Week 2 economic balance sheet

Question 1

EPS

Answer 1

earnings per share

Question 1

3 questions to ask asses the financial health of a company

Answer 1

• How to measure profitability?
• What drives profitability?
• Does the firm make ends meet?

Question 2

why is a BS not the best presentation of a firm’s assets in an economic state/

Answer 2

• cash is not an asset that generates return (rather held for liquidity reasons like negative debt)
• account receivables and payables are similar in economic sense (called working capital)

Question 3

how to convert a BS to an economic BS

Answer 3

on the left:
- operating assets - operating liabilities
= WCR (working capital requirement)

on the right:
- ST debt + Lt debt - cash
= net debt

Question 4

WCR

Answer 4

= operating asset - operating liabilities
= receivables + inventories (+prepaid expenses) - payables (-accrued expenses)

***!! cash and short-term debt are not components of WCR

Question 5

accrued expense

Answer 5

Accrued expenses are liabilities that build up over time and are due to be paid.

example: bonus paid to CEO
(accounts payable are paid in the near future)

Question 6

WCR and nature of business

Answer 6

negative: air transport, grocery store

positive: aircraft manufacturing, machinery

(can you logically explain this?)

Question 7

invested capital

Answer 7

= WCR + fixed/intangible assets

• capital invested is the actual capitals that generate profits for the firm

Question 8

employed capital

Answer 8

= equity + net debt

• capital employed is the financing source of the invested capital