Chapter 7 Flashcards
formula for total shareholder return
dividend yield + capital gain or loss
formula for dividend yield
dividend per share / share price at start of year
formula for capital gain / loss
gain or loss / share price at start of year
definition of profitability
how well a company performs given its asset based
definition of liquidity
short term financial position
definition of gearing
measure of financial risk
definition of investor performance
share value and dividends
formula for ROCE
PBIT / average capital employed x100
formula for capital employed
total assets - current liabs
advs of financial ratio analysis
easy to compare
easy to look at changes over time
can compare to companies of different sizes
disadv’s of financial ratio analysis
tendency to focus on short term performance
focusses only on variables that are monetary
what are appropriate benchmark for ratio analysis
over time
other companies
internal targets
what is residual income
a measure of a companys profit after deducing an imputed cost of capital
formula for RI
PBIT - (estimated cost of capital x capital employed)
what is the estimated cost of capital
usually weighted average cost of capital, however it can be adjusted based on risk
what is EBITDA
earnings before interest, tax, depreciation, and amortisation
advantages of EBITDA
can be used to measure managements performance, as these are things they have no control over
tax and interest are unrelated to performance
useful for companies with low levels of tangible assets
depreciation and amortisation are due to historical decisions
drawbacks of EBITDA
it allows a company to paint a better picture of the financials
it doesn’t account for cash to pay interest and tax
what does IRR assume
that cash flows after the investment phase are reinvested at the projects IRR over the life of a product
what does MIRR assume
funds are reinvested at the investors minimum required return
