Study Unit 10 Flashcards Preview

Gleim BEC > Study Unit 10 > Flashcards

Flashcards in Study Unit 10 Deck (20)
Loading flashcards...
1

Profitability index

method to rank projects so limited resources used in investments that will have highest return per dollar
PI=PV of FCF or NPV/ Initial investment

2

2 methods to assess Return generated for owners

return on investment
residual income
allow investor to assess how effective or efficient firm is in using assets to enjoy a return

3

ROI

ROI=op income/Avg invested capital
=Op income/Total assets
ROI> cost of capital, add to S/h value

temptation to reject capital projects that would decrease ROI even though would increase s/h wealth

4

ROI- Component

ROI= PM * Capital Asset Turnover
ROI= (Op Income/Sales) * (Sales/Avg Invested capital)
PM=Return on Sales

5

Residual Income

RI= Operating income- Target return on invested capital
RI= 42000- (700k *5.5%)

derived by weighting avg invested capital with imputed interest rate

6

ROA

ROA=NI/Avg total assets

7

EPS

(NI-Preferred dividends)/common shares outstanding

8

ROCE

measures amnt of income company earns per $1 invested by common s/h
(NI-preferred dividends)/Avg common equity

9

Price-Earnings ratio

measures amnt investors will pay for $1 of earnings

P/E= Market price of share/ EPS

10

Economic Rate of Return on Common Stock

measures relative amnt of s/h wealth generated during pd

(Dividends paid + Change in stock price)/Beginning Stock price

11

Economic Value Added

residual income adjusted for opp cost of capital
EVA=After tax op income-(initial investment * cost of capital)

12

EVA represents

true economic profit b/c charge for cost of equity is w/in cost of capital

measures marginal benefit by using resources in particular way; useful to determine if segment increases s/h value

coe is an opp cost

13

EVA differs from accounting income

subtracts coe
more adjustments
-R&D may be amortized over 5 years
-true economic depreciated rather than tax depreciation may be recognized

14

Solvency

ability to pay noncurrent debt as due and remain in business in long run
-ability to service debt out of current earnings is key to see if using leverage successfully

15

Times interest earned

EBIT/Interest exp

16

Debt

return on debt > interest paid, use of debt is advantageous
return enhanced bc fact interest pmts are tax deductible

more debt is risky

17

Equity

permanent capital of an entity, from firm's owners w/hopes of getting return

ROE is uncertain bc equity come from residual (claim left after all debt satisfied) interest in assets

18

Total debt to Total Capital

low-more capital from s/h
creditors prefer ratio to be low to cushion against loss
TD/TC

19

Debt to Equity

reflects LT debt pmt ability
lower means less debt burden, more likely to pay creditors

20

LT Debt to Equity

lower means easier to raise new debt capital