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2021 - Financial Mgmt > Module 2 > Flashcards

Module 2 Flashcards

1
Q

what are the major objectives of financial statements?

A
  • assess liquidity
  • assess past performance to indicate future performance
  • assess operation efficiency
  • predict bankruptcy / failure
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2
Q

primary users of FS?

A

equity investors
credit granters
mgmt

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3
Q

secondary users of FS?

A
  • employees
  • acquisition and merger analysts
  • auditors
  • SARS / tax authorities
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4
Q

time series techniques?

A
  • comparative/trend FS (directly comparing years)

- index analysis (uses a base year to compare)

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5
Q

cross section techniques?

A
  • common size analysis (% of sales)

- financial ratio analysis

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6
Q

what does FRA do?

A
  • express the relationship between two or more line items if it is a meaningful relationship
  • highlights the important fin characteristics of an enterprise by comparing ratios against a benchmark
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7
Q

benchmarks used for FRA comparison?

A
  • previous years
  • similar companies of the same size
  • av industry standards
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8
Q

what is deferred tax?

A

it is an interest free liability

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9
Q

solvency ratio formula?

A

TA:TL

do assets exceed liabilities

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10
Q

what do liquidity ratios do?

A

reflect/evaluate the ability of a firm to convert its CA to cash and use the cash to settle CL (settle short term debts)

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11
Q

what do financial leverage ratios do?

A

examine the cap structure of the company and determine whether it made efficient use of debt to create wealth

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12
Q

what does the debt ratio indicate?

A

the % of total assets financed by debt

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13
Q

adv and disadv of a decrease in debt?

A
  • we forgo the adv of debt to lever up returns to SH and benefits
  • decreases exposure to risk
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14
Q

what does the times int earned ratio measure?

A

the ability of the bus to pay interest from NPBIT

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15
Q

what does the cash coverage ratio show?

A

the ability of the bus to pay int from op CF (more reliable)

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16
Q

what does the CF to debt ratio show?

A

CF from ops / total debt

shows the firm’s ability to generate sustainable CF from normal op activities

17
Q

what is profit?

A

the primary measure of overall success of a comp’s normal operating activities

18
Q

what causes a dec in gross margin?

A
  • lower prices
  • incorrect mix of inv
  • inc in COS
19
Q

what causes a dec in net operating margin?

A
  • dec selling price
  • inc COS
  • inc operating exp
20
Q

what does the return on total assets do?

A

evaluates the use of assets to generate income

21
Q

what is ROE?

A

the overall measure of the financial success of the firm with respect to inc SH wealth

22
Q

what do markets ratios do?

A

evaluate the performance of the share price on the JSE based on the firm’s past and expected future performance

23
Q

what is the dividend/income yield?

A

cash returns SH earn on their inv

(DPS/market price per share) x 100

24
Q

return to shareholder / holding period return?

A

[ (P1 - P0) + DPS / P0 ] x 100

25
Q

what is return to shareholder / holding period return?

A

the overall return to SH including cap appreciation and dividend of the share

26
Q

what is headline EPS?

A
  • primary measure of comp performance

- measures profitability from class A SH view

27
Q

what is the dividend cover?

A

number of times divds can be paid out of earnings

headline EPS / DPS

28
Q

what does high div cover mean?

A

large % of earnings are retained within the firm to finance future growth plans

29
Q

what is the payout ratio?

A

% of earnings paid out as divs

DPS / headline EPS

30
Q

what does retention ratio evaluate?

A

amount of earnings are retained within the firm to finance future growth plans

31
Q

what does the price-earnings ratio measure?

A

how many times share price covers EPS

32
Q

what does high/low P/E ratio mean?

A 
high = high future growth prospects and earnings
low = risky inv
33
Q

what is the sustainable growth rate?

A

the maximum rate the firm can grow without any external financing (maintains d/e ratio with no added leverage)

34
Q

what influences sustainable growth rate?

A
  • net margin, TAT, financial policy (debt use)

- dividends policy

35
Q

what if a company wants to grow at a rate bigger than SGR?

A
  • inc long term borrowing (more risk, more int pmts). assumes borrowed money will earn a return in excess of cost.
36
Q

what is the ROE through Du Pont analysis?

A

net margin x TAT x equity multiplier

37
Q

how to improve our ROE through net margin?

A

inc sales, dec COS, dec op exp

38
Q

how to improve our ROE through TAT?

A

make efficient use of assets

39
Q

how to improve our ROE through equity multiplier?

A

use debt to lever up returns to SH

2021 - Financial Mgmt (11 decks)

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