Corp Issuers

Question 1

Cash flow from operations

Answer 1

Cash from customers
Dividends and interest received
(Cash paid to suppliers and employe)
(Taxes) + (interest)

Question 2

DOH : BS -> days formula

Answer 2

Inventory/COGS

Question 3

DSO: BS -> days formula

Answer 3

AR/Sales

Question 4

DPO: BS -> days formula

Answer 4

AP/COGS

Question 5

Free cash flow

Answer 5

Cash flow from operations - Investments in long term assets

Question 6

Working Capital

Answer 6

Short term assets/short term liabilities

Question 7

short term assets

Question 8

Secondary sources of liquidity

Answer 8

Suspend/reduce dividends
Delay/reduce Cap. EXP
Issuing equity
Re. Neg. contract terms
Selling assets
Filing for bankruptcy

Question 9

Primary sources of liquidity

Answer 9

Cash and marketable securities on hand (sold quickly w no loss of value)
Borrowings (banks, bonds, supplier credit)
Cash flow from business (takes time)

Question 10

CCC - Cash conversion cycle

Answer 10

( Days) DOH + DSO - DPO

Question 11

Drag on liquidity

Answer 11

Uncollected receivables, Obsolete inventory, Borrowing constraints

Question 12

Pull on liquidity

Answer 12

Early payments, Reduced credit limits, limits on short term lines of credit, low liquidity positions

Question 13

Current ratio

Answer 13

Current assets/ current liabilities

Question 14

quick ratio

Answer 14

Cash + Short term marketable investments + AR/ Current liabilities

Question 15

Cash ratio

Answer 15

Cash + short term marketable securities/ Current liabilities

Question 16

ROIC formula

Answer 16

After tax operating profit (1-T) x opp profit
/ Average invested LT cap( Average lt liabilities + equity

Question 17

ROIC benefits

Answer 17

Can be calculated using available data
ROIC accounts for amount of capital needed to generate returns. operating profit margin is just operating profit as a percentage of sales

Question 18

IRR potential errors

Answer 18

• if CF values switch from neg to positive more than once two resulting IRR’s will be created.
• IRR assumes CF’s invested at same rate.

Question 19

NPV

Answer 19

Net present value of future cash flows from a project.
Shows return in cash terms instead of % like IRR

Question 20

ROIC drawback

Answer 20

Is accounting, not cash based measure. Operating profit and cash flows can differ materially due to recognition of certain items and the difference between depreciation, and capital expenditures.

Question 21

ROIC Drawback

Answer 21

Aggregated measure of company activities, may mask profitable or unprofitable areas

Question 22

ROIC drawback

Answer 22

Backward looking, can be volatile from year to year. Examining trends and rates of change is essential

Question 23

How do companies improve ROIC

Answer 23

Dispose of underperforming operations, seek areas of investing with greater returns, return capital to investors, improve turnover, or profit margins.

Question 24

ROIC relevant fact

Answer 24

Should be compared to required rates of return for equity and debt investors. blended required rate of return WACC.

Question 25

Capital allocation process

Answer 25

Idea generation - investment analysis - planning and prioritization - monitoring and reviewing

Question 26

Capital allocation principles

Answer 26

After tax cash flows
incremental cash flows only, but examine broadly
timing of cash flows
p279*

Question 27

Cognitive errors in capital allocation

Answer 27

internal forecasting erros
ignoring the costs of internal financing
inconsistent treatment of, or ignoring inflation
P280*

Question 28

Behavioural biases in capital allocation

Answer 28

inertia
basing investment decisions on accounting measures
pet project bias
failure to consider investment alternatives, or alternative scenarios
P280*

Question 29

What to look for to detect inertia bias

Answer 29

Examine capital investments by segment, or business line if disclosed and compare it to prior year/ competitor Capex. If CAPEX is static each year, or rising despite falling returns there may be an inertia bias in management.

Question 30

What to look for to detect Basing investment decision on accounting measures, such as EPS

Answer 30

Review management compensation structure, management may be acting under incentives to increase these measures due to short-term thinking. Capex (even with high NPV’s) reduce EPS in the short term. You could also compare Capex levels with historical and peer levels. Low Capex may also be a sign of limited investment opportunities.

Question 31

How to spot pet project bias

Answer 31

Uneven control over decision making process, weak board oversight/control, executive compensation not aligned with interests of shareholders are indicators.