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Finance Quiz: 2 & 3

Financial Statements and Financial Ratios

QuestionAnswer
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