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3 Aspects of Role of Financial Manager:

-Capital Budgeting
-Capital Structure
-Working Capital Management

Capital Budgeting

Firm's Needed Investment in New Assets

Capital Structure

Policy for Degree of Financial Leverage

Working Capital Management


3 Forms of Business Organizations:

-Sole Proprietorship

Business Process for Public Companies


Principal-Agent Problem


Markets Types:

Primary, Secondary, Dealer, Auction

New RE =

Old RE + Net Income - Dividends

Tax Liability


Average Tax Rate


Marginal Tax Rate


4 Items for Financial Plan


Role of Financial Planning


Pro-Forma Financial Statements:
-Percent-of-Sales Method


Pro-Forma Financial Statements:
-Spontaneous vs. Non-Spontaneous Accounts


Pro-Forma Financial Statements:


Pro-Forma Financial Statements:
New RE =

Old RE + [Projected Sales x Net Margin x (1-Payout Ratio)]

Pro-Forma Financial Statements:
-External Financing Needed (EFN) or Discretionary Financing Needed (DFN) [Definition and Calculation]


Capacity Usage Calculations


4 Ways to Reduce EFN (aka DFN)


3 Reasons Working Capital Management is Important


2 Key Management Objectives for Short-Term Planning


Operating Cycle


Cash Cycle


Inventory Period


Accounts Receivable Period


Accounts Payable Period


Flexible Short-Term Financial Policy


Restrictive Short-Term Financial Policy
-Size of Current Assets
-Carrying Costs vs. Shortage Costs
-Financing of Current Assets
-Temporary vs. Permanent Current Assets


3 Major Considerations for Short-Term Borrowing Policies


PV Lump Sum


PV Annuity


FV Lump Sum


FV Annuity


Annuity Due (Begin Mode)


Regular Annuity (End Mode)




Uneven Cash Flows (practice on calculator using cash flow CFj function and Nj function)


Two Period Calculations (Switching from Lump Sums to Regular Payments and vice versa)


Mortgage Balloon Payments


Effective Annual Rate (EAR) (Can use calculator shortcut or equation to solve)


Simple Interest (definition and calculation)


Compound Interest (definition and calculation)


Amortization (calculation)


Assets =

Liabilities + Owners Equity

Working Capital =

Current Assets - Current Liabilities

Tax Bill =

Reference Tax Table Provided; Taxable Income x Tax Rate

Average Tax Rate =

Total Taxes Paid/Total Taxable Income

Marginal Tax Rate =

Reference Tax Table Provided; Rate of extra tax you would pay if you earned one more dollar

Current Ratio =

Current Assets/Current Liabilities

Quick Ratio =

(Current Assets - Inventory)/Current Liabilities

Average Collection Period =

Accounts Receivable/Daily Credit Sales

Accounts Receivable Turnover =

Credit Sales/Accounts Receivable

Inventory Turnover =


Total Asset Turnover (TAT) =

Sales/Total Assets

Fixed Asset Turnover (FAT) =

Sales/Fixed Assets

Operating Income Return on Investment (OIROI) =

Operating Income/Total Assets

Debt Ratio =

Total Debt/Total Assets

Debt-Equity Ratio =

Total Debt/Total Equity

Times Interest Earned (TIE) =

EBIT/Interest Expense

Cash Coverage Ratio =

(EBIT + Depreciation)/Interest Expense

Return on Assets (ROA) =

Net Income/Total Assets

Return on Equity (ROE) =

Net Income/Total Equity

Dupont ROE =

(Net Income/Sales) x (Sales/Total Assets) x (Total Assets/Equity)

Gross Margin =

Gross Profit/Sales

Operating Margin =


Net Profit Margin =

Net Income/Sales

Price to Earnings (PE) =

Price Per Share/Earnings Per Share (EPS)

Price to Sales =

Price Per Share/Sales per Share

Market to Book =

Market Value per Share/Book Value per Share

New RE =

Old RE + Net Income - Dividends

New RE =

Old RE + [Projected Sales x Net Margin x (1-Payout Ratio)]

Net Margin =

Net Income/Sales

Payout Ratio =

1-Plowback Ratio

Plowback Ratio =

1-Payout Ratio

Payout Ratio =

Dividends/Net Income

Plowback Ratio =

∆Retained Earnings/Net Income

External Financing Needed (EFN) =

Projected Total Assets - Projected Total Liabilities - Projected Owners' Equity

Sales at Full Capacity =

Total Sales/Capacity %

Fixed Asset Capital Intensity Ratio =

Fixed Assets/Sales at Full Capacity

Required Investment in Fixed Assets =

Projected Sales x Fixed Asset Capital Intensity Ratio

Internal Growth Rate (IGR) =

(ROA x b)/(1 - ROA x b) (Note: b is the plowback ratio)

Return on Assets (ROA) =

Net Income/Total Assets

Sustainable Growth Rate (SGR) =

(ROE x b)/(1 - ROE x b) (Note: b is the plowback ratio)

Return on Equity (ROE) =

Net Income/Equity

DuPont Equation for ROE =

(Net Income/Sales) x (Sales/Total Assets) x (Total Assets/Equity)

Debt-Equity Ratio =

Total Debt/Total Equity
(Note: You can manipulate the Debt-Equity formula and the A = L + E formula to solve for beginning equity.)

Ending Equity =

Beginning Equity + (Net Income x Plowback Ratio)

Operating Cycle =

Inventory Period + Accounts Receivable Period

Inventory Period =

365/Inventory Turnover

Inventory Turnover =

COGS/Average Inventory

Accounts Receivable Period =

365/Accounts Receivable Turnover

Accounts Receivable Turnover =

Credit Sales/Average Accounts Receivable

Cash Cycle =

Operating Cycle - Accounts Payable Period

Accounts Payable Period =

365/Accounts Payable Turnover

Accounts Payable Turnover =

COGS/Average Accounts Payable

Present Value of Perpetuity =

Payment/Interest Rate
(Note: Interest rate is calculated as decimal #; match numerator and denominator as quarterly, semiannual, annual, etc.)

Return on Perpetuity =

Payment/Present Value
(Note: Payment must be an ANNUAL amount.)

Simple Interest =

Original Principal x Quoted Interest Rate x # Years Invested

Compound Interest =

Future Value - Original Principal -Simple Interest

Effective Annual Rate (EAR) = [1 + (Quoted Rate/m)]m -1]

(Note: You may also use the NOM%, I/Yr, and EFF% calculator keystrokes for shortcut.)

Quoted Rate =
m =

Quoted Rate = Annual Percentage Rate (APR)
m = number of compounding periods per year

1st Month Interest =

Original Principal x Monthly Interest Rate

1st Month Principal =

Total Monthly Payment - 1st Month Interest

2nd Month Interest =

(Original Principal - 1st Month Principal) x Monthly Interest Rate

2nd Month Principal =

Total Monthly Payment - 2nd Month Interest

3rd Month Interest =

(Original Principal - 1st Month Principal - 2nd Month Principal) x Monthly Interest Rate

3rd Month Principal =

Total Monthly Payment - 3rd Month Interest

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