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23 Cards in this Set

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Working Capital Requirement
(WCR)
WCR measures the firm's net investment in its operating cycle.

WCR is the difference btwn Operating Assets (trade receivables, inventories & prepaid expenses) and operating liabilities (trade payables & accrued expenses).
Normal Bal Sheet Assets
Cash
A/R*
INV*
Prepaid*
Net FA
Managerial Bal Sheet Invested Capital or Net Assets
Cash
WCR*
Net FA

*WCR = Operating Assets (trade receivables, inventories & prepaid expenses) minus operating liabilities (trade payables & accrued expenses).
Normal Bal Sheet Liab & OE
Owed to Banks
Current portion of LT debt
Acc Pay*
Accrued Expense*
LT Debt
OE
Managerial Bal Sheet Capital Employed
SHORT TERM DEBT
Owed to banks
Current portion of LT Debt
LONG TERM FINANCING
LT Debt
OE
Income Statement
Net Sales
COGS
-Mat
-Labour
=GROSS PROFIT
-SG&A
-Lic Fees
-Deprec
= Operating Profit
- Extraord Loss
= EBIT
- Net Int
= EBT
- Inc Tax Exp
= EAT (bottom line)
--> Dividends
--> Retained Earnings
Cash-to-Cash Period or Cash conversion period
Period between the date a firm pays its suppliers and the date it collects the invoices from customers.
NPV defined
- Initial Cash Outlay + PV of Future net cash benefits*

*Found using an approapriate discount rate, the cost of financing the proposal
If NPV > 0 the proposal creates value.
Weighted Average Cost of Capital (WACC)
(After Tax cost of debt*) x (% Debt financing) + (Cost of Equity**) x (% Equity Financing)

*Return req'd by lenders measured after tax
** Return req'd by shareholders
After Tax Cost of Debt
Take EBIT. Don't take out interest. Then take out the tax expense. This gives the baseline for comparison.

Then figure EAT. Subtract EAT from EBIT. Divide result by EAT = % paid to Debt and Tax.

Subtract (% paid to debt and tax) from (% paid in tax w/out interest baseline) --> Result is the After tax cost of debt.


Figure the cost without the loan (ie: paying no interest) - tax expense. Then figure cost of debt with interest and
Capital Budgeting Decision
Should an investment project be accepted or rejected?
Capital Structure Decision
How much of the firm's assets should be financed with debt and how much w/ equity?
NPV Rule
NPV > 0 Accept
NPV < 0 Reject
IRR Rule
IRR is NPV = 0

Undertake a project if IRR is higher than cost of capital.
Two ways to raise equity and debt capital
EXTERNAL FINANCING
Short Term: Money mkt
Long Term:
Equity Mkt
Corporate Bond mkt
INTERNAL EQUITY FINANCING
Retained Earnings
What does the Bal sheet really tell us?
Records assets and liab at date of bal sht.
Their difference is the book value of equity at that date
what does the income statement really tell us?
Records revenues and expenses over a period of time. Their difference represents an increase or decrease in the book value of equity. This is the profit or loss for the period.
Cash Flow Statement Composition
CF OPERATING ACTIVITIES
Sales
-Operating Expenses (including depreciation)
-Tax Expense
+Depreciation expenses
- Cash used to finance growth of WCR*
=NOCF New Operating CF (A)
CF INVESTING ACTIVITIES
- Capital Expenditures and acquisitions
= New CF from Inv Activities (B)
CF FINANCING ACTIVITIES
+ New Borrowings
- Interest Payments
- Dividend Payments
= Net CF from Financing Activities (C)
(D) TOTAL NET CASH FLOW (A+B+C)
(E) Opening Cash
(F) Closing Cash (E+D)
Net Operating Cash Flow (NOCF)
Cash inflow from Operations - Cash outflow from operations

= Sales - COGS - SG&A expenses - Tax expenses - change in WCR

Change in WCR 2005 = WCR 12/31/04 - WCR 12/31/03
Accounts receivable (end)
= AR (beginning) + Sales - Cash inflow from sales
Cash inflow from sales
= Sales - [AR(end) - AR (begining)

= Sales - Change in AR
NOCF =

Net operations CF
Sales - COGS - SG&A - Tax Expense - Change in WCR.

= EBITDA - Tax Expense - Change in WCR
NCF Inv

Net CF from Investment Activity
Net fixed Assets end = NFA begin + Fixed Asset Acquisitions - Deprec Exp - Fixed Asset disposals