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Midterm

School

Ryerson UniversityDepartment

FinanceCourse Code

FIN 300Professor

Laleh SamarbakhshStudy Guide

MidtermThis

**preview**shows half of the first page. to view the full**1 pages of the document.**CHAPTER 2:

- Types of Assets: cash (current), accounts receivable (current), interest receivable (current), supplies, inventory (current), prepaid expenses, investments (long term), property and equipment (long

term), accumulated depreciation (subtract), notes receivable (long term), intangibles, stocks, bonds, mutual funds, other assets

- Current Assets: items that are completely consumed, sold, or converted into cash in 12 months or less

- Fixed Assets: tangible assets with a life span of at least one year or more; might include: machinery, buildings, and vehicles; not very liquid, and costs of more expensive fixed assets are not

expensed they are depreciated

- Depreciation: assets do not last forever, historic cost must be adjusted every year to reflect wear and tear; historic cost – accumulated depreciation = book value of asset; the most important non-

cash item

- Types of Liabilities: accounts payable, dividends payable, accrued expenses payable, income tax payable, unearned fees, notes payable (long term), mortgage, home/auto/student loan, credit card

debt

- Current Liabilities: debts that are paid in 12 months or less usually paid by current assets; normally cash + receivables + inventory

- Long-term Liabilities: typically mortgages or loans used to purchase or maintain fixed assets and are paid off in years instead of months

- Net Working Capital: the difference between current assets and current liabilities; usually positive in a healthy firm, positive if CA exceeds CL

- Balance Sheet: Assets = Liabilities + Shareholder Equity

- Income Statement: Income = Revenues – Expenses

- Net Income – Cash Dividends = Addition to Retained Earnings

- To Calculate Net Income, Make I/S: Net sales – Costs of goods sold – admin and selling expenses – depreciation = EBIT, then EBIT – Interest Paid = Income before taxes, then Income before

taxes – taxes (% of income before taxes) = Net Income

- Operating Cash Flow = EBIT + Depreciation – Taxes

- Operating Cash Flow = sales – cost of goods sold – other expenses – taxes (could also be this depends on given scenario, but when doing it this way don’t include dep cuz its not cash outflow and

don’t include interest cuz it’s a financing expense)

- Cashflow to Creditors (or bondholders) = interest paid – net new borrowings (net new borrowing can be redeeming outstanding long-term debt which is a negative value)

- Cashflow to Shareholders (or owners) = dividends paid – net new equity raised

- Addition to NWC (3 steps): 1. Cash flow from assets (aka free cash flow) = cash flow to creditors + cash flow to shareholders 2. Net capital spending = increase in fixed assets (given) + Dep 3.

Addition to NWC = OCF – Net Cap Spending – Cashflow from assets

- Net cap spending = ending fixed assets – beginning fixed assets + dep

- Change in NWC = Ending NWC (2012 CA – 2012 CL) – Beginning NWC (2011 CA – 2011 CL)

CHAPTER 3:

- Sources of cash (generate cash) – Increase in: accounts payable, common stock, or retained earnings / Decrease in: accounts receivable/ A decrease in assets or increase in liability or equity

generally means a source of cash

- Uses of cash (cash is spent) – Increase in: accounts receivable or inventory / Decrease in: notes payable or long-term debt / Net fixed asset acquisitions / An increase in assets (firm bought

something) or a decrease in liability (firm made payment) or equity means a use of cash

- Net addition to cash = total sources of cash – total uses of cash

- Common-Size Statements: Standardize F/S to compare with other companies, how? B/S express line items as % of Total Assets, I/S as % of sales

SHORT TERM SOLVENCY RATIOS

- Current ratio = Current assets/Current liabilities, #s come from B/S

- Quick ratio = (Current assets – Inventory) / Current Liabilities; the higher the better

