do we calculate Average Collection Period ?
formula
average trade receivables / average daily revenues
what does the success of a company depend on?
it depends not only on the volume of sales but not how much profit is generated from those sales
how do we calculate Profit Margin ?
formula
net income or earnings / revenues
how do we calculate Operating Profit Margin ?
formula
NOPAT / revenues
what is the DuPont Formula ?
some profitability of efficiency ratios can be linked in useful ways. a breakdown of ROA into the product of turnover and margin
what are Leverage Ratios?
they measure how much financial LEVERAGE (FIXED OBLIGATION) the firm has taken on
how do we claulcuate Long-term Debt Ratio?
formula
long term debt or non-current liabilities / total assets
how do we calculate Longterm debt-to-equtiy ratio?
formula
long term debt / total equity
how do we calculate Total Debt Ratio ?
formula
tota debt / total assets
how do we calculate Times Interest Earned (TIE)?
formula
EBIT or operating income / interest expense
how do we calculate Cash Coverage Ratio?
formula
EBIT + depreciation and amortization / interest expense
how do we calculate EBITDA?
formula
EBIT + depreciation and amortization
what is Liquidity ?
access to cash or assets that can be turned into cash on short notice
how do we calculate Net Working Capital ?
formula
current assets - current liabilities
how do we calculate Current Ratio?
formula
current assets / current liabilities
Quick (Acid-Test) Ratio?
formula
quick assets / current liabilities
Cash Ratio?
formula
cash and cash equivalents / current liabilities
how do we interpret financial ratios?
- compare to a natural benchmark
- compare to industry ratios and averages
- compare to principal competitors
- compare over time-trend
what are the Roles of Financnial Ratios?
- provide a bird’s eye view of the performance of a firm
- do not tell the whole story
- transparency
why are Return on Capital and Return on Assets better measures of operating performance ?
they use net operating profit after taxes
