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Principles of Finance > Exam 2 > Flashcards

Exam 2 Flashcards

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1
Q

Common-size statements

A

A standardized financial statement presenting all items in percentage terms.

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2
Q

Common size income statement

A
  • Expresses each item as a percentage of total sales
  • Tells us what happens to each dollar in sales
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3
Q

Common Size Balance sheet

A

Expresses each item as a percentage of assets and liabilities/equity

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4
Q

The role of Financial ratios

A

Ways of comparing and investigating the relationships between different pieces of financial information

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5
Q

Financial ratios categories

A
  • Liquidity ratios (Short-term solvency)
  • Financial leverage ratios (Long-term solvency)
  • Turnover ratios (Asset management)
  • Profitability ratios
  • Market value ratios
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6
Q

Short-term solvency, or liquidity, ratios

A

The firm’s ability to pay its bills over a short period of time

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7
Q

Current Ratio Formula

A

Current Assets/Current liabilities

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8
Q

Quick (or Acid-Test) Ratio Formula

A

Current Assests - Inventory/ Current liabilites

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9
Q

Cash Ratio Formula

A

Cash/Current liabilities

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10
Q

Conglomerates

A

owning more or less unrelated lines of business.

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11
Q

Problems with Financial statements analysis

A

There is no underlying theory to help us identify which items or ratios to look at and to guide us in establishing benchmarks

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12
Q

Do financial statements outside of the US conform to GAAP

A

No

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13
Q

Is profitability strongly affected by the regulatory environment?

A

Yes, so utilities in different locations can be very similar but show very different profits.

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14
Q

North American Industry Classification System (NAICS)

A

(NAICS) = Intended to replace older SIC codes

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15
Q

Aspirant group

A

The top firms in their industry

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16
Q

Standard Industrial Classification (SIC) codes

A

Four-digit codes established by the U.S. government for statistical reporting purposes

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17
Q

First digit in an SIC code establishes what?

A

the general type of business

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18
Q

Companies beginning with SIC code 602

A

are mostly commercial banks

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19
Q

Companies with an SIC code beginning with 6

A

Firms engaged in finance, insurance, and real estate

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20
Q

Companies beginning with SIC code 60

A

Are mostly banks

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21
Q

An example of a major competitor and natural peer group member in an industry may be scattered across the globe

A

Ex. Automobile industry

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22
Q

Peer Group Analysis

A

Identifying firms similar in the sense that they compete in the same markets, have similar assets, and operate in similar ways

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23
Q

SIC code

A

Standard Industrial Classification code

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24
Q

The website to know

A

www.reuters.com

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25
Q

Why evaluate financial statements?

A

We look at accounting information because we don’t have the market value information

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26
Q

ROE Formula

A

EAT/Total Equity

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27
Q

MTR

A

Marginal Tax Rate

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28
Q

Two examples of non-cash expenses

A

Depreciation & Depletion

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29
Q

IPP

A

Initial Purchase Price

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30
Q

What is more important accounting or market value?

A

Market Value

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31
Q

If payout ratio (PR) is 100% then?

A

there is no room for growth or investment

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32
Q

The two common size statements

A
  • Common size balance sheet
  • Common Size income statement
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33
Q

RR

A

Retention Ratio

34
Q

Things to know about Walmart

A
  • Acid ratio of 1.44
  • Quick ratio of .23
  • carries a lot of inventory therefore reflecting those ratio numbers
35
Q

Do public utilities have high or low asset turnover ratio?

A

high

36
Q

NPM

A

Net Profit Margin

37
Q

Is low NPM favorable for a stock in the future?

A

NO, a high NPM is considered to be accretive for the valuation of the stock

38
Q

What does every ratio have?

A

A numerator & a denominator

39
Q

What happened to stock dividends during the pandemic?

A

Stable yet projected to be cut in half

40
Q

When you buy stock do you want the PE to be high or low

A

low, because price is what you pay and earnings is what you get

41
Q

If the expected future growth rate is down then PE is

A

down

42
Q

What are margins driven by?

A

expectations

43
Q

With selling stock you want a high or low PE?

A

high

44
Q

The inverse of a PE

A

earnings yield

45
Q

If the growth rate goes up then PE

A

goes up

46
Q

If the PE goes up then

A

Interest goes down

47
Q

How would the federal government handle a recession?

A

Cut interest rates

48
Q

How are markets driven?

A

By expectations?

49
Q

When Apply was almost bankrupt what was their PSR

A

1

50
Q

High price of Apple

A

$180

51
Q

Current price of Apple

A

$144

52
Q

Who did the first Econ metrics?

A

Prof. William Barbee

53
Q

Who has the largest Market Cap

A

Apple

54
Q

EBITDA

A

Earnings Before Interest, Taxes, Depreciation, & Amortization

55
Q

Is it possible for negative free cash flow to be positive for company stock?

A

Yes if it’s a new company and has high capital spending or if it’s being invested for future growth

56
Q

Examples of free cash flow being invested for future growth?

A
  • Walmart had negative Free CF and invested (risky)
  • KMART had a positive free CF and went bankrupt
57
Q

Purpose of the DuPont Identity

A

To break internal equity into 3 parts
- operation efficiency
- asset use efficiency
- financial leverage

58
Q

Favorable financial leverage

A

increasing EAT, ROE, & EPS

59
Q

What brings down the mean reversion growth rate?

A

competition

60
Q

It’s a well-documented fact that when the mean reversion growth rate is high it…

A

eventually drops

61
Q

It’s a well-documented fact that when the mean reversion growth rate is low it…

A

eventually goes up

62
Q

1st & 2nd Constraint

A

1 - Basic Math
2 - Growth has to be financed

63
Q

What does the sustainable growth rate do?

A

helps firms maximize growth rate if the debt-equity ratio is constant and there’s no external equity

64
Q

External equity example

A

selling stock

65
Q

Determinates the sustainable growth rate

A

ROE (Return on Equity) * RR (Retention Ratio)

66
Q

Payout Ratio should be high or low?

A

low

67
Q

Retention Ratio should be high or low?

A

high

68
Q

PE

A

price to earnings

69
Q

Depletion

A
  • natural resources
  • percent of sales
  • not related to the amount spent
70
Q

Depreciation

A
  • related to capital expenditures
  • applies to fixed assets
71
Q

The government had what type of allowance?

A

The depletion allowance

72
Q

When is a low-profit margin considered ok and not bad

A

Companies having low sales prices but high unit volume

73
Q

How is operating efficiency measured

A

As measured by profit margin

74
Q

How is Asset use efficiency measured

A

As measured by total asset turnover

75
Q

Financial leverage is measured by

A

As measured by the equity multiplier

76
Q

Why PE varies

A

Differences in the expected future earnings growth

77
Q

Trailing earnings is used for

A

Used for four quarters of earnings

78
Q

Forward earnings is used to

A

Project earnings

79
Q

Two ways to increase the sustainable growth rate

A
  • Anything that increases ROE through the Dupont Identity ( PM x TAT x EM)
  • Increasing the plowback ratio(retention ratio
80
Q

The firm has the ability to sustain growth depends on these four factors

A
  1. Profit margin
  2. Total asset turnover
  3. Financial policy
  4. Dividend Policy
81
Q

Time-Trend Analysis (Time Series)

A

Using history as a standard

Principles of Finance (8 decks)

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