- Cash ratio = (Cash + Cash equivalents) /Current liabilities

- Net working capital to total assets = Net working capital/Total assets

- Interval measure = Current assets/Average daily operating costs

LONG TERM SOLVENCY RATIOS

- Total debt ratio = [Total assets - Total equity]/Total assets; (TA-TE) is simply Total Liabilities; the lower the better

- Debt/equity ratio = Total debt/Total equity or [equity multiplier]-1 (answer means we have x dollars for every one dollar in equity)

- Equity multiplier = Total assets/Total equity

From total debt ratio to equity multiplier – the higher the ratio the higher the risk

- Long-term debt ratio = Long-term debt / Long-term debt – Total equity

- Times interest earned ratio = EBIT/Interest; TIE is based on EBIT; EBIT = Earning before income taxes, net capital spending = (net fixed assets) 2012 – (net fixed assets + dep) 2011; TIE not

really measure of cash coverage because dep is non cash, to know true measure add back dep = EBIT + dep/Interest

- Cash coverage ratio = [EBIT + Depreciation]/Interest

ASSET UTILZATION

- Inventory turnover = Cost of goods sold/Inventory

- Days’ sales in inventory = 365 days/Inventory turnover

- Receivables turnover = Sales / Accounts receivable – remember sales on credit

- Days’ sales in receivables = 365 days/Receivables turnover

- NWC turnover = Sales/NWC

- Fixed asset turnover = Sales/Net fixed assets

- Total asset turnover = Sales/Total assets or 1/capital intensity ratio

PROFITABILITY MEASURES

- Profit margin = Net income/Sales

- Gross profit margin = sales – cogs/sales

- Operating profit margin = sales – cogs – general & administrative expenses /sales

- Return on assets = Net income/Total assets

- Return on equity = Net income/Total (Shareholder’s) equity

MARKET VALUE MEASURES

- Market to book ratio = market value per share / book value per share ; book value per share = total equity/# of shares outstanding

- Earnings per share = NI / shares outstanding

- P/E ratio = Price per share/Earnings per share

- Enterprise value

CHAPTER 4:

- capital intensity ratio = total assets/sales

- EFN = Increase in total assets – addition to retained earnings; = A(g) – p(S)R x (1+g)

- EFN Calculated: Ratios needed: PM, RR, ROA, ROE, Debt to Equity (D/E), assumption sales growth is 20%: EFN = Increase in total assets – addition in retained earnings; Increase in TA = A x g

= 500(.20) = $100; Addition to RE = PM(S)(RR) x (1+g) = .132(500)(.677) x (1.2) = $52.80, EFN = 100 – 52.8 = 47.20

- Retention ratio = 1 – dividend payout ratio

- Dividend payout ratio = cash dividends/net income

- To calculate Internal Growth Rate (without any external financing required), first calculate the retention ratio (R) then: ROA x R/1-ROAxR; ROA = profit margin % x asset turnover ratio % (in

decimals); total asset turnover = sales/total assets (just in case)

- To calculate Substainable Growth Rate, first calculate the retention ratio (R) then: ROExR/1-ROExR

- Example: Solving for sustainable growth rate given profit margin 3%, capital intensity ratio of 1, debt/equity ratio of .5, and dividend payout ratio of 40% : g = .03(1)(1+.5)(1-.40)/[1-.03(1)(1+.5)

(1-.40)] = 2.77%

CHAPTER 6:

- You invest $500 in an account that pays 6 percent simple interest per year. How much more could you have earned over a thirty year period if the interest had compounded annually? First, you

calculate simple interest = 500 x 0.06 x 30 = 900 (simple interest you earn in 30 years that’s added to your $500 investment., giving you a total of $1400) Then, calculate annual compounding = 500

x (1.06)^30 = 2871.75, then you subtract 1400 from 2871.75 to get 1471.75.

- Compound interest annually: First year, $1000 x 1 year x 10% = $100 in interest, Second year, $1100 x 1 year x 10% in interest = $110 in interest, total interest = $210

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