Financial Management: Asset Effectiveness & Efficiency & Working Capital Management Flashcards Preview

BEC > Financial Management: Asset Effectiveness & Efficiency & Working Capital Management > Flashcards

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

The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the

Historical weighted average cost of capital for the company.