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Managerial Finance > Week 1 - 4/6 > Flashcards

Week 1 - 4/6 Flashcards

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1
Q

Agency Problem

A

Conflict of interest

Managers acting in their own best interest

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2
Q

Corporate Governance

A

Mechanisms that address the “agency problem” and work to ensure alignment of interests between managers and stakeholders

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3
Q

What determines or drives a corporation’s value?

A

Its ability to generate cash flows now and in the future.

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4
Q

Intrinsic Value

A

What is the “true” value
“A firm’s intrinsic value is present value of its future free cash flows (FCF) discounted at the weighted average cost of capital (WACC)

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5
Q

Free Cash Flow (FCF)

A

The following, each formula is further broken down

= NOPAT - net investment in total operating capital

= NOPAT - net investment in net fixed assets - net investment in NOWC

= NOPAT - Capital Investment - investment in NOWC + Depreciation

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6
Q

Does maximizing stockholder wealth mean managers should violate legal and ethical considerations?

A

No.

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7
Q

3 types of decisions confronting a financial manager

A
  1. Investment decisions (corporate budgeting)
  2. Financing decisions (capital structure)
  3. Operating decisions (working capital
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8
Q

Primary determinant of a firm’s value

A

Free Cash Flow

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9
Q

Free Cash Flows determine value of future or past Free Cash Flows?

A

Future

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10
Q

Free Cash Flow estimated or foretasted over a _ to _ year horizon…

A

3 to 10 year horizon

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11
Q

Free Cash Flow = …

A

= Net Operating Profit After Tax (NOPAT) - Net Investment in Operating Capital

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12
Q

NOPAT =

A

= EBIT x (1-Tax Rate)

DIFFERENT than net income. Net income is EBT x (1-Tax Rate)

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13
Q

Net Investment in Operating Capital = …

A

Investment in Net Operating Working Capital (NOWC) + Investment in Net Fixed Assets (PP&E)

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14
Q

Total Net Operating Capital = …

A

Net Operating Working Capital (NOWC) + Net Fixed Assest (PP&E)

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15
Q

Net Fixed Assets (PP&E) = …

A

Fixed Assets (PP&E) net of Depreciation

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16
Q

Steps to Calculating Free Cash Flow (5 steps)

A
  1. Find Net Operating Profit After Taxes
  2. Find Net Operating Working Capital
  3. Find Total Net Operating Capital
  4. Find Net Investment in Operating Capital
  5. Find Free Cash Flow
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17
Q

Revenue vs Sales

A

Revenue is the total amount of money generated by a company. Sales are the total consideration accrued from selling goods or services by a company.

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18
Q

Retained earnings

A

Accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period.

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19
Q

How do you find gross profit margin

A

(Total Revenue - COGS) / Total Revenue

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20
Q

How do you find net profit margin?

A

Net Income/ Total Sales Revenue

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21
Q

How do you find cash flow margin?

A

Cash flows from operating activities / total revenue

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22
Q

Net sales, net income, net revenue…

A

Net sales and net revenue are the same thing. Net sales and net revenue are the money your company earns from doing business with its customers.

Net income is profit - what’s left over after you account for all revenue, expenses, gains, losses, taxes and other obligations.

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23
Q

Current Ratio =

A

Current Assets / Current Liabilities

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24
Q

Quick or Acid Test Ratio =

A

[Current Assets - Inventories] / Current Liabilities

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25
Q

Accounts Receivable (A/R) Turnover =

A

Sales / Accounts Receivable

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26
Q

Inventory Turnover =

A

COGS / Inventories

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27
Q

Net Fixed Assets (PP&E) Turnover =

A

Sales / Net Fixed

28
Q

Total Assets Turnover =

A

Sales / Total Assets

29
Q

Liquidity Ratios (2)

A

Current Ratio

Quick or Acid Test ratio

30
Q

Asset Management Ratios (4)

A

Accounts Receivable (A/R) Turnover
Inventory Turnover
Net Fixed Assets (PP&E) Turnover
Total Assets Turnover

31
Q

Debt Management (Financial Leverage Ratios) (6)

A 
Debt to assets ratio
Debt to equity ratio
Market debt ratio
Liability to assets ratio
Interest Coverage ratio
EBITDA Coverage Ratio
32
Q

Debt to assets ratio =

A

Total debt / total assets

33
Q

Debt to equity ratio =

A

Total debt / total common equity

34
Q

Market debt ratio =

A

total debt / (total debt + market value of equity)

