Financial Management Flashcards
Value-adding costs
Value-adding costs are those costs that are necessary to production and add value to the product.
The overall cost of capital
The overall cost of capital is the rate of return on assets that covers the costs associated with the funds employed.
Cost of capital usually refers to the cost of long-term sources of funds, such as long-term debt, preferred stock, and common stock.
The operating cycle
The operating cycle extends from thepur date inventory is chased until the date it is finally converted back to cash (collection of accounts receivable).
Cash ratio
Cash ratio = Cash + Cash equivalents + Marketable securities/Current liabilities
Discounting Method
Discounting is the method by which we take a future value and determine its current, or present, value.
ordinary annuity
An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time. The opposite of an ordinary annuity is an annuity due, in which payments are made at the beginning of each period.
what is Free cash flow? and what are its equations?
Free cash flow is the cash flow actually available for distribution to investors after the firm has made all necessary investments in fixed assets and working capital. It is an important analytical tool in the planning and forecasting process.
Free cash flow = NOPAT – Net investment in operating capital
Free cash flow = Operating cash flow – Gross investment in operating capital
Free cash flow = EBIT (1 − Tax rate) + Noncash expenses – Capital expenditures – Change in working capital
manufacturing cycle efficiency
Manufacturing cycle efficiency measures the proportion of production time spent on value-added activities
Manufacturing Cycle Efficiency =
Manufacturing or Process Time / Time from Start of Manufacturing to Delivery
Inventory turnover rate
cost of good sold / average inventory
Discounted cash flow = cost of new Asset * MACRS rate * Income tax rate * Present value factor
Discounted cash flow is forecasted future cash flows, discounted (at an appropriate rate) to reflect present value. This is one method used in business valuation. Because this method involves financial forecasts, it is not widely used in valuing small businesses.
The modified accelerated cost recovery system (MACRS)
The modified accelerated cost recovery system (MACRS) is a depreciation method specified in the tax law applied to assets acquired after 1986. MACRS replaced ACRS (accelerated cost recovery system) and prescribes asset lives and rates of depreciation for classes of assets.
Discounted breakeven period
The discounted breakeven period is the time required to recover the cash invested in a project. However, since almost all investment projects span several years, it is necessary to discount both cash inflows and outflows. When this is done, breakeven time becomes “the point where discounted cumulative cash inflows on a project equal discounted total cash outflows.”
profit margin ratio
it measures the efficiency of earnings as compared to sales.
Profit margin = Operating income / Sales revenue
Accounts receivable turnover
Accounts receivable turnover = Net credit sales / Average accounts receivable
ways to caluclate Return on equity (ROE)?
Return on equity = Net income − Preferred dividends / Average common equity
or
= Net income / stockholders’ equity
or
= Profit margin × Asset turnover × Leverage.
when Shareholder value is created ?
Shareholder value is created when ROI is greater than WACC
NET Present Value
Present value = F * 1 / (1+i)n
The net present value method determines the discounted rate of return. It predicts the present value of money in the future and adjusts for the time value of money.
inventory turnover
Cost of goods sold / Average merchandise inventory
internal rate of return
IRR is a time-adjusted rate of return. it is the discount rate that results in the net present value of all cash flows equal to zero.
working capital
Working capital is the money used to cover all of a company’s short-term expenses, including inventory, payments on short-term debt, and day-to-day expenses—called operating expenses.
The cash conversion cycle
= Inventory conversion period + Receivable cash period- Payable deferral period
EBIT = Earnings before interest and taxes
EBIT = Net Income + Interest + Taxes
EBIT is also sometimes referred to as operating income and is called this because it’s found by deducting all operating expenses (production and non-production costs) from sales revenue.
Operating Margin
EBIT / sales revenue
the payback method
The payback period is the number of months or years it takes to return the initial investment
payback period = amount to be invested / estimated annual net cash flow.
the efficient markets hypothesis (EMH)
EMH is an investment theory that states it is impossible to “beat the market” because existing share prices always incorporate and reflect all relevant information; stocks always trade at their underlying fair value, making it impossible for knowledgeable investors to either purchase undervalued stocks or sell stocks for inflated prices. It is essentially impossible to outperform the overall market through expert stock selection or market timing; the only way an investor can obtain higher returns is by purchasing riskier investments.
dividend yield
Dividends per common share ÷ Market price per common share
When do Bonds are sold at a discount?
Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond.
The market approach
The market approach is a valuation approach that uses market comparisons of identical or comparable assets or liabilities.
