Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A312 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

ROA

A

NI+Int Exp(1-tax)/Avg Total Assets

-Measures firm’s performance in using assets to generate earnings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

ROE

A

NI - Preferred Div/Avg Common Equity

-Firm’s ability to use and finance assets to generate earnings for common shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Profit Margin

A

NI+Int Exp(1-tax)/Revenue

-Firm’s ability to control level of expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Expense over Revenue

A

Cogs Exp+SG&A+R&D+Other/Revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Asset Turnover

A

Revenues/Avg Total Assets

-How efficient is company at using its assets; how much in revenue is generated by each dollar of assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

AR Turnover

A

Net Credit Sales/Average AR

-Rate at which firm collects AR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Inventory Turnover

A

COGS/Avg Inventory

-Number of times inventory is complete sold

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Plant Asset Turnover

A

Net Credit Sales/Net PPE

-Revenue generated by each dollar of plant assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Operating Cycle

A

Day Sales’ Outstanding+ Days’ Inventory on Hand

  • Costco has a (-) operating cycle, meaning it acquires, sells, and collects on inventory before they have to pay for the inventory (very efficient)
  • Include or exclude Days Payable subtracted from OC
  • How long a $ is stuck inside the company
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Debt to Asset Ratio

A

Total Debt/Total Assets

  • Leverage
  • Percentage of firm’s assets that are financed through debt
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Interest Coverage Ratio

A

EBIT/Int Exp

  • How many times earnings covers the interest charges
  • High ICR is good as debt holder, could be concerning as equity holder (they should be taking on more debt and buy more assets to make more money for shareholders)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Current Ratio

A

Current Assets/Current Liabilities

-Sufficient current assets to cover its current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Quick Ratio

A

Cash+Market Securities+Receivables/Current Liabilities

-Enough assets that can be converted QUICKLY to cash to meet current liabilities? (Quickly means much less than 1 year)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Cash Flow Statement

A

Change in Cash = CF Operations + CF Investing + CF Financing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Debit increase accounts

A
  • Assets
  • Expenses
  • Dividends
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Vital signs of a company

A
  • Profitability

- Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Price to Book

A
  • How much the market is willing to pay for $1 of assets

- Market sees more growth potential if this number is higher (valued higher)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Valuation Models

A
  • Whichever model we choose is where “value” lies for specific user
  • Do not have inputs, based on forecasting
  • Given a set of consistent financial statements, all of these will generate the SAME value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Dividend Discount Model (DDM)

A
  • Based on value distributed to shareholders

- Expresses firm value directly from financial statements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Discounted Cash Flow Model (DCM)

A

-Based on firm’s ability to create value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Residual Income Model (RIM)

A
  • Based on firm’s ability to create value, earnings over cost of capital
  • Focus on value creation rather than distribution
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Mispricing

A
  • = Value - Price
  • Value is estimated using a valuation model
  • Positive mispricing: purchase security
  • negative mispricing: sell or short security (hold position until mispricing is corrected)
  • Before you buy, figure out the reasoning for the mispricing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Market efficiency

A
  • How quickly prices reflect all available information about a particular stock
  • Under efficient market hypothesis, no investor has an advantage in predicting stock returns because no one has access to info not readily available to anyone else
24
Q

Forms of market efficiency

A
  • Weak form
  • Semi-strong form
  • Strong form
25
Q

US Market is…

A

Semi-strong! Stock prices reflect stock price history, all public information and all private information

26
Q

Post-earnings announcement drift

A
  • Theory is that these prices continue to drift in the general direction post-earnings announcement
  • In reality, numbers are all over the board so averages are almost meaningless and do not reflect what is really going on
27
Q

Market inefficiencies

A
  • Research shows that earnings are predictable based on past earnings and stock returns do not always reflect this
  • Market does not reflect info in the footnotes or in the components of earnings
28
Q

Market sum up:

A
  • Markets are reasonably efficient
  • Making money in the market requires costly information acquisition and interpretation
  • To get into the market, what skill or advantage do I have that market doesn’t?
29
Q

