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- Grove City College
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- Business 440
- Mech
- Exam 1 - DuPont, WACC, EVA
Exam 1 - DuPont, WACC, EVA
Business 440 with Mech at Grove City College
About this deck
By: Doug McClean
Created: 2012-02-15
Size: 22 flashcards
Views: 7
Created: 2012-02-15
Size: 22 flashcards
Views: 7
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ROE
Return on Equity
= Net Income / Equity
Typically 4-5% higher than LT Debt interest rate
EM
Equity Multiplier
= Total Assets / Equity
Measures the extent the firm is financed with debt (as opposed to equity)
HIGHER EM = GREATER RELIANCE ON DEBT
PM
Profit Margin
= Net Income / Sales
Tells how much income shareholders earn from each $ of sales
When EXPENSES increase relative to SALES, the PM decreases - MEASURES EXPENSE MANAGEMENT!
TAX
Total Asset Turnover
= Sales / Total Assets
Tells how effectively the firm generates sales given assets
Low TAX means unproductive assets of ineffective uses of Assets: MEASURES ASSET MANAGEMENT
DuPont Analysis
ROE = EM * PM * TAX
so, ROE reflects:
Debt Management (EM)
Expense Management (PM)
& Asset Management (TAX)
Reasons for Low ROE
1. if firm has low EM, that means it relies on less debt. So even though lower ROE, also less risky.
2. decrease in PM
- price war
- an expense rising faster than sales
How to determine what expense is rising faster than sales...
- Look at each asset as a percentage of sales
- OR look at asset management ratios:
- Inventory Turnover
- Days Sales in Receivables
- Fixed Asset Turnover (FAX)
Inventory Turnover
COGS / Inventory
Days Sales in Receivables
AR / Daily Sales
Daily Sales = Sales/365
Fixed Asset Turnover (FAX)
Sales / Net Property Plant & Equipment
Gross Profit
= Revenue - COGS
Gross Margin
= (Revenue - COGS) / Revenue
SGR
Sustainable Growth Rate
= ROE * ( 1 - Dividend Payout Ratio)
[ 1 - dividend payout ratio = plowback ratio ]
Dividend Payout Ratio = ( Net Income - Dividends ) / Net Income
CAPM
Capital Asset Pricing Model
ke = RF + Beta [ rm - RF ]
ke : cost of capital,
RF : risk-free rate,
Beta : Beta of firm,
rm : expected market return
ke is the rate of return required given the risk
Dividend Growth Model
ke = [D0 ( 1 + g )] / [Price + g]
g : future growth rate of dividends
WACC
Weighted Average Cost of Capital
= [ D/V * kd ( 1 - T ) ] + [ E/V * ke ]
D = % of firm financed by debt
E = % of firm financed by equity
V = 1 (or total value of company)
kd = cost of debt
ke = cost of equity
T = tax rate
increase in WACC = increase in risk
EVA
Economic Value Added
= NOPAT - [ WACC * Invested Capital ] or
= [ ROIC - WACC ] * Invested Capital
ROIC: Return on Invested Capital
Deduct from earnings a charge reflecting what investors require, showing how much earnings exceeds that capital charge.
Valuation
if ROEbeg = ke , then market/book = 1
if ROEbeg > ke , then market/book > 1
Project future beta
BetaL = BetaU [ 1 + (1 - T)(D/E) ]
Degree of Combined Leverage = Degree of Operating Leverage * Degree of Financial Leverage
DCL: how sensitive EPS is to changes in leverage
Lower DOL = lower BetaU so BetaL will be overestimated
DFL
Degree of Financial Leverage
= EBIT / (EBIT - Fixed Financing Expense)
OR...
= % Change in Net Income / % Change in EBIT
Fixed Financial Expenses
DOL
Degree of Operating Leverage
= ( EBIT + FO ) / EBIT
OR...
= % Change in EBIT / % Change in Sales
Fixed Operating Expenses
DCL or DTL
Degree of Combined (or Total) Leverage
= DFL * DOL
OR
= % Change in Net Income or EPS / % Change in Sales
About this deck
By: Doug McClean
Created: 2012-02-15
Size: 22 flashcards
Views: 7
Created: 2012-02-15
Size: 22 flashcards
Views: 7
About StudyBlue
STUDYBLUE makes things that make you better at school.
Things like online flashcards with photos and audio.
Things like personalized quizzes and friendly reminders about when (and what) to study next.
Think of it as a digital backpack™: access to all of your study materials online and on your phone.
STUDYBLUE exists to make studying efficient and effective for every student, for free. Join us.
“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
Dennis
Dennis