35
Q

liability to assets ratio

A

total liabilities / total assets

36
Q

interest coverage ratio =

A

EBIT / Interest expense

37
Q

EBITDA Coverage ratio =

A

(EBITDA + lease payments) / (interest + principal payments + lease payments)

38
Q

Profitability Ratios (5)

A 
Net Profit Margin
Operating Profit margin
ROA - Return of assets
ROE - Return on Equity
Return on invested Capital - ROIC
39
Q

Net Profit Margin =

A

Net income / sales

40
Q

Operating profit margin =

A

EBIT / sales

41
Q

ROA (return on assets) =

A

Net income / total assets

42
Q

ROE (return on equity) =

DuPont Equation

A

Net income / common equity
or
(Net Income/ Sales) * (Sales/ Total Assets) * (Total Assets/ Common Equity)
or
Profit Margin * Total Assets Turnover * Equity Multiplier
or
ROA * Equity Multiplier

43
Q

Return on Invested Capital (ROIC) =

A

NOPAT / Operating Capital

44
Q

Market Value Ratios (3)

A

Price to Earnings (P/E) ratio
Price to cash flow ratio
Market to book (M/B) ratio

45
Q

Price to Earnings (P/E) ratio =

A

Price per Share / earnings per share

46
Q

Price to cash flow ratio =

A

Price per share / cash flow per share

47
Q

Market to book (M/B) ratio =

A

Price per share / book value per share

48
Q

Debt Management Ratios are also called…

A

Leverage Ratios

49
Q

Equity Multiplier =

A

Total Assets / Common Equity

50
Q

DuPont Equation

A

Provides a framework for understanding how managerial actions affecting a firm’s profitability, asset efficiency, and financial leverage interact to determine the return on equity (ROE), a performance measure that is important for investors.

51
Q

DSO - Days Sales Outstanding

What is it AND what is the calculation?

A

Accounts Receivable / Sales
A calculation used by a company to estimate the size of their outstanding accounts receivable. It measures this size not in units of currency, but in average sales days.

52
Q

Book Value per Share =

A

common equity / number of shares outstanding

53
Q

What does EBIT stand for?

A

Earnings before interest and taxes

54
Q

PV of an annuity =

A

C * (1 - (1 / ( 1 + r ) ^ t ) ) / r

55
Q

Future Value =

A

PV * (1+rate)^time

56
Q

Present Value =

A

FV / (1+rate)^time

57
Q 
Definitions of...
PV
FV
Rate
Nper
Pmt

(used for future value and present value calculations)

A 
PV - Present Value
FV - Future Value
Rate - Rate of return
Nper - Time value
Pmt - Payments
58
Q

Net operating working capital =

A

Operating current assets - operating working liabilities

“working” means ‘short term’

59
Q

Present Value of Perpetuity

A

= C/r

= (what it pays every year/ rate

60
Q

Constant Dividend ( zero growth model

A

D1 = D2 = D3 = constant; P0 = D/R

61
Q

Constant dividend growth model (DGM)

Two stage growth (non-constant growth) model

Multi stage growth (non-constant growth) model

A

slide 7 corporate and stock valuation

Dividend growth rate attains steady state in second stage

Multiple dividend growth rates (more than 2)

62
Q

WACC

A

(D/V)Rd(1-T)+(P/V)Rp+(E/V)Re

Rd - Rate of return on debt (cost of debt)
T - Tax rate
P - value of preffered stock
E/V - weight of equity
Re - cost of equity

V = E+P+D

100% = E/V + P/V + D/V

D - value of debt
V - Value of equity

63
Q

Cost of debt (Rd)

A

= Yield-to-maturity on debt

= market-required interest rate on firms debt

may be estimated from observing the yields on similarly rated debt

64
Q

After tax cost of debt

A

= Rd (cost of debt)* (1-T)

Interest tax shield or tax savings = RdDT

65
Q

Dividend growth model approach

A

= Cost of Equity (Rd) = Dividend/ Stock Price (D1/P0) + Dividend growth rate (g)

  • Assumes constant g, which may be estimated from historical growth rates or fro analysts’ forecasts
66
Q

Capital Asset Pricing Model (CAPM)

A

Cost of equity (Re) = risk-free rate (Rf) + Market risk premium (Rm - Rf) * beta

Managerial Finance (2 decks)

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