Midterm 1

Question 1

NWC= CA-LC

Answer 1

Measure of the firm’s ability to meet short-term obligations
Higher the number = more liquid the business

Question 2

Current Ratio = CA/CL

Answer 2

Ability to pay short-term debts with short-term assets
Higher is generally better = greater ability to pay off debts

Question 3

Quick Ratio = (CA-Inventory)/CL

Answer 3

Ability to pay short term debts using ONLY most liquid assets (cash/AR).
Higher is generally better as it has more liquidly available funds

Question 4

Cash Ratio = Cash/CL

Answer 4

Ability to pay off CL using only cash.
Higher is better = more cash (above 1 good, below 1 potential issues)

Question 5

Debt-Equity Ratio = D/E

Answer 5

measure of how much funding comes from debt compared to shareholder equity.
A HIGH number could mean a company might have a harder time paying debts, but a LOW number could mean not taking advantage of potential profits

Question 6

Capital Intensity Ratio = Assets/Sales

Answer 6

How much capital a company needs to invest to generate a 1$ in sales.
High number = capital intensive, low number = less capital needed to generate revenue

Question 7

Total Debt Ratio = Debt/Assets

Answer 7

Percentage of assets financed by debt.
Higher = greater debt reliance
having more debt than assets (# above 1) generally not good

Question 8

Times Interest Earned = EBIT/Interest Exp

Answer 8

Company’s ability to pay interest on debt
Higher number = better because you are less likely to default on loans

Question 9

Cash Coverage = EBITDA/Interest Exp

Answer 9

Ability to pay off liabilities using cash used by lenders to determine the amount of money to lend
Higher = Better

Question 10

Inventory Turnover = COGS/Inv

Answer 10

How often a company sells and replaces inventory
Higher = more frequent
Lower = less frequent

depending on the industry higher might indicate effective inventory management and working capital

Question 11

Days Sales in Inventory = 365/Inv turnover

Answer 11

How long it takes a company to sell inventory in days
A lower # is generally better because it indicates quicker sales

Question 12

Receivables Turnover = credit sales/AR

Answer 12

measures how quickly a company collects its average accounts receivable.
A high ratio means a company is collecting payments quickly
A low ratio means a company may need to improve its collection processes

Question 13

Days’ Sales in Receivables = 365/Receivables Turnover

Answer 13

how long it takes a company to collect payment after a sale

A low # indicates that customers are paying on time
A high # indicates that it’s taking longer to collect payments

Question 14

Payables Turnover = COGS/(A/P)

Answer 14

how quickly a company pays its bills.
A high payables turnover ratio indicates that a company is paying its bills quickly and efficiently

Question 15

Days to pay suppliers = 365/Payables turnover

Answer 15

how long, on average, a company takes to pay its suppliers

A higher number is not necessarily good or bad. It just indicates the company is holding onto more cash and paying off slower, lower # indicates good supplier relations, but the possible limiting of cash for other operations.

Question 16

EPS = NI/Shares

Answer 16

how much profit a company generates per outstanding share of common stock

the higher a company’s EPS, the more profitable it is considered to be

Question 17

DPS = Dividends/Shares

Answer 17

how much dividend income you can expect to receive per share of a company’s stock,

A rising DPS speaks highly of the company because it shows that the company has long-term sustained earnings and has confidence in sharing its profits with shareholders.

Question 18

P/E = Price per Share / EPS

Answer 18

assess whether a company’s stock is overvalued, undervalued, or fairly priced relative to its earnings

Higher # = high growth expectations or overvalued
Lower # = cheaper aka possible good investment, or slow growth/financial trouble

depends on the other factors how you interpet

Question 19

Book value per share = Book Value of Equity / Shares

Answer 19

what each share would be worth if the company sold all its assets and paid off its debts. It’s essentially the company’s net worth divided by the number of shares.

Higher BVPS is usually better because it means the company has more assets per share, making it financially stronger.

Question 20

B/M = Book value of equity per share / Market value of equity per share

Answer 20

tells you whether a company is considered undervalued or overvalued based on its current market price compared to its net asset value;

a high B/M ratio suggests a potentially undervalued stock, while a low B/M ratio indicates a potentially overvalued stock.

Question 21

Market-to-book = Market value of equity per share / Book value of equity per share

Answer 21

inverse of B/M
M/B > 1 → Investors are willing to pay more than book value (common for growth stocks).
M/B < 1 → Investors see the stock as undervalued or risky.

