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Managerial Finance > Week 1 - 4/6 > Flashcards

Week 1 - 4/6 Flashcards

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
Accounts Receivable (A/R) Turnover =
Sales / Accounts Receivable
26
Inventory Turnover =
COGS / Inventories
27
Net Fixed Assets (PP&E) Turnover =
Sales / Net Fixed
28
Total Assets Turnover =
Sales / Total Assets
29
Liquidity Ratios (2)
Current Ratio | Quick or Acid Test ratio
30
Asset Management Ratios (4)
Accounts Receivable (A/R) Turnover Inventory Turnover Net Fixed Assets (PP&E) Turnover Total Assets Turnover
31
Debt Management (Financial Leverage Ratios) (6)
``` Debt to assets ratio Debt to equity ratio Market debt ratio Liability to assets ratio Interest Coverage ratio EBITDA Coverage Ratio ```
32
Debt to assets ratio =
Total debt / total assets
33
Debt to equity ratio =
Total debt / total common equity
34
Market debt ratio =
total debt / (total debt + market value of equity)
35
liability to assets ratio
total liabilities / total assets
36
interest coverage ratio =
EBIT / Interest expense
37
EBITDA Coverage ratio =
(EBITDA + lease payments) / (interest + principal payments + lease payments)
38
Profitability Ratios (5)
``` Net Profit Margin Operating Profit margin ROA - Return of assets ROE - Return on Equity Return on invested Capital - ROIC ```
39
Net Profit Margin =
Net income / sales
40
Operating profit margin =
EBIT / sales
41
ROA (return on assets) =
Net income / total assets
42
ROE (return on equity) = | DuPont Equation
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
Return on Invested Capital (ROIC) =
NOPAT / Operating Capital
44
Market Value Ratios (3)
Price to Earnings (P/E) ratio Price to cash flow ratio Market to book (M/B) ratio
45
Price to Earnings (P/E) ratio =
Price per Share / earnings per share
46
Price to cash flow ratio =
Price per share / cash flow per share
47
Market to book (M/B) ratio =
Price per share / book value per share
48
Debt Management Ratios are also called...
Leverage Ratios
49
Equity Multiplier =
Total Assets / Common Equity
50
DuPont Equation
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
DSO - Days Sales Outstanding | What is it AND what is the calculation?
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
Book Value per Share =
common equity / number of shares outstanding
53
What does EBIT stand for?
Earnings before interest and taxes
54
PV of an annuity =
C * (1 - (1 / ( 1 + r ) ^ t ) ) / r
55
Future Value =
PV * (1+rate)^time
56
Present Value =
FV / (1+rate)^time
57
``` Definitions of... PV FV Rate Nper Pmt ``` (used for future value and present value calculations)
``` PV - Present Value FV - Future Value Rate - Rate of return Nper - Time value Pmt - Payments ```
58
Net operating working capital =
Operating current assets - operating working liabilities "working" means 'short term'
59
Present Value of Perpetuity
= C/r | = (what it pays every year/ rate
60
Constant Dividend ( zero growth model
D1 = D2 = D3 = constant; P0 = D/R
61
Constant dividend growth model (DGM) Two stage growth (non-constant growth) model Multi stage growth (non-constant growth) model
slide 7 corporate and stock valuation Dividend growth rate attains steady state in second stage Multiple dividend growth rates (more than 2)
62
WACC
(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
Cost of debt (Rd)
= Yield-to-maturity on debt = market-required interest rate on firms debt may be estimated from observing the yields on similarly rated debt
64
After tax cost of debt
= Rd (cost of debt)* (1-T) Interest tax shield or tax savings = Rd*D*T
65
Dividend growth model approach
= 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
Capital Asset Pricing Model (CAPM)
Cost of equity (Re) = risk-free rate (Rf) + Market risk premium (Rm - Rf) * beta

Managerial Finance (2 decks)

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