Lesson 0-3 Flashcards
investment and financing are two sides of the same coin, where risk
is an essential analysis parameter
True
How do you calculate net present value
You divide the cashflow with one plus the given interest rate exponentiated by the time untill you recive the payment. $/(1+i)^t
What question shall be answered in The Statement of Financial Position
What are the firm’s assets and how are they funded?
The statement of financial position is an average value of accounts over a period of time
No, it is an accountant’s snapshot of a firm’s accounting value on a particular date
In the statement of financial position you find a list of a companies assets and if they are financed through debt or equity
yes and no, this is the financial statement so you will see what assets there are and what liabilities there are but you will not see what share of the company car is financed through debt
How is net working capital (NWC) calculated
Current assets - current liabilities (current means things with fast turnover)
The income statement mesures performance at a specific point in time
No, average over a period
How is net income calculated
Revenue - Expenses
Name some operating expenses
COGS (cost of good sold aka costs incurred by the main operations of the business f.ex material labor and depreciation of property plant and equipment) also R&D is included under operating expenses
How is ebit calculated
Operating income is revenuses - operating expenses
What is marginal tax rate
the tax rate you pay if you earn one more unit of
currency
How is average tax rate calculated
it is the proportion of the taxable income that goes to pay
taxes so; taxes payed / profits before tax
If the tax rate is 20% for taxable income up to €200,000 and then 30% does a firm that earns more have to pay 30% on all they earn
No they pay 20% on 200k and 30% on the rest. The average tax rate becomes the total tax payed divided by total earnings while marginal tax rate is the tax rate on additional income so 30%.
What are the three parts of the cashflow statement
Cashflow from operating, investing and financing activities all added together become net cashflow
When evaluating companies financial statement it is important to compare to companies of simmilar size and industry, like for like
true
What is characteristic of margins in financial ratios
They are all generally divided by revenue
What is gross profit margin aka gross margins
(Revenue - COGS) / Revenues
what are operating profit margins aka operating margins
EBIT / Revenue
What are profit margins
Net profit/revenue
What is meant by the phrase it is important to compare like for like
To not look at absolute values but rather ratios, what investment would pay off more handsomly
What does short term solvency or liquidity ratios tell us about a company
A firms imediate ability to pay without undo stress
What does Long-term solvency or financial leverage ratios tell us about a company
The firms long run ability to pay its obligations
What does asset management or turnover ratios tell us about a company
How efficiently or intensively a company uses its assets to generate sales
What are the five categores of financial ratios
Market ratios, profitability ratios, longterm & short term solvency ratios and asset tunrover ratios
Name three short term liquidity ratios
current ratio = (current assets/ current liabilities), quick ratio = (c assets - inventory)/c liabilities and cash ratio = cash & cash equivalents / c liabilities
Name five long term leverage ratios
total debt ratio, debt/equity ratio, equity multiplyer = assets/equity, interest coverage or interest earned ratio = EBIT/Interest and cash coverage ratio = EBIT+Depreciation / interest
Name five asset management mesures
inventory turnover = COGS/Inventory, recivable turnover = revenues / number of trade receivables, payable turnover = Cogs/ trade payables, asset turnover = revenue/ total assets & days sale in recivables = average recivables of a day durring the year
Name three profitability metrics
profit margin = net income/ revenue, return on assets = net income / total assets and return on equity = net income / equity
How are ROA, ROE, equity multiplier and debt to equity ratio related to eachother
ROE=ROAEqMul=ROA(1+Debt to equity)
Explain the dupont model
ROE = profit margin * asset turnover * Equity multiplier. Aka “ROE is affected by, Operating efficiency (as measured by profit margin), Asset use efficiency (as measured by asset turnover), Financial leverage (as measured by equity multiplier)”
What is OROA
Operating return on assets, EBIT/Total assets, Must be higher than interest rate or assets poorly positioned
ROE = 1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 [𝑂𝑅𝑂𝐴 + (𝑂𝑅𝑂𝐴 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒) × D𝑒𝑏𝑡/Equity]
True
OROA is unafected by capital structures aka level of leverage
True
ROA = Profit margin × Asset turnover
True
Name some Market financial ratios
P/E price/earnings, EPS earnings per share, market to book ratio mv/bv
Name two benchmarks to compare the financial ratios of a company
pear group analysis or time trend analysis
Fiancial flows like bank loans have decreesed as a percentage of GDP from the mid 2000
Yes although I belive this is in the case of sweden
Bank loans stand for a minority of external financing in most countries
Yes although in italy it is close to 50% but that is an outlier. It is usually 10-25%
What is the differece between issuing bonds and taking a bank loan
Bonds are sold to the public while bank loans are loaned from a private bank, payments to a bank are done in the form of an annuity while in the case of a bond it is most often just once at the end of the life of the bonds life
What is a zero coupon bond
A bond that pays no periodical interest but only a grand principle payment
What is the face value or par value of a bond
The nominal value payed at the end of life.
What are the three common types of bonds payments
Pure discount bonds; aka no coupon, Fixed rate; aka coupons & principle and Console bonds; aka only coupons
How do you calculate the present value of a console bond
Coupon payment / interest rate
What is the yield to maturity rate YTM
The discount/interest rate that would make the present value of a bond equal to its price
How does the yield curve normally look
it becomes higher for bonds further into the future since those are more uncertain and demand higher interest rates
What are discount and premium bonds
discounts are sold below their present value and premium bonds are sold above
YTM is larger than coupons in premium bonds
False, that is the case for discount bonds, for premium it is the oposite
For premium bonds the price is usually higher than the face value
True, usually becouse the coupons are higher than the market interest rate
What is accrued interest
Coupon payment * time since last coupon / time between coupons
Why is the quoted price usually lower than the price you pay if you buy a bond between coupon payment
becouse the quoted price aka the ckean price does not count in accrued interest as per convention so what you must pay is the dirty price
Why is the quoted price used by bond traders to denominate bond price instead of the real one
Becouse the price fluctuations due to accrued interest is predictable but adds complexity, to highlight price changes due to unpredictable factors like risk they remove the accrued interest from the equation.
