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23 Cards in this Set
- Front
- Back
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). |
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Normal Bal Sheet Assets
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Cash
A/R* INV* Prepaid* Net FA |
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Managerial Bal Sheet Invested Capital or Net Assets
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Cash
WCR* Net FA *WCR = Operating Assets (trade receivables, inventories & prepaid expenses) minus operating liabilities (trade payables & accrued expenses). |
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Normal Bal Sheet Liab & OE
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Owed to Banks
Current portion of LT debt Acc Pay* Accrued Expense* LT Debt OE |
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Managerial Bal Sheet Capital Employed
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SHORT TERM DEBT
Owed to banks Current portion of LT Debt LONG TERM FINANCING LT Debt OE |
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Income Statement
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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 |
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Cash-to-Cash Period or Cash conversion period
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Period between the date a firm pays its suppliers and the date it collects the invoices from customers.
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NPV defined
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- 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. |
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Weighted Average Cost of Capital (WACC)
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(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 |
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After Tax Cost of Debt
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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 |
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Capital Budgeting Decision
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Should an investment project be accepted or rejected?
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Capital Structure Decision
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How much of the firm's assets should be financed with debt and how much w/ equity?
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NPV Rule
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NPV > 0 Accept
NPV < 0 Reject |
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IRR Rule
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IRR is NPV = 0
Undertake a project if IRR is higher than cost of capital. |
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Two ways to raise equity and debt capital
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EXTERNAL FINANCING
Short Term: Money mkt Long Term: Equity Mkt Corporate Bond mkt INTERNAL EQUITY FINANCING Retained Earnings |
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What does the Bal sheet really tell us?
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Records assets and liab at date of bal sht.
Their difference is the book value of equity at that date |
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what does the income statement really tell us?
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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.
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Cash Flow Statement Composition
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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) |
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Net Operating Cash Flow (NOCF)
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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 |
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Accounts receivable (end)
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= AR (beginning) + Sales - Cash inflow from sales
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Cash inflow from sales
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= Sales - [AR(end) - AR (begining)
= Sales - Change in AR |
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NOCF =
Net operations CF |
Sales - COGS - SG&A - Tax Expense - Change in WCR.
= EBITDA - Tax Expense - Change in WCR |
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NCF Inv
Net CF from Investment Activity |
Net fixed Assets end = NFA begin + Fixed Asset Acquisitions - Deprec Exp - Fixed Asset disposals
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