107 terms

FIN 3716 Midterm 2

Uses of Cash
Activities of a firm which require the spending of cash
Statement of Cash Flows
The sources and uses of cash over a stated period of time are reflected on the
Common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of
Common-base year statement
Standardizes items on the income statement and balance sheet relative to their values as of a common point in time
Financial ratios
Relationships determined from a firm's financial information and used for comparison purposes
Du Pont Identity
Formula which breaks down the return on equity into three component parts
Standard Industrial Classification
U.S. gov't coding system that classifies a firm by the nature of its business operations
Increase in accounts payable
Source of cash (Asset decreases, Liability increases)
Decrease in common stock
Use of cash (Asset increases, Liability decreases)
Acquisition of debt
Source of cash
Decrease in inventory
Source of cash
Source of cash
Increase in accounts payable, acquisition of debt, decrease in inventory
financing activities
Increase in long-term debt & dividends paid are _____ on the Statement of Cash Flows
operating activities
Cost of Good Sold, Decrease in accounts payable, Interest paid are _____ on the Statement of Cash Flows
Increase; Operating
According to the Statement of Cash Flows, a decrease in accounts receivable will ___ the cash flow from ___ activities
Decrease; Operating
According to the Statement of Cash Flows, an increase in interest expense will ___ the cash flow from ___ activities
Total assets for the current year
On a common-size balance sheet all accounts are expressed as a percentage of
base-year accounts receivable
On a common-base year financial statement, accounts receivable will be expressed relative to
Interval measure & quick ratio
Which ratios are measures of a firm's liquidity
Decrease in quick ratio
An increase in current liabilities will have which one of the following effects, all else held constant
Accounts receivable
An increase in which of the following will increase a firm's quick ratio without affecting its cash ratio
a supplier, who requires payment within ten days, should be most concerned with which ratio when granting credit?
cover operating costs for the next 48 days
Interval measure = 48. Firm has sufficient liquid assets to do which?
Inventory decreased
Over the past year, the quick ratio for a firm increased while the current ratio remained constant. Which must have occurred?
Long-Term Solvency
Ratios that measure a firm's financial leverage are known as ___ ratios
An increase in the depreciation expense will not affect the cash coverage ratio
payment of interest to a lender
The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its obligations?
Decrease in days' sales in inventory
Corner Hardware increased amt. of goods sold while maintaining inventory constant. Cost per unit & selling price per unit are constant. How is this reflected in financial ratios?
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ____ ratios
If a firm produces a 12% return on assets and also a 12% return on equity, it has an equity multiplier of
Price-earnings ratio
Will decrease if a firm can decrease operating costs
today's cost to duplicate assets
Tobin's Q relates the market value of a firm's assets to which?
negative earnings
the price-sales ratio is especially useful when analyzing firms that have
return on equity and price earnings
Shareholders probably have the most interest in
equity multiplier, profit margin, total asset turnover
DuPont Identity
sales & net income
an increase in which will increase return on equity
return on equity
Return on assets x Equity multiplier and net income/total equity can be used to compute what?
DuPont Identity
How many sales dollars has the firm generated per each dollar of assets? How many dollars of assets has a firm acquired per each dollar in shareholder's equity? How much net profit is a firm generating per dollar of sales?
equity multiplier
$600 in debt for $1000 in equity. Uses cash to decrease debt while maintaining equity and net income. Which decreases?
