Final Flashcards
Porter’s Five forces
Industry competition (Rivalry among existing firms)
Threat of new entrants (barriers to entry)
Threat of substitution
Bargaining power of suppliers/vendors
Bargaining power of customers/buyers
3 business strategies
Product differentiation
Cost leadership
Focus (niche)
Invested Capital
How the company is financing its operating assets
Return on Net Operating Assets
Measures the operating return that is generated by net operating assets without regards to how the company is financed
Same as return on invested capital (ROIC)
Cash Conversion Cycle
Tells you how long a company’s cash is tied up in
working capital.
Negative cash conversion cycle means a company is selling goods and receiving A/R before it pays for inventory purchases
Terminal Value
Present value (PV) at the end of the forecast horizon of that terminal year amount in perpetuity (with a growth rate)
Discounted Cash Flow Model
Uses the free cash flow to common equity holders
Common equity> cost of equity capital is the discount rate
Entire enterprise> WACC
Residual Income Model
Directly uses the financial statement information that we forecasted, rather than converting these
into Free Cash Flows
Amount by which net income exceeds the capital charge on the BOOK VALUE of common equity as of the beginning of the period
Capital Charge
The amount the company needs to generate in net income to cover its cost of capital (cost of equity)
Market to Book ratio
Greater than 1.00, then the market expects that, on average, the company will earn an ROE greater than the cost of capital in the future
Cost of Equity Capital
This is the expected rate of return that the market requires to attract funds for a particular investment (e.g. the stock of the company).
It is based on investor expectations.
Free Cash Flow
How much cash the company is able to generate from operations after considering how much they need to maintain or expand their investment in capital assets
Operating cash flows to net income
A company that consistently has negative amount signals that the company isn’t converting its net income into cash
Current ratio
Tells us something about the company’s ability to meet short term obligations (current liabilities) with short termassets (current assets)
Cash from Operations to Total Debt
Type of debt coverage ratio and gives us an estimate of a company’s ability to repay its total debt if it devoted all of its cash flow from operations to debt repayment
