Financial Analysis

Question 1

Dupont Equation

Answer 1

Leverage Multiplier x Efficiency x Profitability Ratio= ROE

Assets / Equity
x Sales / Assets
x Net Profit / Sales
= Net Profit / Equity

Question 2

TIE

Answer 2

TIE == Times Interest Earned
aka Coverage Ratio

TIE = EBIT / Interest Expense

Question 3

Coverage Ratio

Answer 3

TIE == Times Interest Earned
aka Coverage Ratio

TIE = EBIT / Interest Expense

Question 4

EBIT on Consolidated Statement

Answer 4

Earnings Plus Interest?

Question 5

Financial Leverage Ratio

Answer 5

Assets / Equity
How much assets per owners’ $
(Increasing will increase ROE, but that is not necessarily a sign of financial health…)

Question 6

Profitability Ratio

Answer 6

Net Income / Gross Income or
Net Profit / Sales or
Earnings / Revenue

How much profit per $ gross income

Not same as Profitability Index

Question 6

Efficiency Ratio

Answer 6

Sales / Assets

How much gross income per $ of assets

Question 7

PV of future lump sum

Answer 7

PV = 1/(1+i)^n * FV

Question 8

FV of present lump sum

Answer 8

FV = (1+i)^n * PV

Question 9

weighted average cost of capital

Answer 9

discount rate and weighted average cost of capital are synonymous

aka

k-sub-wacc

also referred to as

cost of capital

Question 10

Capital Budgeting

Answer 10

cost-benefit analysis

synonymous with

investment analysis
project valuation
project analysis
capital budgeting

Question 11

k-sub-wacc

Answer 11

discount rate and weighted average cost of capital and investor’s required rate of return are synonymous

aka k-sub-wacc

also referred to as just “cost of capital”

Question 12

Investment Analysis

Answer 12

cost-benefit analysis

synonymous with

investment analysis
project valuation
project analysis
capital budgeting

Question 13

Project Valuation

Answer 13

cost-benefit analysis

synonymous with

investment analysis
project valuation
project analysis
capital budgeting

Question 14

Project Analysis

Answer 14

cost-benefit analysis

synonymous with

investment analysis
project valuation
project analysis
capital budgeting

Question 15

Cost-Benefit Analysis

Answer 15

cost-benefit analysis

synonymous with

investment analysis
project valuation
project analysis
capital budgeting

Question 16

Capital Budgeting / Cost-Benefit Process

Answer 16

0. Determine decision criteria
1. Identify all incremental operating cash flows (ie costs and benefits)
   
   • note: operating cash flows only. Not interest expense.
   • note: incremental cash flows–the ones that are different between the scenarios
2. Determine discount rate
3. Calculate decision variables (NPV, PI, IRR, PP)

Question 17

NPV

Answer 17

Net Present Value

value today of sum of current and future cash flows

Question 19

BCR

Answer 19

Benefit-Cost Ratio aka BCR aka PI aka Profitability Index
(PI not same as Profitability Ratio)

Ratio of initial investment to PV of future cash flows

BCR = Initial investment / present value of Future cash flows

Since NPV = initial investment MINUS present value of future cash flows:

• BCR < 1 means negative NPV
• BCR = 1 means NPV of 0
• BCR > 1 means positive NPV

Question 20

PI

Answer 20

Benefit-Cost Ratio aka BCR aka PI aka Profitability Index
(PI not same as Profitability Ratio)

Ratio of initial investment to PV of future cash flows

BCR = Initial investment / present value of Future cash flows

Since NPV = initial investment MINUS present value of future cash flows:

• BCR < 1 means negative NPV
• BCR = 1 means NPV of 0
• BCR > 1 means positive NPV

Question 21

FCF

Answer 21

Free Cash Flow

Question 22

FCF Equation

Answer 22

FCF = EBIT - Tax + Depr +/- ∆NWC +/- CapEx

FCF = EBI + Depr +/- ∆NWC +/- CapEx