Financial statements are frequently used as the basis for performance evaluations
uses the same accounting procedures as other firms in the industry
It is easier to evaluate a firm using financial statements when the firm
financial ratios to the firm's historical ratios
The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current
Problems when comparing separate financial statements
Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. The operations of the two firms may vary geographically. The firms may use different accounting methods. The two firms may be seasonal in nature and have different fiscal year ends.
net present value
the difference between an investment's market value and its cost
discounted cash flow valuation
the process of valuing an investment by discounting its future cash flows
payback period
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost
discounted payback period
the length of time required for an investment's discounted cash flows to equal to its initial cost
average accounting return
an investment's average net income divided by its average book value
internal rate of return
the discount rate that makes the NPV of an investment zero
net present value profile
a graphical representation of the relationship between an investment's NPV and various discount rates
multiple rates of return
the possibility that more than one discount rate will make the NPV of an investment zero
mutually exclusive investment decision
a situation in which taking one investment prevents the taking of another
profitability index
the present value of an investment's future cash flows divided by its initial cost
profitability index
benefit-cost ratio
The NPV rule is to take a project if its NPV is ____
frequently estimated by calculating the present value of future cash flows (to estimate market value) and then subtracting the cost
has no serious flaws; preferred decision criterion
discounted cash flow return
required return
the IRR rule is to take a project when its IRR exceeds the ____
conventional, independent
IRR leads to exactly the same decisions as NPV for ___ projects
When project cash flows are not ___, there may be no IRR or there may be more than one
mutually exclusive
IRR cannot be used to rank ___ projects
The project with the highest IRR is not necessarily the ___ investment
Cash flows are modified by discounting the negative cash flows back to the present, compounding cash flows to the end of the project's life, or both
guaranteed to avoid the multiple rate of return problem
discounting or compounding
MIRRs are not truly "internal" because they depend on externally supplied __ rates
The PI rule is to take an investment if the index exceeds __
measures the present value of an investment per dollar invested
cannot be used to rank mutually exclusive projects
sometimes used to rank projects when a firm has more positive NPV investments than it can currently finance
internal rate of return
discount rate which causes the net present value of a project to equal zero
mutually exclusive
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery
increasing the project's initial cost at time zero
which will decrease the net present value of a project?
net present value
the best method of analyzing mutually exclusive projects
profitability index
provides the best information on the cost-benefit aspects
balance sheet
financial statement showing a firm's accounting value on a particular date
net working capital
current assets less current liabilities
generally accepted accounting principals
the common set of standards and procedures by which audited financial statements are prepared
income statement
financial statement summarizing a firm's performance over a period of time
noncash items
expenses charged against revenues that do not directly affect cash flow, such as depreciation
average tax rate
total taxes paid divided by total taxable income
marginal tax rate
amount of tax payable on the next dollar earned
cash flow from assets
the total of cash flow to creditors and cash flow to stockholders
cash flow from assets
consists of operating cash flow, capital spending, and change in net working capital
operating cash flow
cash generated from a firm's normal business activities
free cash flow
another name for cash flow from assets
cash flow to creditors
a firm's interest payments to creditors less net new borrowing
cash flow to stockholders
dividends paid out by a firm less net new equity raised
sources of cash
a firm's activities that generate cash
uses of cash
a firm's activities in which cash is spent
uses of cash
applications of cash
statement of cash flows
a firm's financial statement that summarizes its sources and uses of cash over a specified period
common-size statement
a standardized financial statement presenting all items in percentage terms
common-base year statement
a standardized financial statement presenting all items relative to a certain base year amount
financial ratios
relationships determined from a firm's financial information and used for comparison purposes
DuPont identity
popular expression breaking ROE into three parts : operating efficiency, asset use efficiency, and financial leverage
Standard Industrial Classification
A U.S. govt code used to classify a firm by its type of business operations
incremental cash flows
the difference between a firm's future cash flows with a project and those without the project
stand-alone principal
the assumption that evaluation of a project may be based on the project's incremental cash flows
sunk cost
a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision
opportunity cost
the most valuable alternative that is given up if a particular investment is undertaken
the cash flows of a new project that come at the expense of a firm's existing projects
pro forma financial statements
financial statements projecting future years' operations
accelerated cost recovery system
a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
depreciation tax shield
the tax saving that results from the depreciation deduction
depreciation tax shield
depreciation multiplied by the corporate tax rate
equivalent annual cost
the present value of a project's costs calculated on an annual basis