Finance Study

Question 1

Quick ratio

Answer 1

CA - inventory - prepaids / CL

Question 2

Cash Conversion cycle

Answer 2

DSO + DOH - DPO

Days sales outstanding = AR/credit sales * days

DOH = days inven. on hand = Avg Inven / COS * days

DPO = (AP/COS) * 365

Question 3

Times Interest Earned

Answer 3

EBIT / interest expense

Question 4

Debt service coverage

Answer 4

Net operating income / principal+ interest payments

Question 5

DIOH

Answer 5

(Avg inventory / COS) * 365

Question 6

Approach for an income or cash flow valuation

Answer 6

Pre-tax income
+/- accounting adj

\+/- normalize adj
= adjusted pre-tax
- income taxes or +/- non-cash
= adjusted aft-tax
x multiple or / discount rate
= capitalized earnings/CF value
\+NRV redundant
=value of equity

Question 7

Approach for an asset-based valuation

Answer 7

Book value
+/- FMV difference

• liabilities
• costs of disposal
  = value of equity

Question 8

Approach for intangible asset valuation

Answer 8

Earnings - (return on assets of each type) = excess earnings from intangibles

Intangibles * perpetual growth = value

Perpetual growth = earnings * (1*g)/(discount - growth)

Question 9

Dividend discount model formula

Answer 9

[div * (1+g) ] / (Ce - g)

Question 10

How to analyze a cash discount?

Answer 10

Compare the present value of the new and old policy with the AFTER TAX cost of debt for the cash to be borrowed (instead of paid under the discount).

Question 11

How to calculate residual dividend?

Answer 11

Capital investments * equity portion = portion related to equity

Net earnings - portion related to equity = available for dividend.