EZC1

Question 1

cash flow from CFO (2.5)

Answer 1

NI + depreciation + operating asset changes (non-cash) + liability changes (not NP) = CFO

Question 2

about cash flow from investing/CFI (2.5)

Answer 2

change in PP&E

Question 3

about cash flow from financing/CFF (2.5)

Answer 3

finance account changes (LTD, NP, E), plus dividends paid (old RE + NI - new RE)

Question 4

calculation for dividends (2.5)

Answer 4

dividends = (old RE + net income) - new RE

Question 5

current ratio (3.2)

Answer 5

current ratio = current assets/current liabilities

• don’t want to see it fall below 1

Question 6

quick ratio (3.2)

Answer 6

quick ratio(acid test) = (current assets - inventory)/current liabilities

*accounts for only most liquid assets (removes inventory)

Question 7

average collection period (3.2)

Answer 7

AR / Daily credit sales

Question 8

inventory turnover (3.2)

Answer 8

COGS / inventory

Question 9

total asset turnover (3.3)

Answer 9

• calculates $$ in sales generated per dollar of assets it owns
• higher is better

total asset turnover = sales/total assets

Question 10

fixed asset turnover (3.3)

Answer 10

fixed asset turnover = sales/fixed assets

*fixed is total assets - current assets (or all non-current assets)

Question 11

debt ratio (3.4)

Answer 11

debt ratio = total debt/total assets

Question 12

times interest earned (3.4)

Answer 12

times interest earned = EBIT/interest expense

*tells how many times a company could pay its interest expenses given its profit

Question 13

ROA and ROE (3.5)

Answer 13

• ROA: net income/total assets
• ROE: net income/total equity
• higher ROE than ROA means effectively using debt

Question 14

DuPont Equation (3.6)

Answer 14

ROE = Net profit margin (net income/net sales) * asset turnover * leverage multiplier

*leverage multiplier=assets/equity

Question 15

net profit margin equation (3.6)

Answer 15

net profit margin = NI/net sales

Question 16

% of sales method (4.2)

Answer 16

1 Project sales revenues and expenses
2 Forecast change in spontaneous balance sheet accounts
3 Deal with discretionary accounts
4 Calculate retained earnings
5 Determine total financing needs/assets
6 Calculate DFN

Question 17

discretionary financing need (4.2)

Answer 17

DFN = projected total assets - projected total liabilities - projected owners’ equity

Question 18

4 ways to decrease DFN (4.4)

Answer 18

1 slow sales growth
2 examine capacity constraints (fixed asset needs)
3 lower dividend payout (and increasing RE)
4 increase net margin (means more cash retained)

Question 19

sustainable growth rate/SGR (4.4)

Answer 19

SGR = ROE(1-b)

*b is dividend payout ratio, or dividends/net income

NI/S * S/A * A/E * (1-D/NI)
NI/E * (1-D/NI)

Question 20

discount rate and bond price relationship (6.6)

Answer 20

inc/dec and dec/inc

*discount changes the I/YR rate on the calculator

Question 21

preferred vs common stock (7.3)

Answer 21

• common: variable return, represents equity in a firm, vote for board, corporate governance, lowest claim in payout, can be bought and sold freely
• preferred: hybrid security with elements of debt and equity, fixed dividend payments, priority payout before common stock dividends, usually non-voting stock, lowers company cost of capital and increases value

Question 22

CAPM (9.3)

Answer 22

required return = risk free rate+ beta(return on market-risk free rate)

*risk premium = return on market (Rm)-risk free rate (Rrf)

Question 23

Build-Up Method (9.3)

Answer 23

bond yield + equity risk premium + micro-cap risk premium + start-up risk premium = required rate or return

Question 24

WACC definitions (9.4)

Answer 24

C=mv common stock
P=mv preferred stock
D=mv debt
V=(C+P+D)
k_cs= cost common stock
k_ps=cost preferred
k_d=cost debt
t=tax rate

Question 25

3 key attributes that capital budgeting should possess (11.3)

Answer 25

1 should include all cash flows occurring during the life of the project
2 timing of future cash flows (time value of money)
3 account for varying levels of risk

Question 26

3 equations for time values of money (11.3)

Answer 26

1 payback period - simplest and least accurate.
2 NPV - present value of future cash flows. Positive NPV=accept project, negative=reject.
3 IRR

Question 27

initial outlay calculation (11.5)

Answer 27

purchase price of asset + shipping and install costs + investment of working capital +/- sale form old asset = net initial outlay
*also account for taxes on sale of old product