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# Finance Quiz: 2 & 3

### Financial Statements and Financial Ratios

Question | Answer |
---|---|

What is "R"? | The % return that a company needs to provide their security holders to satisfy them |

Rrisky = what? | Rrisky= nominal risk free rate + risk premium |

What is risk premium? | Additional return investors want for investing in riskier security. |

Net Present Value | NPV = PV of benefits - PV of costs |

Average Tax Rate | Tax Liability/Taxable Income |

Corporate Tax Income | Or average tax rate is the % of each dollar of taxable income that the firm pays in taxes. |

Marginal Tax Rate | The amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns. |

Interest is taxable with two exceptions, what are they? | State/local government bonds and one corporation owning stock in another where 70% are tax exempt. |

Taxes and interest/dividends paid by corporation | Interest payments deducted from income before calculating taxable income. Dividends paid to shareholders not tax deductible. |

What is free cash flow? | The cash available for distribution to the investors after investments for firms necessary, ongoing operations. |

What is the free cash flow equation? | FCF=[EBIT(1-tax rate)+Depreciation]-[Change in gross fixed assets + change in net operating working capital] OR (Operating cash flow - Investment in operating capital) |

Positive FCF | Funds available for distribution to investors |

Negative FCF | May be experiencing operating or managerial problems, may be investing heavily in operating capital to support growth. |

What are ratios used for? | Trend analysis and competitor analysis. |

What is trend analysis? | A time series method; comparison to the same firm over time. |

What is competitor analysis? | A cross sectional method; comparison to other firms in the same industry. |

P/E Ratio | Trailing P/E = trailing twelve years and Forward P/E = five years extended. |

Liquidity Ratios | Relationship between firm's liquid assets. |

Current Ratio | Current Assets/Current Liabilities |

Quick Ratio or Acid-Test Ratio | Current Assets - Inventory/Current Liabilities Measures ability to pay short-term obligations without inventory sales. |

Cash Ratio | Cash and marketable securities/Current Liabilities |

Asset management ratios | Measure efficiency of firms asset use |

Inventory Turnover | Sales or COGS/Inventory Dollar of sales produced per dollar of inventory. Often uses COGS instead of sales because of way it's listed on the balance sheet |

Average Collection Period | Accounts receivable X 365 days/Credit sales OR accounts receivable/(Sales/365) Measures number of days accounts receivable held until collected. |

Fixed Asset Turnover | Sales/Fixed Assets Measures dollars of sales produced per dollar of fixed assets. |

Total Asset Turnover | Sales/Total Assets How well management is using its assets to generate sales. Measures dollars of sales produced per dollar of total assets. |

Debt Management Ratios | Mesure how much debt (financial leverage) versus equity a firm uses to finance assets . |

Debt Ratio | Total Debt/Total Assets Measures % of total assets financed with debt. How many dollars of debt for each dollar of equity. |

Long-Term Debt Ratio | Long-term debt/total assets |

Debt-to-equity ratio | Total Debt/Total Equity Measures dollars of debt financed for every dollar of equity financed. |

Equity multiplier ratio | Total Assets/Total Equity Measures the dollars of assets on balance sheet for every dollar of equity financed. |

Times interest earned ratio | EBIT/Interest Measures operating earnings dollars available to meet interest obligations. |

Net Profit Margin | Net Income available to common stockholders/Sales % of sales left after all firm expenses are paid. How many dollars of NI are generated through sales. |

Return on Assets | Net Income available to common stockholders/Total Assets Measures overall return on firms assets inclusive of leverage and taxes. |

Return on Equity | Net Income available to common stockholders/Common stockholder's Equity Measures return on common stockholder's investments. Affected by NI and amount of financial leverage. High ROE = good unless driven by excessively high leverage |

Dividend payout ratio | Common stock dividends/Net Income available to common stockholders Measures fraction of earnings paid out to common stockholders as dividend. |

Retention Ratio | 1-POR |

Market Value Ratios | Market prices of publicly traded firms incorporate risk. Ratios that include stock market values are important. Market values reflect what investors think of the company's future performance and risk. |

P/E Ratio | Market Price per Share/Earnings per Share P0/E0=P0 * Shares/NI = P0 * # shares/EPS * #shares |

To find price based on the industry. | (Average P/E)*Earnings = Price OR (industry P/EBIT)*EBIT |

Price-to-book or market-to-book ratio | Measures price investors will pay per $1 of book value. High P/B means high expected growth. Also drives stock classification as growth or value. |

Dividend Yield | Expected dividend per share/ price per share OR DIV1/P0 How many dollars of income do you get from how many dollars or stock. Measure of % return of dividends for the upcoming year. |

Pay-out-ratio | Gross Dividends Common Stock/NI Proportion of earnings that company pays out as dividends |

Dupont Model | ROA = NI/TA = NI/S X S/TA |

Created by:
efgreenberg