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Banking & Asset Management > Session7 - Managing growth and Corporate Lending > Flashcards

Session7 - Managing growth and Corporate Lending Flashcards

1
Q

How do you break down the DuPont-model?

A

Profit Margin * Asset Turnover * Financial Leverage = ROE
Moreover,
(NI / Sales) * (Sales / Assets) * (Assets / equity) = ROE

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2
Q

If profit margin is decreasing and financial leverage is increasing, good or bad?

A

Probably bad.

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3
Q

In terms of risk, what does a high ROE imply?

A

A higher risk

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4
Q

How do you measure the asset turnover?

A

REV / TA or REV / FA

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5
Q

How do you measure the time it takes for inventories to stay in the firm?

A

INV / CGS * 365

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6
Q

How do you measure the Collection period?

A

AR / REV * 365

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7
Q

How do you measure the Payable period?

A

AP / REV * 365

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8
Q

How do you measure the day’s sales in Cash?

A

CASH / REV * 365

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9
Q

What does the collection period, the payable period and Cash days sales all have in common?

A

They measure the flow of the firms income or costs.

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10
Q

What is EBIT / Int?

A

It is to which extent we generate accounting “cash” to cover for interest

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11
Q

In terms of this course, what does NLB measure?

A

NLB measures to which extent the NWC is positive

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12
Q

What does the Leverage ratio measure?

A

the repartitation of the origin of external funds

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13
Q

What does the coverage ratios measure?

A

the amount of income available to a debt service

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14
Q

What does the liquidity ratios measure?

A

The capability of meeting short term needs

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15
Q

What does the current ratio measure?

A

Current assets / current liabilities

DOES NOT say anything about liquidity!

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16
Q

What is an acid test?

A

[Current Assets - Inventory] / Current liabilities

17
Q

What is the main difference between Finance and Accounting?

A

Finance measures what will happen while Accounting measures what have happened.

18
Q

What could be the problem when we see an Increasing WCR and decreasing NLB? How can it be solved?

A

Increasing WCR means that we sell more and more.
Decreasing NLB means that short term debt is increasing.

The company can solve this by:

1) Decrease the WCR by reducing AR days
2) Take on debt AS LONG AS it adds value to the firm.

19
Q

What does NWC show?

A

to what extent we have long term resources to cover long term uses

20
Q

What is a good link to use between NI and CASH?

A

To see to which extent that NI generates CASH: If NI increases more and more, does the cash follow or not?

If not, may have an issue.

21
Q

What are the 2 formulas for WCR?

A

WCR = AP + INV - AR
or
WCR = (CA - CASH) - (CL - STD)

22
Q

What could be bad with growth?

A

unmanagerial growth

23
Q

Is a positive cash flow always good news?

A

NO! Cash = CF_OP + CF_INV + CF_FIN

Because there could be sources of financing that generates cash for instance which doesn’t show any sign of profitability

24
Q

When the cash variation is positive over the year, it always means that the company creates value?

A

NO, it depends on where the cash flow variation is coming from

CF_OP could be negative while the other two are positive –> Cash is positive. However, doesn’t mean that the firm is profitable.

25
Q

What does FCF show?

A

the amount of money that could be generated from the sources

26
Q

What is the sustainable growth rate?

A

What is the growth that can be targeted GIVEN a set of constraints

27
Q

How is the growth rate (g) calculated?

A 
Variation in E / E 
or 
[Earnings * R] / E = [Earnings * (1-d) ] / E
or 
ROE * R
or
(Earnings / Sales) * (Sales / Assets) (Asset / Equity) * R
(Last one is Dupont)
or
R * (Assets / Equity) * ROA
R = retention ratio 
d = dividends ratio
28
Q

What does it mean if the real growth rate is higher than the sustainable?

A

means that one or several assumptions aren’t meet, rather than the s-growth being wrong

29
Q

What should we do when Actual growth > sustainable growth?

A

1) Sell new Equity
2) “Increase financial leverage”
3) reduce dividend payout
4) abandon marginal activities
5) Outsource production
6) increase prices
7) Merge with a cash cow

30
Q

What should we do when Actual growth < sustainable growth?

A

1) ignore the problem
2) Invest in core business despite low returns
3) increase amount of cash holdings
4) return the money to the shareholders (increase div)
5) Equity buy back
6) Buy growth

31
Q

What should we do when Actual growth < sustainable growth?

A

1) ignore the problem
2) Invest in core business despite low returns
3) increase amount of cash holdings
4) return the money to the shareholders (increase div)
5) Equity buy back
6) Buy growth

32
Q

why should we be careful with this formula?

ROE = ROIC + (ROIC - r(1-Tc)) * D/E

A
  • This equation means that we can improve ROE if ROIC > cost of financing
  • Only shows the accounting perspective - not enough to make the correct interpretation

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