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Corp Finance Midterm

Ratios and Important Equations

Net cash flow Net income - Noncash revenue + Noncash charges OR Net income + Depreciation and amortization
NOPAT (Net Operating Profit After Taxes) The amount of profit a company would generate if it had not debt and held no financial assets. Better measure of performance than Net Income. EBIT(1-tax rate)
NOWC (Net Operating Working Capital) Difference between op current assets and op current liabilities. The working capital acquired with investor-supplied funds. Operating current assets - Operating current liabilities
Total net operating capital Total amount of cap needed to run business NOWC + operating long-term assets
FCF (Free cash flow) Amt of cash flow available to investors NOPAT - Net investment in op cap OR (NOPAT + Dep) - (Net inv in op cap + Dep) OR Operating cash flow - Gross inv in op cap OR Operating cash flow - Gross inv in long-term op assets
Gross investment in operating capital Net investment in operating capital + Depreciation
Operating cash flow NOPAT + Depreciation
ROIC (Return on invested capital) Helps to determine if growth is profitable. If ROIC > rate of return required by investors, then negative FCF is no problem. NOPAT / Operating capital
MVA (Market value added) Difference between market value of stock and equity capital provided Mkt value of stock - Equity cap provided by shareholders OR (Shares outstanding)(Stock price) - Total common equity
EVA (Economic value added) Estimate of management value addNOPAT - after-tax cost of capital used to support ops OR EBIT(1-taxrate) - (Total net op cap)(WACC)
Current Ratio Prime test of liquidity. Creditors generally like it high. Measures extent to which creditors are covered by assets in case of trouble. Current assets / Current liabilities
Quick Ratio, Acid Test Ability of firm to pay off short-term obligations without having to liquidate inventory, which is the least liquid of current assets. (Current assets - Inventories) / Current liabilities
Inventory turnover ratio How many times inventory is cleared and restocked per year. High is good. Sales / Inventory
DSO (Days sales outstanding) Average collection period. Lower the better. Receivables / (Annual sales/365)
Fixed assets turnover ratio How effectively firm uses PPE. Higher the better. Sales / Net fixed assets
Total assets turnover ratio Sales / Total assets
Debt ratio Creditors prefer low (bigger cushion). Stockholders may want high (more leverage = more return). Total liabilities / Total Assets
Debt to equity ratio Version of debt ratio that gives perspective on the non-asset side of the BS. Total liabilities / (Total assets - Total liabilities)
Market debt ratio Reflects risk to future cash flows Total liabilities / (Total liabilities + Market value of equity)
TIE (Times interest earned) Ratio Measures how much operating income can decline before firm will be unable to pay annual interest costs. Higher the better. EBIT / Interest expense
EBITDA coverage ratio Like TIE but accounts for other scheduled payments and full available FCF. EBITDA + Lease payments / (Interest + Principal payments + Lease payments)
Net profit margin Profit per dollar of sales Net Income / Sales
Operating profit margin Shows efficiency of operation without consideration for Int or Taxes EBIT / Sales
Gross profit margin Gross profit per dollar of sales before any expenses are deducted (Sales - COGS) / Sales
BEP (Basic earning power) ratio Earning power of firm before consideration of tax and leverage. Good tool to compare companies with different tax/leverage situations. EBIT / Total assets
ROA (Return on total assets) How much a company earns per dollar of assets Net income available to stockholders / Total assets OR Profit margin * Total assets turnover
ROE (Return on common equity) How effectively management uses funds from equity Net income available to stockholders / Equity OR ROA * Equity multiplier
P/E (Price to Earnings) Ratio How much investors are willing to pay per dollar of profits. Higher the better. Price per share / earnings per share
Book value per share Common equity / Shares outstanding
M/B (Market to Book) Ratio Market price per share / Book value per share
Equity multiplier Helps get ROE from ROA Total assets / Common equity
AFN (Additional funds needed) Required increase in assets - Increase in spontaneous liabilities - Increase in retained earnings
Self-supporting growth rate M(1-POR)(S) over A - L - M(1-POR)(S) M = last year's profit margin POR = last year's payout ratio, net income/sales S = last year's sales A = required increase in assets L = last year's spontaneous assets (payables + accruals)
CCC (Cash conversion cycle) Time from which the product materials are bought, product is made and product is sold. Inventory conversion period + Average collection period - Payables deferral period
Inventory conversion period Time it takes to convert new inventory to cash. Inventory / COGS per day
Payables deferral period Time given by suppliers to pay back Payables / COGS per day
Nominal cost of trade credit Cost incurred by firm using supplier credit (forgoing discounts) instead of bank. Discount % / (100 - discount %) multiplied by 365/ (Days credit is outstanding - discount period)
Approximate annual rate (add on) A method of calculating interest whereby the interest payable is determined at the beginning of a loan and added onto the principal. Interest paid / (Amount received / 2)
Created by: 9212507