Financial Mgmt & Capital (mostly) Flashcards
Cash Conversion Cycle
Inventory Conversion + Accounts receivable collection period - Accounts payable deferral period
CCC = ICP + RCP - PDP
ICP = (Average Inventory / COGS) x 365
RCP = (Average receivables / Credit sales) x 365
PDP = (Average payables / COGS) X 365
CCC: time pay suppliers to the time collect receivables
PDP: time buy inventory from suppliers to the time you pay suppliers
ICP: time you buy from suppliers to the time you sell the finished produtct
ACP: time sell finished products to the time you collect the receivables
Internal rate of Return
The IRR is when the present value of project cost equals the present value of money coming in from the project
Essentially this is the breakeven point
Net cash inflows includes salvage value.
This method emphazieses cash flows and discounting future cash amounts to their present value and takes into account the time value of money (discounts future cash values to thier present amouont).
Net Present Value
NPV is the present value of the cash coming in from the project minus the present value of how much the project cost
PV of net cash inflows - NPV = Cost (initial investment)
The salvage value is treated as an additional single cash flow for 1 year
Cash inflows : include savings generated from more efficient equipment and the salvage value from replaced equipmnet; income tax savings from depreciation expense (tax shield) are treated as cash inflows.
Cash outflows: include the cost of the new project
Cost of the loan
Total interest paid / Total loan amount - compensating balance
Cash Ratio
Cash + Cash equivalents / current liabities
CL = A/P, Unearned revenue, taxes payable, dvidends payable
Futures Contract
A futures contract is when one party agrees to purchase an assets and one party agrees to sell that asset at an agreed upon future date and price, regardless of what the market price is at the end of the contract.
If the contract price is less than the spot price (the current market price) on the day the contract is settled, the economic impact is a savings to the buyer.
If the spot price (the current market price) is greater than the contract price on the delivery date then the buyer will pay the contract price. Net profit = difference between the market and contract price minus the cost of the contract
If the spot price (the current market price) is less than the contract price on delivery date then the buyer will pay the contract price. The loss = Difference between market and contract price plus cost of contract
Accouning Rate of Return: ARR
Net operating income divided by the initial investment
Salvage is indirectly considered because it is part of depreciation expense calcuation.
Depreciation expense retures acccounting income.
ARR does not focus on cash flows, it does not discount
After tax cost of Debt and Equity
After tax cost of debt is
(Bond payout / issue price) x ( 1 - tax rate %)
Bonds interest are tax deductible
Dividends paid are not tax deductible
Cost of Equity is
Dividend payout / issue price per share
Just-in-time inventory managment
- Just in time is an inventory management system designed to prevent excess inventory balances that increase nonvalue added costs like storage.
- Uses a cost accumulation method called backflush costing. This is when all manufacturing costs are charged directly to COGS, and the work-in-process account is eliminated. If inventory exist at the end of the period, costs are allocated (i.e. flushed backwards) from COGS to the appropriate inventory accounts using standard costs. Under the back-flush approach, there is a decrease in the detailed tracking of costs to specific jobs.
- Called the pull method
Residual income
Operating income - (RRR x operating income)
Residual income is the amount of income left over after deducting the cost of capital (imputed interest on assets) related to generating that income.
Return on Equity
Net income / average shareholders equity
Net income = Sales x profit margin
Also,
Net income - Preferred dividends / Average common shareholders equity
Return on sales
Operating income / sales
Asset turnover
Net Sales / total average assets
Profit margain
Net income / Net sales
Return on investment (return on assets)
Net inomce / Average invested capital (assets)
*Remember to do beg assets + end assets /2 if average is given
Fixed asset turnover ratio
Sales / Fixed assets @ book value
Accouting Rate of Return
Average annual profit / average investment (or inital investment cost)
The numerator is calcuated as the profit minus the projects depreciation expense (when provided)
Business cycles
Expansion - Peak - Contraction -Trough
Expansion : Economy is growing, stocks are in bull market; inflation nearing its target rate; unemployment is decreasing
A late expansion : is characterized by an acceleration of both growth and inflation above the moderate rates typical for each in early expansion phase.
An early expansion : follows a trough and is characterized by stable to moderate GDP growth and moderate to decreasing inflation
Peak : transitionary phase; economy is “overheated”; excessive inflation and growth; unemployment at its natural rate
occurs after an expanstion have been going on for some time. There is usually a lack of available labor and capital, which results in deceleration of growth. Tight labor markets and lack of excess capacity often result in the bidding up of wages and prices, leading to an acceleration of inflation.
Contraction : Economy is weakening; stocks in bear market; unemployment increases; prices falling; deflation
A negative GDP growth (decling economic output). Its usually accompained by falling rates of inflation.
Trough : Transitionary phase; economy hits bottom; low or stagnant growth; high unemployment
Factoring
Factoring recivables involves selling accounts receivable to a factoring company, which charges a % fee for accetping the risk of nonpaymnet, as well as interest is based on the amount of advanced funds.
As a result, the selling company receives cash sooner, which decreases A/R and improves the A/R turnover ratio.
Economic value-added
Net operating profit after taxes - cost of financing
Cost of financing (finance charge) is the WAAC (Weighted Average Cost of Capital) X Capital used to generate the profits
Cost of financing Summary
WAAC X Invested Capital
Economic value added is the net income/profit after taxes - cost of equity which includes deb and equity
Tax Shield Formulas
Cash Expense
Formula: Expense x (1 - tax rate)
Examples : Insurance, salaries, utilities
Deprecation
Formula : Expense x tax rate
Examples : Losses, depreciation, amortization
Key Financial Ratios
Profitbility : measures a company’s degree of success or failture in geneating profit using margins and return metrics
- Gross-Margin Ratio
- Return on assets
Asset Utilization : measures how efficiently the company uses its operating assets
- Inventrory turnover
- Receivables turnover
Liquidity : measures a company’[s ability to pay its maturing short-term obligations
- Current ratio
- Quick ratio (acid test)
Debt Utilization : measures a company’s use of leverage and its ability to service or pay off debt oligations
- Debt-to-total assets ratio
- Debt to-equity ratio
Market : mostly used by investors to evaluate whether a company’s share price is overvalued or undervalued.
- Price-to-earnings ratio
- Sales-to-cash-flow ratio
Reorder point for inventory
Average daily demand x Average daily lead time = Reorder point w/o safety stock \+ Safety Stock = Reorder point with safety stock
Deflator Ratio
Value of current year output at current year prices / Value of current year outptut at base year prices
Derivative
- Settled in cash or liquid assets for its net amount
- There is at least one underying and notional amount
- No initial costs or the inital cost is disproportionately low compared to other investments that would provide similar reactions to the market.
