Flashcards in Financial Management: Asset Effectiveness & Efficiency & Working Capital Management Deck (45):

1

## Return on Investment ROI Formula

###
Income/ Investment Capital

Investment Capital (D+E)

OR

Investment Capital = Net Income/ Avg. Assets

2

## Return on Total Assets Ratio

### Net Income/ Average total assets

3

## Debt-to Asset ratio

###
Total Debts/ Total assets

4

## Debt to Equity Ratio

### Total Debt/ Total Shareholder's Equity

5

## Definition of Net Working Capital

### CA-CL

6

## Current Ratio

### Current Assets/ Current Liabilities

7

## Quick Ratio

### Cash + MS+ A/R / CL

8

## APR of quick payment discount

###
(360/Pay Period- Discount Period) X (Discount/100-Discount %)

9

## Cash Conversion Cycle

### ICP+ RCP- PDP

10

## Inventory Turnover

### Cogs/Average Inventory

11

## Inventory Conversion Period (ICP)

### 365/ Inventory Turnover

12

## A/R Turnover

### Sales/ Avg. A/R

13

## Receivable Conversion Period (RCP)

### 365/ A/R Turnover

14

## A/P Turnover

### COGS/ Average A/P

15

## AP Deferral Period

### 365/ AP Turnover

16

## Reorder Point

### Safety Stock + (Lead Time X Sales during lead time)

17

## Economic Order Quantity

### (2X Annual Sales Order X Order Cost )/ Carrying cost per unit

18

## Return on Investment *2nd type of formula)

###
Profit Margin X Investment turnover

19

## ROI

### is ideal performance measure for investment in strategic business units

20

## Return on Assets

### Net Income/ Average Total Assets

21

## Limitations of Return on Investment

###
-Residual Income may be superior

-inadvertently focus managers purelt on maximizing short-term returns

-Disincentive to Invest ( Takes time for asset to produce sales)

22

## Return on Equity

### Net Income/ Total Equity

23

## ROE Goal

### ROE> Cost of Equity (CAPM)

24

## Net Profit Margin is a measure of operating efficiency

### Net Income/ Sales

25

## Asset Turnover is a measure of the degree of efficiency with which a company is using its assets

### Sales/Avg. Total Assets

26

## Financial Leverage amplifies both risk assumed and potential return

###
FL= Avg. Total Assets/ Equity

-Must be within risk appetite

27

## Residual Income and Economic Value Added in dollars for investors

###
RI =Net Income (i/S) - Required Return $

Required return= Net Book Value X Hurdle Rate

Net Book Value of Equity = Assets - Liab.

28

## Calculating DuPoint ROE

###
Net Profit Margin X Asset Turnover X Financial Leverage

NI/S X Sales/Avg Total Assets X Avg. TA/ Equity

29

## Extended DuPoint Model

###
Net Profit Margin into 3 distinct components.

Net Income/Sales

a) Tax Burden: Net Income/ Pre-tax Income

b) Interest Burden: Pretax Income/ EBIT

c) Operating Income Margin= EBIT/Sales

30

## Benefits of Residual Income Performance Measures

###
a) Realistic Target Rates In dollars

b) Focus on Target Return and Amount

31

## Weakness of Residual Income Performance Measures

###
a) Reduces Comparability

b) Target Rates Require Judgement

32

##
Economic Value Added

EVA is WACC

The hurdle rate is WACC

### EVA uses NOPAT

33

## NOPAT

### Profit before interest but after tax

34

## EVA =

###
NOPAT- $WACC

Investment = D+E

NOPAT - Required Return

EBITX(1-T)

35

## Residual Income

### Looks at the return available to the stockholder

36

## EVA

### Looks at the return to all providers of capital

37

## Positive EVA means

###
Performance is meeting standards.

Stock value is going to go up

38

## Negative EVA means

###
Not meeting standards

Stock is going to go down.

39

## Debt- to Asset Ratio Interpretation

### Ratio indicates a long term debt paying ability. The lower the ratio, the better protection afforded to creditors

40

## Debt-to- Equity Ratio Interpretation

### the lower the ratio, the lower the risk involved

41

## When it comes to carrying inventory

### The lower the cost of inventory, the more companies are willing to carry.

42

## Determination of Safety Stock depends on the following factors

###
1) Reliability of sales forecasts

2) Possibility of customer dissatisfaction resulting from back orders

3) Cost of running out of inventory

4) Lead time

5) Seasonal demands on inventory

43

## What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers

### ROI may lead to rejecting projects that yield positive cash flows

44

## The basic objective of the residual income approach of performance measurement and evaluation is to have a division maximize its:

### Income in excess of a desired minimum amount

45