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55 Cards in this Set

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  • Back

Current Ratio

=current assets/current liabilities

quick ratio

=(cash+short-term marketable securities+receivables)/current liabilities

receivables turnover

=credit sales/average receivables

days receivable

=365/receivables turnover

inventory turnover

=COGS/average inventory

days of inventory

=365/inventory turnover

payables turnover

=purchases/average trade payables

number of days payable

=365/payables turnover

operating cycle

=days of inventory + days of receivables

cash conversion cycle

Net operating cycle

=days of inventory + days of receivables - days of payables

Discount Basis Yield

=(face value - price)/(face value)x(360/days)

=% discount x (360/days)

Money - Market Yield

=(face value - price)/(price)x(365/days)

=holding period yield x (365/days)

Bond equivalent yield

=2 x semiannual yield

=holding period yield x (365/days)

Committed Line of Credit

Bank extends an offer of credit for a certain amount but may refuse to lend if circumstances change

Committed (Regular) Line of Credit

-bank extends an offer of credit that it commits to for a certain time

-more reliable than uncommitted

-can be listed in footnotes of financial statements as a source of liquidity

Revolving Line of Credit

-more reliable than a committed Line of Credit

-typically longer terms

-can be listed in footnotes of financial statements as a source of liquidity

Banker's Acceptance

-guarantee from bank of firm that has ordered goods that a payment will be made upon receipt of goods

-may be sold at a discount to generate immediate funds


-actual sale of receivables at a discount of face value

commercial paper

-short-term debt securities issued by large, credit worthy firms

Business Risk

combination of sales risk and operating risk

Sales risk

uncertainty about a firms sales

operating risk

uncertainty about operating earnings cause by FIXED operating costs

Financial Risk

addition risk firm's common stock holders must bear when a firm uses fixed cost (debt) financing

Degree of Operating Leverage

=% change EBIT/% change sales


Degree of Financial Leverage

=% change in net income (EPS)/% change EBIT


Degree of Total Leverage


Drags on Liquidity

-Delay or reduce cash inflows or increase borrowing costs (eg. obsolete inventory)

Pulls on liquidity

-accelerate cash outflows (eg. paying vendors sooner)

Outcome on payables turnover if an important buyer to suppliers

-payables turnover decreases as they let you have more time to pay

Ex-dividend date

-the first day a share of stock trades without the dividend, occurs two days before the holder-of-record date

pure-play method


Beta(Asset) = Beta (equity)(1/(1+((1-t)(D/E)))


Beta(Asset) = Beta(Asset)(1+((1-t)(D/E))

When evaluating the qualifications of board members, consider:

-make informed decisions about the firm's future

-can act with care and competence as a result of their experience

-have made public statements regarding their ethical stances

-have had any legal or regulatory problems as a result of working on another board

-have other board experience

-regularly attend meetings

-are committed to shareholders

-have served on the board for more than ten years (bad as may be too aligned with management)

Audit Committee

-responsible for providing financial information to shareholders

Compensation Committee

-sets the compendsation for the firm's executives

Nominations Committee

-responsible for recruiting new, qualified, independent board members

What limits the ability of shareholders to effect firm's direction

-requiring attendance at annual meeting

-groups its meetings to be held the same day as other companies in the same region

-allows proxy voting by some remote mechanism

-allowed to use share blocking

-board of directors tabulates the results of all proxy votes

share blocking

- prevents investors who wish to vote their shares from trading their shares during a period prior to the annual meeting

Cumulative Voting

-may be able to cast the cumulative number of votes allotted to their shares for one or a limited number of board nominees

-favorable for shareholders

How to Calculate Beta

=Covariance with the Market Portfolio/Variance of market return

-a measure of market risk, not total risk

Aging Schedule

-absolute or present amount of accounts receivable that are current and that are past due by various lengths of time

-identify trends in how well the firm is doing at collecting receivables and converting them to cash

Cash dividend and a share repurchase of the same amount are....

...equivalent in terms of the effect on shareholders' wealth, all else equal

Independent Projects

-projects that are unrelated to each other and allow for each project to evaluated based on its own profitability

Mutually Exclusive Projects

-only one project in a set of possible projects can be accepted and the projects compete with one another

Profitability Index

PI = PV of Future Cash Flows/CF0

Steps of Capital Budgeting process

-process of identifying and evaluating capital

projects (received over longer than a year)

* remember cash flows are based on opprtunity costs and after-tax

1. Idea generation

2. Analyzing project proposals (cash flow)

3. Create the firm-wide capital budget (prioritize according to timing of cash flows + strategic plan)

4. Monitor decisions and conduct a post-audit


-new project takes sales from an existing poduct

Basic Dupont Equation

=(net income/sales)(sales/assets)(assets/equity)

=net profit margin X asset turnover X leverage ratio

Extended Dupont Equation

=(net income/EBT)(EBT/EBIT)(EBIT/revenue)(revenue/total assets)(total assets/total equity)

=tax Burden x interest burden x EBIT margin x asset turnover x leverage ratio

-tax burden = 1-tax rate

Determining the Effect of a Share Repurchase on Earnings per Share

-Calculate earnings yield (EPS/Share Price)

-If after-tax yield on company funds, or after-tax cost of borrowed debt is greater, EPS will fall

Effect of Share Repurchase on Book Value per Share

-will decrease if the repurchase price is greater than the original BVPS

-will increase if the repurchase price is less than the original BVPS

Primary Sources of Liquidity

-cash balances

-short-term funding

-cash flow management of collections and payment

Secondary Sources of Liqidity

-liquidating assets

-negotiating debt agreements

-bankruptcy protection

Cost of Trade Credit

=(1 + (% discount/(1-%discount))^(365/days past discount) - 1

What Favors Shareholder Interests

-independent board

-strong code of ethics

-confidential voting

What Harms Shareholder Interests

-management-aligned board

-voting restrictions

-takeover defenses