Leading with Finance - Module 2 Flashcards
Why is Accounting Net Income considered a poor measurement of economic performance?
It includes a lot of distorting information.
What is the best measure of a company’s economic returns in Finance?
Cash generated.
What does EBIT stand for?
Earnings Before Interest and Taxes.
What does EBIT reflect?
Net Income with fewer distortions.
What is EBITDA an acronym for?
Earnings Before Interest, Taxes, Depreciation, and Amortization.
What does EBITDA measure?
Cash.
Define Working Capital.
The difference between operational assets and operational liabilities essential to basic operations.
What are the components of Working Capital?
- Accounts Receivable
- Inventory
- Accounts Payable
What do Operating Cash Flows incorporate?
The effects of working capital.
What formula represents Free Cash Flows?
EBIT * (1 - tax rate) + depreciation - increases in working capital - capital expenditures.
What is the Cash Conversion Cycle?
Days Inventory + Receivables Collection Period - Payables Period.
What does the Cash Conversion Cycle represent?
A gap that must be financed.
What affects the methods and sources companies use to finance working capital?
Their business model.
What is the time value of money?
Cash flows received in the future are worth less than cash flows received today.
What must be done to future cash flows to consider them at different times?
Discount them back to the present.
How do you discount cash flows?
Divide the cash flow by (1 + discount rate) raised to the power of the number of years in the future.
What does the Net Present Value (NPV) represent?
The sum of the present values of cash flows for a project, including initial negative cash flow.
What should a company do if the NPV is positive?
Invest in the project.
What are sunk costs?
Costs that have been expended in the past and are not recoverable.
Are sunk costs considered when determining the NPV of a project?
No.
