Part III Chapter 9 Flashcards
capital budgeting
The process by which proposed large-dollar
investments in long-term assets are evaluated.
cash conversion efficiency
An efficiency/asset management ratio that measures
how effectively a company has converted sales (or
revenues) into cash
common-size financial statement
A financial statement that expresses every line item
on the statement as a percentage of revenue or as a
percentage of total assets.
coverage ratio
A type of financial ratio concerned primarily with
measuring a company’s ability to make payments on
(i.e., service) its debt.
current asset turnover ratio
An efficiency/asset management ratio that measures
how many times the firm has turned over the stock
of its most liquid assets with the flow of revenue.
debt management ratio
A type of ratio that measures the firm’s degree of
indebtedness and its ability to service its debt.
debt to tangible net worth ratio
A type of debt management ratio that reflects the
impact of intangible assets (e.g., goodwill, patents,
trademarks, and copyrights) on the balance sheet.
DuPont approach
An integrated ratio analysis technique that looks
at the return on equity (ROE) as a relationship
among an organization’s net profit margin, asset
management, and financial leverage.
EBITDA margin
A measure of operating profitability calculated by
dividing EBITDA (earnings before interest, taxes,
depreciation, and amortization) by total revenues
economic value added (EVA)
A performance measurement ratio that isolates the
funds available to all suppliers of capital and then
relates that total to the amount of capital supplied.
It can be computed as earnings before interest
and taxes (EBIT), times one minus the company’s
tax rate, and then subtracting the product of the
weighted average cost of capital (WACC) and longterm debt and equity.
efficiency/asset management ratio
A type of ratio that measures how effectively assets
are utilized.
equity capital
The invested capital of an organization (as
contrasted with borrowed or debt capital).
financial budget
A component of a master budget, this budget
addresses an organization’s financing and investing
activities.
financial leverage
A measure of a company’s use of debt in its capital
structure.
fixed asset turnover ratio
An efficiency/asset management ratio that measures
how efficiently fixed assets (or property, plant, and
equipment) are used. It is computed as revenues
divided by net property, plant, and equipment.
fixed cost
A type of cost that does not vary in total over a wide
range of activity and is not immediately impacted by
changes in business activities.
fixed-charge coverage ratio
A measure computed as earnings before interest and
taxes (EBIT) plus fixed charges, divided by interest
expense plus fixed charges.
flotation costs
The costs of issuing a security (usually the
underwriting costs), not related to direct interest or
equity costs.
free cash flow (FCF)
The amount of effective cash generated and
available to a company after all necessary
investments have been accounted for.
future value (FV)
For an investment made today, this is the expected
value of the investment at a later date.
gross profit margin
A performance ratio that shows the percentage of
revenues remaining after the cost of goods sold is
deducted from revenue
indebtedness/debt ratio
A ratio used to measure the level of indebtedness or
use of leverage by a company.
internal rate of return (IRR)
The discount rate that makes the net present value
equal to zero or, equivalently, makes the present
value (PV) of cash inflows equal to the PV of cash
outflows.
liquidity/working capital ratio
A type of ratio that measures a firm’s ability to meet
its payment obligations on short-term debt and helps
ascertain whether cash is being used effectively.
long-term debt to capital ratio
A type of debt management ratio that measures the
percentage of a company’s capital that is provided
by long-term debt.
master budget
An annual budget for an entire organization.
net present value (NPV)
A type of financial analysis, this value is calculated
by summing the present value of anticipated cash
inflows and the present value of cash outflows.
net profit margin
A performance ratio that shows the percentage
of profits earned after all expenses and taxes are
deducted from revenues.
operating budget
A component of a master budget, this budget
focuses on day-to-day operations.
operating leverage
A concept that examines the responsiveness of
operating profits to changes in sales by examining
the extent to which fixed costs are used in a
company’s operating cost structure.
operating profit margin
A performance ratio that shows the percentage
of revenue remaining after both the cost of goods
sold and all operating expenses are deducted from
revenue. It is computed as earnings before interest
and taxes (EBIT) divided by revenues
opportunity cost
The value of the best known alternative not taken
when two or more mutually exclusive alternatives are
available.
payback period
The number of years required to recover the initial
investment in an asset or project.
performance ratio
A type of ratio that measures profit relative to the
amount of revenue or the level of financing.
present value (PV)
The current value of anticipated future cash flows or
payments.
profitability index (PI)
A cost/benefit measurement that is similar to net
present value, this is ratio of the present value gained
to the cost required to obtain that value.
return on assets (ROA)
A performance ratio that measures net income in
relation to the investment in assets.
return on common equity (ROCE)
A performance ratio that measures the amount of
earnings available to common shareholders relative
to the level of their investment in the company.
It is computed as earnings available to common
shareholders divided by common equity.
return on invested capital (ROIC)
A performance measurement ratio that calculates
profit per dollar of invested capital. It is computed
by dividing net income by the sum of long-term debt
and equity.
risk-adjusted discount rate (RADR)
A type of cost/benefit analysis that essentially
requires high-risk endeavors to earn a higher rate of
return in order to justify the investment.
risk-adjusted return on capital
RAROC
A method of determining the economic value of a
transaction or activity based upon the anticipated
risk-adjusted performance of the activity.
scenario analysis
A method for assessing investment risk, this type of
what-if analysis assesses possible outcomes under
a range of circumstances. It is used frequently to
establish the lower bound (i.e., worst case) and upper
bound (i.e., best case) of outcomes.
sensitivity analysis
A method of assessing investment risk, this type of
analysis determines how a final outcome, such as net
present value, is influenced by changes in the value
of a single variable and how vulnerable the expected
outcome is to changes in a specific assumption.
simulations
A method of assessing investment risk, this method
combines aspects of scenario and sensitivity
analyses, allowing certain assumptions in a decision
model to fluctuate simultaneously
step-up-cost
A type of cost that is fixed over a wide range of
activity, but once output reaches a certain level,
requires additional fixed costs to facilitate an
increased level of output
time value of money
A fundamental finance principle that establishes the
relationship between cash flows received at different
times.
times interest earned (TIE) ratio
A coverage ratio that measures a firm’s ability to
service its debt through interest payments. It is
computed as operating income divided by interest
expense.
total asset turnover ratio
An efficiency/asset management ratio that measures
how many times a firm’s asset base was used in
generating the flow of revenue during the period.
total liabilities to total assets ratio
A type of debt management ratio that measures the
percentage of all liabilities to total investments or
total assets. It is computed as total liabilities divided
by total assets.
variable cost
A type of cost in a business whose total amount
changes in direct proportion to the level of business
activity.
weighted average cost of capital
WACC
Used in determining the overall cost of capital, this
cost is computed as a weighted average of the
effective cost of debt and the cost of equity.