Standard Setting Influences

A
  • Manager/Companies (more flexibility, look more profitable, fewer required disclosures)
  • Investors/Users (More disclosures, transparent info, cost is less important)
  • Congress (Constituents happy)
  • Auditors (bright lines in standards, guidance from standard setters, reduce liability to investors)
30
Q

Bond indenture

A
  • Bond contract

- Includes covenants to protect lender and borrower

31
Q

Investors through public offering

A
  • Primary bond market (money paid for the bonds goes to the issuer)
  • Secondary bond market ( Reselling of bonds by investors, money goes to investors not the issuer)
32
Q

Private placement

A
  • Selling un-registered securities to qualified institutional investors ( investment companies, pension plans, etc)
  • Less costly than public offering because no SEC registration is required
  • Bonds CANNOT be re-sold
33
Q

Stated rate

A

interest rate that the ISSUER chooses

Nominal rate, coupon rate, face rate, etc.

34
Q

Term bonds

A

mature on a single date

35
Q

Serial bonds

A

Mature in installments

36
Q

Zero Coupon (Deep Discount)

A

Provide no interest until maturity

37
Q

Variable Rate

A

Interest rate varies over time

38
Q

Callable bond

A

Company has the right to pay off the bond in advance (payment usually higher than original principal)

39
Q

Putable bond

A

Gives owner the right to sell the bond back to the issuer at pre-specified price

40
Q

Convertible bond

A

Investor has right to trade in the bond for common stock of the company

41
Q

IMPORTANT

A

Interest payments are calculated at the stated rate, present values are calculated using effective rate

42
Q

Effective rate

A

rate the market assigned to the bond when it was initially sold

43
Q

Why does stated rate not equal effective rate?

A
  • Market moves, can’t change
  • Strategic reasons
  • If equal, issued AT PAR
  • Stated rate Effective; AT PREMIUM
44
Q

In effective interest method, what does the interest expense represent?

A

Interest payment plus allocation of the discount/premium

45
Q

Adjusting entries

A

Reflect economic activity when there has been no change of cash

46
Q

If we do not adjust to accrue interest:

A
  • Int expense & payment are UNDERstated

- Income is OVER stated

47
Q

Accounting gain/loss =

A

Book value of bonds - cash paid to retire bonds

  • Cash paid to retire bonds depends on Market rate (the day extinguished)
  • Book value of bonds depends on Effective rate the day it was initially sold
48
Q

Gain or loss when extinguishing debt?

A

Effective rate > market rate = LOSS (price greater than carrying value)
Effective rate

49
Q

Why might market rate have increased?

A
  • Feds could have increased rates

- Company is more risky, market is accounting for this increased risk

50
Q

Accounting effect:

A
  • One time loss, later on lower interest expense and lower bonds payable
  • One time gain, but higher interest expense in the future
  • Choose when you want to show the loss
51
Q

Callable bonds

A
  • Bonds are callable at a certain price (often above face value)
  • Allow the issuer the option to redeem the bond early by paying a set price
  • Investors will realize that the bonds will likely be called if interest rates fall, so callable bonds should be valued less than non-callable bonds
52
Q

Conversion of bonds to stocks

A
  • Bondholders will trade bonds for stocks if they believe the stock price will increase
  • Debit bonds payable, credit capital stock
53
Q

Long-term debt disclosures

A
  • Note will include lots of info including, maturity dates, nature of liability, restrictions imposed by creditors and assets designated or pledged as a security (need to know other existing debt)
  • MUST disclose future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next 5 years
54
Q

Debt covenant

A

Agreement between companies and creditors that the company should operate within certain limits

  • Breach of covenant allows creditor to demand immediate payment
  • Generally only leads to a renegotiation of the terms of the debt
  • Only have disclose debt covenants if there has been a previous violation
55
Q

Fair Value Option

A
  • Mitigate volatility in reported earnings
  • Greater convergence with IFRS
  • Price is the price you would get in an orderly market transaction
56
Q

Debt: Historical cost v. Fair Value

A
  • Effect of fair value changes on the income statement is counterintuitive
  • If credit rating falls, market rate will rise, value of bond will fall and gain is reported
  • If credit rating rises, market rate for bond will fall, value of bond will rise, loss is reported
  • More relevant than hc because reflects current market rates, consistent with fair value
  • Better for equity holders

A312 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions