FINC 301 EXAM 2
Cash inflows (investing activities)
- Any decrease in a long-term asset, such as selling long-term assets like plant and equipment
Any decrease in an asset like marketable securities, or selling stocks and bonds issued by
other firms
Cash outflows (investing activities)
- Any increase in a long-term asset, such as purchasing a plant and equipment Any increase in
an asset like marketable securities, or buying stocks and bonds issued by other firms
Cash inflows (financing activities)
- Any increase in long-term debt, so issuing debt or taking out a loan
- Any increase in equity, so issuing new stock in one's own company
Cash outflows (financing activities)
- Any decrease in long-term debt, so paying off debt or repaying a loan
- Paying a dividend to the firm's shareholders
- Any decrease in equity, so purchasing treasury stock
Corporate Income Tax
- U.S. has a progressive tax with rates ranging from 15 percent to 39 percent
higher taxable income = higher the tax liability
Average tax rate
- total taxes paid divided by taxable income for the period. It's the past rate paid.
Marginal tax rate
,- The rate to be applied to the next dollar of taxable income. The rate paid on the last dollar
earned or the next dollar that will be earned. It's used for planning purposes.
Stockholder's perspective
- net cash flows, risk, rate of return, profitability
- market value of firm's stock; dividends?
Manager's perspective
- rate of return, efficient use of assets
- controlling costs, increasing net cash flows
- increasing market value of firm's stock
Creditor's perspective
- predictability of revenues and expenses
- ability to meet short-term obligations
- ability to make loan payments as scheduled
- no unanticipated change in risk; how much debt?
Ratios used vary across firms
- Occupancy ratios (hotel)
- Sales-per-square foot (retailing)
- Loans-to-assets (banking)
- Medical cost ratio (health insurance)
Liquidity ratios
- how well can firm pay its short-term debt?
Efficiency ratios
- how is company using its assets to generate sales? How often does it turn over its inventory?
, Leverage
- how much debt compared to equity? What portion of assets are financed with debt?
Profitability ratios
- how much profit for every dollar sold? What is return for shareholders?
Market Value ratios
- what is the market price vs. its book value? How many times more is the stock priced at
compared to the earnings per share?
Total Asset Turnover
- Indicates a firm's ability to use assets to generate sales. This is also called a turnover ratio.
In general, higher numbers are a favorable indicator.
Inventory Turnover
- How many times per year the company turns over or sells its inventory. A higher number is
generally a positive signal. DSI tells how many days in the year it takes to turnover inventory.
Debt ratios
- Indicate whether a firm is using the appropriate amount of debt financing. In general, higher
ratios indicate greater potential return and greater bankruptcy risk.
Market Value Ratios
- Indicates how the market is valuing the firm's equity
Return on Assets
- Indicate whether a firm is generating adequate profit from its assets.
The DuPont system
- Diagnostic tool for evaluating a firm's financial health
Cash inflows (investing activities)
- Any decrease in a long-term asset, such as selling long-term assets like plant and equipment
Any decrease in an asset like marketable securities, or selling stocks and bonds issued by
other firms
Cash outflows (investing activities)
- Any increase in a long-term asset, such as purchasing a plant and equipment Any increase in
an asset like marketable securities, or buying stocks and bonds issued by other firms
Cash inflows (financing activities)
- Any increase in long-term debt, so issuing debt or taking out a loan
- Any increase in equity, so issuing new stock in one's own company
Cash outflows (financing activities)
- Any decrease in long-term debt, so paying off debt or repaying a loan
- Paying a dividend to the firm's shareholders
- Any decrease in equity, so purchasing treasury stock
Corporate Income Tax
- U.S. has a progressive tax with rates ranging from 15 percent to 39 percent
higher taxable income = higher the tax liability
Average tax rate
- total taxes paid divided by taxable income for the period. It's the past rate paid.
Marginal tax rate
,- The rate to be applied to the next dollar of taxable income. The rate paid on the last dollar
earned or the next dollar that will be earned. It's used for planning purposes.
Stockholder's perspective
- net cash flows, risk, rate of return, profitability
- market value of firm's stock; dividends?
Manager's perspective
- rate of return, efficient use of assets
- controlling costs, increasing net cash flows
- increasing market value of firm's stock
Creditor's perspective
- predictability of revenues and expenses
- ability to meet short-term obligations
- ability to make loan payments as scheduled
- no unanticipated change in risk; how much debt?
Ratios used vary across firms
- Occupancy ratios (hotel)
- Sales-per-square foot (retailing)
- Loans-to-assets (banking)
- Medical cost ratio (health insurance)
Liquidity ratios
- how well can firm pay its short-term debt?
Efficiency ratios
- how is company using its assets to generate sales? How often does it turn over its inventory?
, Leverage
- how much debt compared to equity? What portion of assets are financed with debt?
Profitability ratios
- how much profit for every dollar sold? What is return for shareholders?
Market Value ratios
- what is the market price vs. its book value? How many times more is the stock priced at
compared to the earnings per share?
Total Asset Turnover
- Indicates a firm's ability to use assets to generate sales. This is also called a turnover ratio.
In general, higher numbers are a favorable indicator.
Inventory Turnover
- How many times per year the company turns over or sells its inventory. A higher number is
generally a positive signal. DSI tells how many days in the year it takes to turnover inventory.
Debt ratios
- Indicate whether a firm is using the appropriate amount of debt financing. In general, higher
ratios indicate greater potential return and greater bankruptcy risk.
Market Value Ratios
- Indicates how the market is valuing the firm's equity
Return on Assets
- Indicate whether a firm is generating adequate profit from its assets.
The DuPont system
- Diagnostic tool for evaluating a firm's financial health
