Finance Week 3 Flashcards
What is the goal of a corporation?
Maximize shareholders wealth through good investing and financing decisions
How can you measure corporate performance?
Statements have info about corporations assets and liabilities, profitability and cash flows and so you can use these to calculate financial ratios that provide indication of managers performace
How can you use financial ratios?
They are objective but can be compared over time and with other firms in the same industry
What are the 2 measures for shareholders value added?
Market value of shareholders equity and market-to-book ratio
What is the market value of shareholders equity?
Market value of shareholders equity = # shares * price per share
What does the size of the market value of shareholders equity suggest?
Larger market value of, the wealthier and better for shareholders
What is the market to book ratio?
This is the market value of SE relative to its book value: Market-to-book ratio= market equity / book equity- measures how much shareholders wealth has been added per dollar shareholder invested
What are the measures for profitabilitiy?
accounting rates of return measures firms profitability per dollar of invested asset: Return on equity (most used), Return on capital, Return on assets, Economic value added
What is the return on equity?
net income/ book equity
What is the return on capital?
Net income / long term debt + book equity
What is the return on assets?
Net income / total assets
What is the Economic value added ?
Net income neglects investors opportunity cost of capital- return investors can expect on opportunities with similar risk. EVA measures income to investors (bondholders and shareholders) after deducting all costs including cost of capital:
EVA= net income + after tax-interest - (opportunity cost capacity * book equity)
What are measures for efficiency and profit margin?
Efficiency: asset turnover = sales / total assets- measures how much sales a company can generate per dollar of assets. Profit margin = net income/ sales. Measures how profitable a firm can transform dollar of sales into dollar of income
What is the Du Pont system for return on equity?
Allows us to decompose ROA into profit margin and asset turnover. ROA = net income / assets = (net income / sales) profit margin * (sales/ assets).
if low profit marging, FM may reduce costs, if low asset turnover, may think about how asset turned over faster.
What are measured for financial leverage?
Leverage ratios measure a firms ability to repay debt. This is important because if unable, default on debt obligations, leads to bankruptcy and shareholders lose investment. Includes debt ratio and times interest earned ratio.
