Week 4 Flashcards
Cleaning earnings is the process of….
Adding back unusual and non-recurring costs and deducting unusual and non-recurring sources of income
The ratio of the provision for depreciation for PP&E to original cost of PP&E indicates and estimate of
The average age of PP&E
What are examples of current liabilities?
Accounts payable
Accruals
Deferred income
Tax payable
Define a liability
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
What are the two financing choices?
Debt or equity capital
What are the 5 types of capital available in order of cost to company:
- Senior secured debt, including asset based koands (lower cost)
- Senior unsecured debt
- Subordinated ‘mezzanine’ debt
- Preferred equity
- Common equity (Higher)
What are the advantages of debt?
- Interest is deductible for tax purposes, dividends on shares are not
- Shareholders’ control is not affected
What are the disadvantages of debt?
- A company with fluctuating earnings and a relatively weak cash position may face great difficulties making interest payments or settling debt when earnings/cash flows are low.
- Face value of debt must be paid at maturity
- Interest must be paid on a periodic basis to lenders
What ratios do we use to investigate and analyse profitability?
- Gross profit margin
- Net profit margin
- Operating margin
Equation for gross profit margin
Gross profit/sales revenue
Equation for net profit margin
Net income/sales revenue
Equation for operating margin
Operating profit / sales revenue
Effective tax rate ratio
Income tax expense / profit before tax
Return on capital employed equation
operating profit / capital employed
Return on equity equation
Net income/equity
