Chapter 7 Flashcards
Fiscal & Monetary Policy
Fiscal - Congress, government spending, tax policies.
Monetary - FED, supply of money, interest rates.
Full employment
An acceptable level of employment
DuPont System
Multi-layer system
Top system
ROE = ROA x equity multiplier
Analysis on a companies ability to increase return on equity, how companies can increase return to investors.
Profitability Ratio’s
Return on Equity = net income/equity
Return on assets = net income/total assets
HIGHER IS BETTER
Debt Ratio’s
Look at the amount and impact of debt
When a company uses debt they are using “financial leverage” and taking “financial risk”
Debt capacity = ability to borrow more
debt to asset ratio = total debt/total assets
equity multiplier = total assets/total equity
Activity Ratio’s
Examine the equity or achievements of particular assets of a firm.
inventory ratio = cost of goods sold/avg yearly inventory
total asset turnover = net sales/total assets
Quick ratio
Acid Test
Acid test = (current assets - inventory)/current liabilities
A liquidity ratio
Current Ratio
Current Ratio = current assets/current liabilities
large number indicates high liquidity or more assets
Net Cash Flow
Net cash flow = Net income + depreciation
Income Statement
Gross profit = net sales - cost of goods sold
EBIT (Earning before interest and tax) =
gross profit - cash & depreciation expenses
Taxable income = EBIT - interest
Net profit = taxable income - Taxes
Goals of fiscal and monetary policy?
Primary
Price stability & low unemployment
Secondary
Manage exchange rates, higher standard of living, overall economic growth, environmental protection.
Inflation?
Disinflation?
Deflation?
Stagflation?
Inflation - Cost of the CPI basket of goods is rising.
Disinflation - Inflation rate is slowing down.
Deflation - The CPI basket cost is going down.
Stagflation - The simultaneous occurrence of a high inflation rate and a recession.
CPI
Price of a basket of goods that a family of four living in a urban area would buy.
Measured monthly
3 tools the FED can use to control the monetary policy
1) Open Market Operations - Fed purchases and sells gvmt bonds and securities to increase bank deposits. Puts more cash in banks. Does this on a daily basis.
2) Discount Rate - Banks can borrow money from the FED to meet reserve requirements (discount loan). The discount rate is the fee the FEED can charge. If the Fed wants to help the economy is can lower the discount rate. (changes occur rarely).
3) Change the reserve requirements. Very rarely makes this change.
Open Market Operations
Open Market Operations - Fed purchases and sells gvmt bonds and securities to increase bank deposits. Puts more cash in banks. Does this on a daily basis.
