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ACF100 > week 23 > Flashcards

week 23 Flashcards

1
Q

what is solvency

A

the ability to cover liabilities when they fall due
potential problem if current assets < current liabilities

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2
Q

what is liquidity

A

refers to the ease of turning an asset into cash (without loss)
cash is most liquid

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3
Q

what is the working capital/current ratio

A

current assets / current liabilities
indicates ability to pay current liabilities from current assets

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4
Q

what is a good working capital/current ratio

A

between 1.5 and 2, very industry dependant

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5
Q

what is the limitation of working capital/current ratio

A

some assets are more liquid than others

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6
Q

what is the quick ratio (acid test)

A

(current assets - inventories) / current liabilities
more stringent test of liquidity because inventory is less liquid

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7
Q

what is a good ratio for the quick ratio

A

at least 1, depends on industry and size

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8
Q

how do you predict insolvency

A

current and quick ratios are crude measures of liquidity, most users of financial statements are interested in liquidity as an indicator of whether the company can pay all its debts or will go into liquidation in the near future

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9
Q

when does overtrading occur

A

when a business is operating at a level beyond its financial capacity

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10
Q

why does overtrading occur

A

young, expanding business
manager miscalculation
unavailability of financing

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11
Q

what are symptoms of overtrading

A

persistent use of bank overdraft facility
working capital ratios and liquidity ratios
significant increases in payment payables periods and settlement periods for receivables
long inventory holding period
low current and quick ratios

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12
Q

what are the impacts of overtrading

A

liquidity problems
supply problems
planning problems
business failure
business must ensure sufficient financing. for long term success

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13
Q

how do you calculate dividend yield

A

annual equity dividend / current market value of equity shares x 100

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14
Q

what is dividend yield

A

seeks to assess equity shareholders annual cash return on investment
often between 2-5%
dividend yield is very important to some shareholders but not others
may be compared with other investments

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15
Q

how do you calculate dividend cover

A

profit for the year / annual equity dividend

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16
Q

what is dividend cover

A

shows the number of times dividend is covered by current profits
indicates how likely it is that company will be able to maintain dividends if profits fall
measure of risk

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17
Q

how do you calculate earnings per share

A

profit for the year / number of equity shares in issue

18
Q

what is earnings per share

A

key measure of profitability and ability to pay dividends
profit - represents profit avaliable for distribution to equity shareholders
weighted average number of shares to take account of the period which shares are in issue

19
Q

what is basic EPS

A

takes account of all equity shares in issue

20
Q

what is diluted EPS

A

takes account of shares that may result if thee are financial statements which might be converted into shares in the future because this conversion would dilute the EPS

21
Q

how do you calculate return on equity

A

profit for the year / (equity - minority interest) x 100

22
Q

what is return on equity

A

comprehensive indicator of performance - how well managers use funds invested by shareholders
ROE should exceed cost of equity capital for the firm to be regarded as a success

23
Q

what is minority interest

A

refers to ownership aside from the parent
reported on balance sheet - reflects claim on assets belonging to other non controlling shareholders

24
Q

how do you calculate price-earnings ratio

A

current market price of each equity share/earnings per share

25
Q

what is price-earnings ratio

A

compares amount invested in one share with earnings per share
represents the number of years of current earnings that investors are prepared to buy
often is in the range between 10 and 25, variation across industries

26
Q

what does low P/e ratio mean

A

riskier firm
firm is expected to stagnate

27
Q

what does high P/e ratio mean

A

firm is expected to grow

28
Q

why is there variation in P/e ratio

A

due to level of stock market and industry of firm

29
Q

how do you calculate market book ratio

A

market capitalisation of shares (market value) / book value of shares (capital and reserves)

30
Q

what is market to book ratio

A

relationship between stock market value of shareholder equity and accounting value of shareholder equity
can indicate whether a company is under or over valued or whether market expectations of the company are high or low

31
Q

how do you calculate interest cover

A

operating profit (before tax and interest) / interest expense

32
Q

what is interest cover

A

an indicator of how much cushion there is before interest is paid

33
Q

what is gearing or leverage

A

the relationship between fixed interest capital and the amount of equity capital

34
Q

why should shareholders care about gearing

A

concerned about risk, gearing is an indicator of financial risk
high leverage = high risk

35
Q

how do you calculate equity

A

share capital + share premium account + reserves + retained profits

36
Q

how do you calculate debt

A

preference shares + loans + bonds + other non-current borrowings

37
Q

are preference shares debt or equity

A

typically debt because interest must be paid before any dividends to ordinary shareholders

38
Q

what is debt-equity ratio

A

debt capital / equity capital x 100

39
Q

what is the gearing ratio

A

debt capital / (debt capital + equity capital) x 100

40
Q

why is high gearing potentially negative

A

increases profit available for distribution as dividends and it is deductible for tax purposes
more debt, more financial risk and more volatility attributable to shareholders

41
Q

what is financial risk

A

relates to company’s exposure to fixed interest

42
Q

what is operating risk

A

relates to particular industry in which the firm is operating

ACF100 (26 decks)

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