Finance Terms Flashcards
What is the sustainable growth ratio?
The rate to which your company can grow with debt financing.
What is the internal growth rate?
The rate at which your company can grow without taking on debt.
What is the cash coverage ratio?
A metric that measures a company’s ability to pay off its debts using cash on hand.
What is the return on assets formula?
Net income / Net Assets.
What is the total asset turnover formula?
Net sales / average total assets
What is the price to earning formula?
Share price / Earnings per share
What is the times interest earned ratio?
EBIT / Interest expense.
What is the current ratio?
Current assets / current liabilities
What is ratio analysis?
A quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability.
What is the difference between the quick and current ratios?
Quick ratio does not include inventory.
What is the total debt ratio?
Total assets - total equity / total assets.
What is the times interest earned ratio?
EBIT / Interest
What is the cash coverage ratio formula?
EBIT + (depreciation and amortization).
What is enterprise value?
A measure of a company’s total value, thought to be more comprehensive that market capitalization.
EV - Market Cap + Total Debt - Cash
EV / EBITA = What?
Enterprise value multiples, which is a comprehensive way to measure a company’s ROI.
The DuPont method disaggregates ROE into what three ratios?
Profit Margin
Total Asset Turnover
Equity Multiplier
What is total Asset Turnover?
Net sales / average total assets
Measures the company’s ability to generate revenue from its assets.
What is equity multiplier?
A measure of the portion of a company’s assets that are financed by stock rather than debt.
Total assets / Total equity.
IN the financial planning model, the external financing needs (EFN) as shown on a pro forma balance sheet is equal to the change in assets minus what?
The changes in both liabilities and equity.
What is the retention ratio?
The proportion of net income retained in the business.
What is the plow back ratio?
Same as the retention ratio - it measures how much cash a firm retains in the business
What is the formula for present value of an investment?
FV1
_______
1 + r
What is the difference between simple interest and compound interest?
In compound interest, the interest on the initial investment makes money as well.
What is present value factor?
A factor used to calculate the present value of an amount to be received in a future period.
What is discounting?
Calculating the present value of a future amount. The process is the opposite of compounding.
What is capital intensity?
A measure of the amount of assets needed to generate income for a unit.
What is the NPV Rule?
Accept a project with a positive NPV and reject a project with a negative NPV.
What are the three attributes of NPV?
NPV uses cash flows
NPV uses ALL the cash flows of the project
NPV discounts the cash flows properly
What is the payback period?
The length of time it takes for a project to return its initial investment.
What is the discounted payback period?
The length of time it takes for a project’s discounted cash flow to equal it’s initial investment.
What is cost of capital?
Cost of capital is the cost of funds used for financing a business. The return investors expect.
What is the internal rate of return?
The discount rate at which the net present value of an investment is zero. It is a method of evaluating capital expenditure proposals.
WHat is the profitability index?
A method used to evaluate projects. It is the ratio of the present value of the future expected cash flows after initial investment divided by the initial investment.
What is the biggest difference between finance and accounting techniques?
Finance uses cash flows, accounting uses income and / or earnings.
What is a sunk cost?
A cost that has already occurred and cannot be reversed.
What is an opportunity cost?
The most valuable alternative that is given up.
What is erosion?
Cash flow transferred to a new project from customers and sales of other products of the firm.
What is synergy?
A positive incremental net gain associated with the combination of two firms through a merger or acquisition.
What is real cash flow?
A cash flow expressed in terms of purchasing power, not actual dollars.
What is a sensitivity analysis?
An analysis of the effect on the project when there is some change in a critical variable such as sales or costs.
What is a BOP analysis?
Best, optimistic, pessimistic
What is a coupon?
The stated interest payment on a debt instrument.
What is a bond face value?
The principal value of a bond that is repaid at the end of the term. Also referred to as par value or principal.
What is a coupon rate?
The annual coupon a bond pays divided by its face value.
What is the yield to maturity?
The discount rate that equates the present value of the interest payments and par value of a bond with the current price of a bond.