Question 22

Equity Multiplier = A/E

Answer 22

how much of a company’s assets are financed by equity rather than debt
a higher equity multiplier = reliance on debt financing, higher financial leverage, and potential risk
lower multiplier suggests more reliance on equity financing and lower risk.

Question 23

AT = Sales/A

Answer 23

how many dollars of sales a company makes for every dollar of assets it owns.
Higher is generally better as you are generating more revenue per asset

Question 24

PM = NI/Sales

Answer 24

A measure of how much money a company makes after accounting for costs
A higher profit margin is better

Question 25

ROA = NI/A

Answer 25

how efficiently a company is using its assets to generate profits. It shows how much profit a company generates for every dollar of assets it owns. A higher ROA is generally seen as a sign of operational efficiency.

Question 25

ROE = NI/E

Answer 25

how well a company generates profits from its equity. Higher ROE → Indicates that the company is effectively using shareholder capital to generate profits. Lower Could mean company is not generating sufficient profits from its equity, or inefficiency in using shareholders' fund

Question 26

Plowback or Retention Ratio = b = RE/NI or 1-d

Answer 26

how much of a company’s earnings are retained (or reinvested) in the business rather than being paid out as dividends. higher retention ratio indicates that the company is focused on growth and reinvesting in itself (useful for expansion or paying down debt). A lower retention ratio indicates that the company is likely distributing a larger portion of its profits to shareholders in the form of dividends, which may appeal to income-focused investors.

Question 27

Dividend Ratio = d = Div/NI

Answer 27

proportion of a company’s earnings paid out as dividends to shareholders Higher Dividend Payout Ratio → The company is paying out a larger portion of its earnings as dividends.

Question 28

IGR = ROA x b

Answer 28

how much a company can grow its sales and assets using only its own internal resources A higher IGR suggests that the company can grow more by reinvesting its earnings. Begining numbers

Question 29

SGR = ROE x b

Answer 29

ate at which a company could grow if its current capital structure – i.e. the mixture of debt and equity – is maintained. beginning numbers

Question 30

IGR = (ROA x b) / [1 – ROA x b]

Answer 30

same as before only ending numbers

Question 31

SGR = (ROE x b) / [1 – ROE x b]

Answer 31

same as before only ending numbers

Question 32

LTD = L – CL

Answer 32

portion of the company’s liabilities that are due beyond one year higher or lower being good depends on context of company

Question 33

Long-Term Debt Ratio = LTD/(LTD + E)

Answer 33

It shows the proportion of the company's assets that are financed by long-term debt. A higher ratio indicates that a larger portion of the company's assets are funded by long-term debt, which can be a sign of higher financial leverage and potential risk.

Question 34

Average Tax Rate = Tax Exp/Taxable income

Answer 34

percentage of taxable income that a company or individual pays in taxes Lower Average Tax Rate: This suggests that a smaller portion of taxable income is paid in taxes. It may indicate the use of tax deductions, credits, or lower tax brackets.

Question 35

EFN = [ΔSales x Assets/Sales] - [ΔSales x (A/P)/Sales] - [b x PM x (Sales + ΔSales)]

Answer 35

how much additional financing a company needs to fund its operations and growth, especially when its current assets and liabilities cannot cover the required funding >=0 indicates no external financing necessary EFN=0 @ IGR rate EFN can be negative if excess retained earnings

Question 36

OCF = NI + Dep + Int Exp OCF = EBIT + Dep – Tax Exp OCF = Sales – Costs – Tax Exp

Answer 36

cash that a company generates from its regular business operations during a specific period. higher = better, but - does not immediately mean bad. Rather it means it could have been capital intensive, etc. Shouldn't be negative for long periods though

Question 37

ΔNWC = New NWC – Old NWC

Question 38

Net Capital Spending = Depreciation + Increase in Fixed Assets

Answer 38

Positive ΔNWC: If ΔNWC is positive, this means the company has increased its net working capital. negative, it means the company has decreased its net working capital, possibly indicating that it is using its current assets more efficiently or has reduced its liabilities.

Question 39

Cash Flow from Assets = OCF – ΔNWC – Net Capital Spending

Answer 39

much cash a company generates or uses from its core operations and investments in assets, after accounting for changes in net working capital (NWC) and capital expenditures.

Question 40

Cash Flow to Creditors = Interest Exp – Net New Long-Term Liabilities

Answer 40

cash that a company pays to its creditors, which includes both interest payments and changes in the company’s long-term debt.

Question 41

Cash Flow to Stockholders = Dividends – Net New Common Stock

Answer 41

cash that a company distributes to its shareholders, typically in the form of dividends, or repurchases stock.