Corporate Finance Theory Flashcards
What is assets always equal to?
Liabilities + Shareholder’s Equity
What is equity?
Is what shareholders would have to remain after the firm has discharged its obligations
What is liquidity?
refers to the ease and rapidity with which assets can be converted into cash.
Name current asses
Trade receivables and inventories
Name non-current assets
Property, equipment, trademark or patent
The formula for Income statement
Income= Revenue - Expenses
The formula for EPS (Earnings per share)
Profit for the period attributed to equity holders/Total shares outstanding
The formula for NWC (Net working capital)
Net working capital= Current assets -Current liabilities
The formula for Cash flows from operating activities
CF(A)=CF(B)( Cash flows to firms creditors)+CF(S)( Cash fl flows to equity investors)
Current Ratio
Current Assets/ Current Liabilities
Which is the least liquid current asset
Inventory
Quick/Acid-Test Ratio
current assets-inventory/current liabilities
Cash ratio
Cash and cash equivalents/Current Liabilities
Total debt ratio
Total assets-total equity/Total assets
Interest coverage ratio
EBIT/Interest
Cash coverage ratio
EBIT+Depreciation/ Interest
What current ratio, quick ratio, and cash ratio measure?
Liquidity
What total debt ratio, interest coverage ratio, and cash overage ratio measure?
Long term leverage
Inventory turnover
Cost of goods sold / Inventory
Receivables turnover
Sale/Trade receivables
Total asset turnover
Sales/Trade receivables
Profit margin
Net operation income/sales
Return on assets(ROA)
Net income/Total assets
Return on equity (ROE)
Net income/ Total equity
What ROA, ROE, and profit margin measure?
Profitability, how efficiently the firm manages its operations
Earnings per share (EPS)
Net income / Shares outstanding
Price-earnings ratio
Price per share/EPS
market-to-book ratio
Market value per share/Book value per share
DuPont identity
Profit margin * Total asset turnover * Equity multiplier
Present values of investments (one period case)
C/1+r
NPV(One period case)
-Cost+PV
FV (t=1…n)
C(1+r)^t
Calculating an investment m times a year
C(1+r/m)^m
EAR (effective annual return)
(1 +r/m)^m-1
FV with compounding
C(1-r/m)^mT
FV with continuous compounding
PV*e^rT
Perpetuity PV
PV=c/r
Growing perpetuity PV
PV=C/r-g
Annuity PV
c/r[1-(1/1+r)^t]
Annuity due PV
C* (1-(1+r)^-t)/r*(1+r)
FV annuity
C[((1+r)^t-1)/r]
Growing annuity PV
PV=C/r-g[1-(1+g/1+r)^t]
What is a bond?
A certificate showing that a borrower owes a specific amount
PV of a pure discount bond
FV/(1+R)^T
PV of a level coupon bond
C*A(T,R)+F/(1+R)^T
PV of a consol bond
C/R
What do Dividends value?
Equity
Value of Firms equity
Po=ΣDivt/(1+R)^t
Value of Po for zero growth
Div1/R
Value of Po for constant growth
Div1/r-g
G estimation
Retention ratio*ROE
Discount rate R
Div1/Po+g
Payout ratio
1-Retention ratio
What cash cow means?
The firm does not invest
Value of equity when a firm is acting as a cash cow
EPS/R=Div/R
Basic Investment rule
Accept if NPV>0, Reject if NPV<0
Average accounting return (AAR)
AAR= Average net income/(Investments per yera/t+1)
IRR rule with first cash flow negative, rest positive
Accept if IRR>R, reject IRR
IRR rule with first cash flow positive, rest negative
Accept if IRRR
PI (Profitability index)
PV of cash flows subsequent to initial investment/Initial investment
PI rule
Accept if PI>1, reject if PI<1
