Cash flow to creditors + cash flow to stockholders
assets= liabilities + stockholders equity
Internal Growth Rate (IGR)
ROA x b/ 1-(ROA x b)
Revenue - expenses = income
Cash Flow to Stockholders (CF2SH)
dividends paid - net new equity paid
Cash Flow Paid to Creditors (CF2CR)
interest paid - net new borrowing net new borrowing=end LTD - start LTD
OCF - NCS - ChNWC
Change in Net Working Capital (ChNWC)
end NWC - beg. NWC
Net Capital Spending
end FA - start FA + depreciation
Du Pont Identiry
ROE = profit margin x total asset turnover x equity multiplier
Operating Cash Flow
EBIT + depreciation - taxes
Average Book Value
NWC + FA
AAR (Average Accounting Return)
Average Net Income/Average Book Value
market value per share/book value per share
price per share/earnings per share
Earnings per Share (EPS)
net income/shares outstanding
Return on Equity (ROE)
net income/total equity
Return on Assets (ROA)
net income/total assets
Total Asset Turnover
total asset/total equity
total debt/total equity
Total Debt Ratio
total debt/total assets
(current assets - inventory)/current liabilities
current assets/current liabilities
Net Working Capital (NWC)
current assets-current liabilities
Long Term Debt Ratio
Long Term Debt/(Long Term Debt + Equity)
Dividend Payout Ratio
cash dividends/net income
price per share x shares outstanding
Sustainable Growth Rate (SGR)
ROE x b / 1 - (ROE x b)
cost of goods sold/inventory
Dividends Per Share
dividends/total shares outstanding
If a company had a negative OCF last year, yet the amount of cash on its balance sheet has increased, what could explain this?
The company issued long term debt and/or the company could of sold some of its assets
If a company experienced a decline in OCF. Which of the following defiantly cannot explain the decline?
Interest expense increased
If a company experienced an increase in OCF. What could be a possible reason for the increase?
Sales revenue decreased, cost of goods sold increased, depreciation increased, taxes increased
Other things held constant, which of the following will not affect the current ratio, assuming an initial currrent ratio greater than 1.0?
Accounts receivable are collected (in cash)
A CFO has proposed that the company issues new debt and uses the proceeds to buy back common stock. What is likely to occur if the proposal is adopted? (assume that the proposal would have no effect of the company's operating earnings)
return on assets (ROA) will decline, and taxes paid will decline
The tax savings generated as a result of a firm's depreciation expense is called the:
depreciation tax shield
What will increase operating cash flow?
In the percentage of sales approach to long-range planning, what is most likely to increase in proportion to sales?
net working capital
When deciding whether or not to accept a project, IRR and NPV usually give the same decisions. What are two important situations that can give different results? In each, what is the preferred basis for decision-making?
Mutually exclusive investments and non-conventional cash flows. In both cases, NPV is preferred
Since, OCF = EBIT + Depreciation - Taxes, and depreciation is a non-cash item, why does it appear in the formula?
Depreciation is subtracted out when computing EBIT. So this is un-doing the subtraction.
In a common-size balance sheet, what is each item expressed as a percentage of? In a common size income statement, what is each item expressed as a percentage of?
Balance sheet: each item is expressed as a percentage of total assets Income Statement: each is a percentage of sales
Why might one be more interested in the quick ratio than the current ratio as a measure of short-term solvency?
quick ratio subtracts inventory from current assets, useful since inventory may be less liquid than other items in current assets
A company wants to undertake a long-range planning exercise. The firm has many good investment possibilities and low leverage. What is the most likely choice of the plug variable?
If a company is able to reduce its net working capital requirements, how would you expect this to affect the Internal Growth Rate
If NWC is reducing current assets, then ROA would go up and so would IGR. If NWC is reduced by increasing liabilities, interest payments may increase, reducing ROA and IGR
In what situation might a company want to use the modified IRR rather than the IRR? What is the main drawback of using MIRR?
Nonconventional cash flows. Requires a discount rate, so the main advantage of IRR is lost
What can you say about the availability of positive NPV projects in a perfectly competitive economy? Why?
Would not expect to find any positive NPV in a perfectly competitive economy, a positive NPV would attract new agents willing to take on the new project at a lower cost. This doesn't mean no profits, it means that returns are commensurate with risk and the time value of money
Why is it that revenue and cost figures shown on a standard income statement may not be representative of the actual cash inflows and outflows that occurred during that period?
The numbers for revenue & cost are recorded when they occur and not when they are received?
In comparing accounting net income and OCF, name 2 items that you typically find in Net income and not in OCF
Depreciation reflects adjustments made in book values, and interest expenses is a cash outlay, but it is a financing cost, not an operating cost
Suppose a company's cash flow from assets is negative for a period of several years. Is this a good or bad sign?
if a company is rapidly expanding, capital outlays will be large, possibly leading to negative cash flow from assets.
If inventory is purchased, what would happen to NWC and current ratio?
NWC is unchanged, if inventory is purchased with cash, no change in current ratio, if purchased on credit, there is a decrease on the current ratio
If a supplier is paid, what would happen to NWC and the current ratio?
NWC is unchanged, and the current ratio will increase
If a short-term bank loan is repaid, what would happen to NWC and the current ratio?
NWC is unchanged, and the current ratio will increase
If long-term debt is paid off early, what would happen to NWC and the Current Ratio?
NWC and current ratio decrease
If A customer pays off a credit account, what would happen to the NWC and the current ratio?
NWC and current ratio are unchanged
If inventory is sold at cost, what would happen to the NWC and the current ratio?
NWC and current ratio are unchanged
If inventory is sold for a profit, what would happen to the NWC and the current ratio?
NWC and current ratio increase
What does peer group analysis mean?
involves comparing the financial ratios and operating performance of a particular form to a peer group in the same industry or line of business
How can you use the results of peer group analysis to evaluate the performance of your firm?
allows the financial manager to evaluate whether some aspects of the firm's operations, finances, or investment activities are out of line with the norm, thereby providing some guidance on what actions to take.
How is a peer group different from an aspirant group?
An aspirant group is a set of firms whose performance the company would like to emulate
Why is the du pont identity a valuable tool for analyzing the performance of a firm?
ROE is an extremely important accounting ratio, the du pont identity emphasizes the role of a firm's profitability, asset utilization efficiency and financial leverage
If there is a positive growth rate and a negative EFN, what does this indicate?
that there is excess internal financing
If the retention ratio increased, and the firm has more internal sources of funding, what does this indicate?
the EFN will decline
If the firm pays out all its earnings in the form of dividends, what does this indicate?
the firm has no internal sources of funding
the accounting break-even point, ignores the time value of money, but it is straight forward and simple,and accounting numbers and estimates are readily available
calculated the same as payback, except cash flow is first converted to present value, this provides a measure of financial break-even
Average Accounting Return
average profit measure/average balance sheet value, (AAR), accept if over target measure, measures accounting value, ignores TVM, used because accounting info is available, used to analyze performance
present value of a projects cash flows, specifically measures the TVM, considered the best decision criteria, however, it relies on cash flow and discounted cash flows
discount rate that causes the NPV of cash flows to be at zero, accept projects with a higher IRR than the discount rate, can be misleading in non-conventional cash flows and mutually exclusive projects, used for rates of return
present value of inflows relative to the project, accept projects greater than one, provides a measure of "bang for the buck"