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55 Cards in this Set
- Front
- Back
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Current Ratio |
=current assets/current liabilities |
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quick ratio |
=(cash+short-term marketable securities+receivables)/current liabilities |
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receivables turnover |
=credit sales/average receivables |
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days receivable |
=365/receivables turnover |
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inventory turnover |
=COGS/average inventory |
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days of inventory |
=365/inventory turnover |
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payables turnover |
=purchases/average trade payables |
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number of days payable |
=365/payables turnover |
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operating cycle |
=days of inventory + days of receivables |
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cash conversion cycle |
Net operating cycle =days of inventory + days of receivables - days of payables |
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Discount Basis Yield |
=(face value - price)/(face value)x(360/days) =% discount x (360/days) |
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Money - Market Yield |
=(face value - price)/(price)x(365/days) =holding period yield x (365/days) |
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Bond equivalent yield |
=2 x semiannual yield =holding period yield x (365/days) |
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Committed Line of Credit |
Bank extends an offer of credit for a certain amount but may refuse to lend if circumstances change |
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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 |
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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 |
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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 |
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Factoring |
-actual sale of receivables at a discount of face value |
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commercial paper |
-short-term debt securities issued by large, credit worthy firms |
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Business Risk |
combination of sales risk and operating risk |
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Sales risk |
uncertainty about a firms sales |
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operating risk |
uncertainty about operating earnings cause by FIXED operating costs |
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Financial Risk |
addition risk firm's common stock holders must bear when a firm uses fixed cost (debt) financing |
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Degree of Operating Leverage |
=% change EBIT/% change sales =(Q(P-V))/(Q(P-V)-F) |
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Degree of Financial Leverage |
=% change in net income (EPS)/% change EBIT =EBIT/(EBIT-Interest) |
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Degree of Total Leverage |
=DOL X DFL |
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Drags on Liquidity |
-Delay or reduce cash inflows or increase borrowing costs (eg. obsolete inventory) |
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Pulls on liquidity |
-accelerate cash outflows (eg. paying vendors sooner) |
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Outcome on payables turnover if an important buyer to suppliers |
-payables turnover decreases as they let you have more time to pay |
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Ex-dividend date |
-the first day a share of stock trades without the dividend, occurs two days before the holder-of-record date |
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pure-play method |
START BY UN-LEVERAGING THE FIRM Beta(Asset) = Beta (equity)(1/(1+((1-t)(D/E))) RELEVER TO GET BETA OF PROJECT Beta(Asset) = Beta(Asset)(1+((1-t)(D/E)) |
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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) |
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Audit Committee |
-responsible for providing financial information to shareholders |
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Compensation Committee |
-sets the compendsation for the firm's executives |
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Nominations Committee |
-responsible for recruiting new, qualified, independent board members |
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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 |
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share blocking |
- prevents investors who wish to vote their shares from trading their shares during a period prior to the annual meeting |
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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 |
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How to Calculate Beta |
=Covariance with the Market Portfolio/Variance of market return -a measure of market risk, not total risk |
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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 |
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Cash dividend and a share repurchase of the same amount are.... |
...equivalent in terms of the effect on shareholders' wealth, all else equal |
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Independent Projects |
-projects that are unrelated to each other and allow for each project to evaluated based on its own profitability |
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Mutually Exclusive Projects |
-only one project in a set of possible projects can be accepted and the projects compete with one another |
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Profitability Index |
PI = PV of Future Cash Flows/CF0 |
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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 |
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cannibalization |
-new project takes sales from an existing poduct |
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Basic Dupont Equation |
=(net income/sales)(sales/assets)(assets/equity) =net profit margin X asset turnover X leverage ratio |
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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 |
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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 |
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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 |
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Primary Sources of Liquidity |
-cash balances -short-term funding -cash flow management of collections and payment |
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Secondary Sources of Liqidity |
-liquidating assets
-negotiating debt agreements -bankruptcy protection |
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Cost of Trade Credit |
=(1 + (% discount/(1-%discount))^(365/days past discount) - 1 |
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What Favors Shareholder Interests |
-independent board -strong code of ethics -confidential voting |
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What Harms Shareholder Interests |
-management-aligned board -voting restrictions -takeover defenses |
