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BEC > Financial Management: Asset Effectiveness & Efficiency & Working Capital Management > Flashcards

Financial Management: Asset Effectiveness & Efficiency & Working Capital Management Flashcards

1
Q

Return on Investment ROI Formula

A

Income/ Investment Capital
Investment Capital (D+E)
OR
Investment Capital = Net Income/ Avg. Assets

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2
Q

Return on Total Assets Ratio

A

Net Income/ Average total assets

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3
Q

Debt-to Asset ratio

A

Total Debts/ Total assets

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4
Q

Debt to Equity Ratio

A

Total Debt/ Total Shareholder’s Equity

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5
Q

Definition of Net Working Capital

A

CA-CL

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6
Q

Current Ratio

A

Current Assets/ Current Liabilities

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7
Q

Quick Ratio

A

Cash + MS+ A/R / CL

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8
Q

APR of quick payment discount

A

(360/Pay Period- Discount Period) X (Discount/100-Discount %)

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9
Q

Cash Conversion Cycle

A

ICP+ RCP- PDP

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10
Q

Inventory Turnover

A

Cogs/Average Inventory

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11
Q

Inventory Conversion Period (ICP)

A

365/ Inventory Turnover

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12
Q

A/R Turnover

A

Sales/ Avg. A/R

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13
Q

Receivable Conversion Period (RCP)

A

365/ A/R Turnover

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14
Q

A/P Turnover

A

COGS/ Average A/P

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15
Q

AP Deferral Period

A

365/ AP Turnover

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16
Q

Reorder Point

A

Safety Stock + (Lead Time X Sales during lead time)

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17
Q

Economic Order Quantity

A

(2X Annual Sales Order X Order Cost )/ Carrying cost per unit

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18
Q

Return on Investment *2nd type of formula)

A

Profit Margin X Investment turnover

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19
Q

ROI

A

is ideal performance measure for investment in strategic business units

20
Q

Return on Assets

A

Net Income/ Average Total Assets

21
Q

Limitations of Return on Investment

A
  • Residual Income may be superior
  • inadvertently focus managers purelt on maximizing short-term returns
  • Disincentive to Invest ( Takes time for asset to produce sales)
22
Q

Return on Equity

A

Net Income/ Total Equity

23
Q

ROE Goal

A

ROE> Cost of Equity (CAPM)

24
Q

Net Profit Margin is a measure of operating efficiency

A

Net Income/ Sales

25
Q

Asset Turnover is a measure of the degree of efficiency with which a company is using its assets

A

Sales/Avg. Total Assets

26
Q

Financial Leverage amplifies both risk assumed and potential return

A

FL= Avg. Total Assets/ Equity

-Must be within risk appetite

27
Q

Residual Income and Economic Value Added in dollars for investors

A

RI =Net Income (i/S) - Required Return $
Required return= Net Book Value X Hurdle Rate
Net Book Value of Equity = Assets - Liab.

28
Q

Calculating DuPoint ROE

A

Net Profit Margin X Asset Turnover X Financial Leverage

NI/S X Sales/Avg Total Assets X Avg. TA/ Equity

29
Q

Extended DuPoint Model

A

Net Profit Margin into 3 distinct components.
Net Income/Sales
a) Tax Burden: Net Income/ Pre-tax Income
b) Interest Burden: Pretax Income/ EBIT
c) Operating Income Margin= EBIT/Sales

30
Q

Benefits of Residual Income Performance Measures

A

a) Realistic Target Rates In dollars

b) Focus on Target Return and Amount

31
Q

Weakness of Residual Income Performance Measures

A

a) Reduces Comparability

b) Target Rates Require Judgement

32
Q

Economic Value Added
EVA is WACC
The hurdle rate is WACC

A

EVA uses NOPAT

33
Q

NOPAT

A

Profit before interest but after tax

34
Q

EVA =

A

NOPAT- $WACC
Investment = D+E
NOPAT - Required Return
EBITX(1-T)

35
Q

Residual Income

A

Looks at the return available to the stockholder

36
Q

EVA

A

Looks at the return to all providers of capital

37
Q

Positive EVA means

A

Performance is meeting standards.

Stock value is going to go up

38
Q

Negative EVA means

A

Not meeting standards

Stock is going to go down.

39
Q

Debt- to Asset Ratio Interpretation

A

Ratio indicates a long term debt paying ability. The lower the ratio, the better protection afforded to creditors

40
Q

Debt-to- Equity Ratio Interpretation

A

the lower the ratio, the lower the risk involved

41
Q

When it comes to carrying inventory

A

The lower the cost of inventory, the more companies are willing to carry.

42
Q

Determination of Safety Stock depends on the following factors

A

1) Reliability of sales forecasts
2) Possibility of customer dissatisfaction resulting from back orders
3) Cost of running out of inventory
4) Lead time
5) Seasonal demands on inventory

43
Q

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers

A

ROI may lead to rejecting projects that yield positive cash flows

44
Q

The basic objective of the residual income approach of performance measurement and evaluation is to have a division maximize its:

A

Income in excess of a desired minimum amount

45
Q

The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the

A

Historical weighted average cost of capital for the company.

BEC (20 decks)

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