Financial Managment 3500 MTE 1

stlwalk's version from 2018-02-08 05:37

Section 1

Question Answer
Three Areas of FinanceWorking capital management, capital budgeting, and capital structure
Forms of OwnershipSole proprietorship, partnership, corporation
Primary objective of financeTo enhance the value of owner's equity
Flow of fundsStockholders provide cash to the company, and the company provides stock certificates to the stockholders.

Section 2

Question Answer
Income Statement Sales - Costs = GM - Dep. Exp. = EBIT (Earnings before Interest and Tax) - Int. Exp. = Taxable Income - Taxes = Net Income
Market valueThe market value of an asset or security: what people would pay for it right now.
Book valueThe value of an asset or security as originally entered in the company's books.
LiquidityHow quickly you can turn an asset into cash
TaxesTiered; add up all the amounts from the tiers to get the tax owed
Average tax rateTotal tax / Taxable income
Marginal tax rateMarginal rate is what one more dollar of income would cost; it's just the last tax tier used.
Cash Flow from AssetsCash flow to creditors + cash flow to stockholders
Operating Cash FlowEBIT + Dep - Taxes
Net Capital SpendingEnding Net Fixed Assets - Beginning Net Fixed Assets + Depreciation Expense
Change in NWCEnding NWC - Beginning NWC
Cash flow to creditors Interest paid - Net new borrowing
Cash flow to stockholdersDividends paid - Net new equity issued
Cash flow from assetsOCF - NCS - Change in NWC

Section 3

Question Answer
5 Categories of RatiosLiquidity (or short term solvency), Leverage (or long term solvency), Asset Management or Turnover, Profitability, Market Value or Market Share
Liquidity: Current RatioCurrent Assets / Current Liabilities
Liquidity: Quick Ratio(Current Assets - Inventory) / Current Liabilities
Liquidity: Cash RatioCash / Current Liabilities
High or low number for Liquidity ratios?High numbers are better.
Leverage: Total Debt RatioTD / TA
Leverage: Debt / Equity RatioTD / TE
Leverage: Equity Multiplier (EM)TA / TE
EM =Debt/Equity Ratio + 1
Leverage: Times Interest EarnedEBIT / Interest Paid
Leverage: Cash Coverage Ratio(EBIT + Depreciation) / Interest Paid
Leverage: Long-Term Debt Ratio (aka Capitalization Ratio)LTD / (LTD + TE)
Leverage ratiosMeasure level of indebtedness and ability to service debt; shouldn't be too high or too low (higher = more debt than assets/equity)
Asset Management: Inventory TurnoverCOGS / Inventory (higher is better)
Asset Management: Days Sales in Inventory365 / Inv TO (lower is better)
Asset Management: Receivables TurnoverSales / Accts Receivable (higher is better)
Asset Management: Days Sales in Receivables365 / Rec TO (lower is better)
Asset Management: Payables TurnoverCOGS / A/P (higher)
Asset Management: Days Sales in Payables365 / Payables TO (lower)
Asset Management: Total Asset Turnover (TAT)Sales / TA (higher)
Asset Management: NWC TurnoverSales / NWC (higher)
Asset Management: Fixed Asset TurnoverSales / NFA (higher)
Profitability: Profit MarginNI / Sales (higher)
Profitability: Return on Assets (ROA)NI / TA (higher)
Profitability: Return on Equity (ROE)NI / TE (higher)
Profitability: Retention Ratio (b)RE / NI
Market Share: EPS NI / Shares Outstanding (higher)
Market Share: Dividends per ShareDividends / Shares Outstanding (higher)
Market Share: Book Value per ShareTE / Shares Outstanding (higher)
Market Share: Price/Earnings RatioMarket Price per Share / EPS (higher)
Market Share: Market to Book RatioPrice / BVPS (higher)
DuPont IdentityROE = PM (Profit Margin) x TAT (Total Asset Turnover) x EM (Equity Multiplier)
Common sizeexpress items as percentage of total assets (BS) and total sales (IS)
Common base yearexpress items as a percent of the corresponding line in the base year
Sources of cashanything that ADDS cash: decrease assets, increase liabilities, or increase equity accounts
Uses of cashanything that DECREASES cash: increase assets, decrease liabilities, decrease equity account

Section 4

Question Answer
Role of financial planningTo provide a better understanding of the interactions between investments and financing, to point out options, help with contingency planning, and check for feasibility and internal consistency among goals
Financial planning model (six components)Sales forecast, Economic forecast, Pro forma statements, Asset requirements, Financial requirements, and "The Plug"
"The Plug" means EFN (External financing needed)
IGR (Internal Growth Rate) The rate the company can grow with internal financing only: (ROA x b) / ( 1 - (ROA x b))
SGR (Sustainable Growth Rate)The rate the company can grow using its internal sources and keeping the Debt/Equity Ratio the same: (ROE x b) / ( 1 - (ROE x b))
Finance TruismThe financial process is a matter of negotiation and adjustment so that major goals are incorporated at costs that are acceptable.