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Flashcards in B3 - M5 Deck (17):
1

Company's Percentage return relative to its capital investment risk

Return on Investment (ROI)

2

Two Formulas for ROI

1. Income / Invested Capital
2. Profit Margin x Investment Turnover

3

Profit Margin x Investment Turnover formula

(Income / Sales) x (Sales / Invested Capital)

4

Return on Assets Formula

Net Income / Average Total Assets or
(Net Income / Sales) x (Sales / Assets)

5

1. Historical Cost - Accumulated Depreciation
2. Historical Cost
3. Cost to Replace at current level of utility
4. Selling Price of productive assets

1. Net Book Value
2. Gross Book Value
3. Replacement Cost
4. Liquidation Value

6

Limitations of ROI

1. Short Term Focus
2. Disincentive to Invest

7

Return on Equity Formula

Net Income / Equity

8

DuPont ROE formula

Net Profit Margin x Asset Turnover x Financial Leverage

9

1. Net Profit Margin
2. Asset Turnover
3. Financial Leverage

1. Net Income / Sales
2. Sales / Assets
3. Assets / Equity

10

Measure of Operating Efficiency

Net Profit Margin

11

Degree of Efficiency that a company is using its assets

Asset Turnover

12

Measures the extent to which a company uses debt in its capital structure

Financial Leverage

13

Extended DuPont Model breaks out Net Profit Margin into three components:

1. Tax Burden
2. Interest Burden
3. Operating Income Margin (EBIT Margin)

14

1. Tax Burden
2. Interest Burden
3. Operating Income Margin (EBIT)

1. Net Income / Pretax Income
2. Pretax Income / EBIT
3. EBIT / Sales

15

Residual Income

Net Income - Required Return

16

Required Return

Net Book Value (Equity) x Hurdle Rate

17

Economic Value Added Formula

Net Operating Profit after Taxes - Required Return
-where Required Return = Investment X WACC