Sheet1 Net Working Capital Current assets - Current liabilities Balance Sheet Analysis 1- Evaluates the liquidity of assets 2- Debt v Equity 3- Value v Cost Balance Sheet Assets=Liabilities+SE Debt v Equity firm borrows money, first claim to firms cash flow to creditors. Equity holders entitled to only residual value, portion left after creditors are paid. Residual value Money left over for equity shareholders after creditors are paid off. Market value Recording assets at current market value Historical value recording assets according to origional cost Product cost costs in creating a good/service=labor, raw material and MOH Period costs not product costs, recorded when incurred, rent, admin salaries. Marginal tax % paid on the next dollar earned Average tax Tax bill / taxable income Operating cash flow EBIT + depreciation - taxes Capital spending spending long term fixed assets= Ending fixed assets - beginning net fixed assets + depreciation = Net capital sepnding NCS Change in NWC Change in current assets and liabilities = End NWC - Beg. NWC = Change in NWC Cash flow from assets Operating CF - NCS - #NWC = Casflow from assets Cash flow to creditors Interest paid - net borrowing Cash flow to stockholders dividends paid - new equity raised Cash flow CF(A)=CF©+CF(S) Non-cash item depreciation Pro Forma Statement A financial plan consists of - forcast balance sheet, income statement, statement of cash flows - based on projected sales % of sales approach Take current balance sheet * % of sales = pro forma balance -- NP, LTD, Equity don't vary directly with sales Non-cash item Cash flow to creditors Which one of the following statements concerning net working capital is correct? 1- Net working capital increases when inventory is purchased with cash. 2- Net working capital must be a positive value. 3- Total assets must increase if net working capital increases. 4- A decrease in the cash balance may or may not decrease net working capital. 5- Net working capital is the amount of cash a firm currently has available for spending. 4. A decrease int eh cash balance may or may not decrease net working capital Depreciation: 1.reduces both taxes and net income. 2.increases the net fixed assets as shown on the balance sheet. 3.reduces both the net fixed assets and the costs of a firm. 4.is a noncash expense which increases the net income 5..decreases net fixed assets, net income, and operating cash flows. 1. Reduces both taxes and net income Which one of the following statements related to an income statement is correct? 1- Interest expense increases the amount of tax due 2- Depreciation does not affect taxes since it is a non-cash expense 3- Net income is distributed to dividends and paid-in surplus 4- Taxes reduce both net income and operating cash flowÂ Â Â Â Â Â Â 5- .Interest expense is included in operating cash flow 4. Taxes reduce both net income and operating cash flow A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity? Shareholders' equity = $5,900 + $21,200 âˆ’ $8,400 = $18,700 (Note: The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.) Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes? Net income = $75 + $418 = $493 Taxable income = $493/(1 âˆ’ .35) = $758.46 Earnings before interest and taxes = $758.46 + $511 = $1,269.46 Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate? Earnings before taxes = $843,800 - $609,900 - $76,400 - $38,200 = $119,300 Net income = $18,000 + $62,138 = $80,138 Taxes = $119,300 - $80,138 = $39,162 Tax rate = $39,162/$119,300 = 32.83 percent According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the cash flow from _____ activities. decrease; operating decrease; financing increase; operating increase; financing increase; investment Increase; operating On a common-base year financial statement, accounts receivables will be expressed relative to which one of the following? current year sales current year total assets base-year sales base-year total assets base-year accounts receivables Base-year accounts receivables An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. increase in the cash ratio increase in the net working capital to total assets ratio decrease in the quick ratio decrease in the cash coverage ratio increase in the current ratio decrease in the quick ratio Which one of the following statements is correct? 1- If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. 2- Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. 3- The debt-equity ratio can be computed as 1 plus the equity multiplier.Â Â Â Â 4- An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.Â Â Â Â Â 5- An increase in the depreciation expense will not affect the cash coverage ratio. 5- An increase int the depreciation expense will not affect the cash coverage ratio Which one of the following will decrease if a firm can decrease its operating costs, all else constant? return on equity return on assets profit margin total asset turnover price-earnings ratio Price earning ratio Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's? 1- Al's has more net income than Ben's. 2- Ben's is increasing its earnings at a faster rate than the Al's.Â Â Â Â Â Â Â 3- Al's has a higher market value per share than does Ben's. 4- Ben's has a lower market-to-book ratio than Al's. 5- Al's has a higher net income than Ben's. 2- Ben's is increasing its earnings at a faster rate than the AL's Which one of the following characteristics applies to a limited liability company? available only to firms having a single owner limited liability for limited partners only taxed similar to a partnership taxed similar to a C corporation all income generated is totally tax-free Taxed similar to a partnership EFN TA - TL & Owner Equity EFN Sources 1. Notes Payable (short term) 2. LT debt (long term) 3. Common stock and PIC 4. Decrease dividend, which increases Retained Earning Internal rate of growth how much firm can grow assets using RE as only source of financing [ROA*(plowback ratio)] / [1 - ROA * (plowback ratio)] Determinant of growth = PM & TAT Increasing debt equity ratio Dividend policy Finding the rate PMT * PVIFA PVIFA=PV/PMT then reference table for rate OR PVIFA= (1-1/{1+r}^t]/r) Compounding more than once a year PV FV = PV(1+r)^tm If given PV - PV= annuity * PVIFA or Annuity = PV / PVIFA Compounding more than once a year FV FV = Annuity * FVIFA (table 4) or Annuity = FV / FVIFA Annual % rate from EAR APR - based on annual compounding EAR - compounding more than once a year FV = C (1+r/t)^t EAR = (FV - C ) / C EAR from APR EAR = (1+APR/m)^tm - 1 EAR - actual interest rate if compounding is done more than once a year Period rate APR / number of periods (times compounding is done) - 1. What is the APR if the monthly rate is .5%? 2. What is the APR if the semiannual rate is .5%? 3. What is the APR if the monthly rate is 1%? .5(12) = 6% .5(2) = 1% 1(12) = 12% Amortization lender may require borrower to repay parts of loan over period of time interest each period plus fixed amount Beg Bal. - Totl. Payment - Int Paid - Princ Paid - End bal. Payment = C * [ 1 - (1/r^t)]/r] C = Payment / X Principle paid = C - int Int = Payment * int Find Rate PV = 1000, T = 2, FV = 1102.6 R = 5% Find FV: Simple interest and Compound Interest PV = 1500, R=5%, T=2 Simple Interest: 1650 Compound Interest: 1653.75 = 1500*1.1025 What else can the future value formula be applied to? Bacteria, Housing, Epidemics and Production You produce 5 million pairs of shoes a year, you expect to have 8.38 million with a growth rate of 9% per year. How long will this take? 6 years Your grandfather invested $1,000 in a savings account 40 years ago, if he now has $7,000 in his saving account approximately how much is the annual interest rate on this account?Â 5% Rule of 72 how long will it take to double at a 4% interest rate? 72/4= 18 yearss you need $2500 in 3 years and the bank gives 8% annually. How much do you need to deposit today? 2500*.7938 = 1984.5 You have a little child that you want to send to college in 16 years. You need 200,000. and you deposit 50,380. What should the interest rate be? 9% What is the present value of $7500 to be received in 7 years? 3 years? the discount rate is 6% 7 years: 4988.25 3 years: 6927 True or False? At a fixed time period, the higher the interest rate the higher the present value. False: The lower the interest rate, the higher the present value. or the higher the interest rate, the lower the present value You need 23,000 in 5 years, the interest is 7%. How much do you invest today?Â 23,000*0.7130=16,339 you look at an investment that will pay 15,000 in with an interest of 7% and you invest 6,225 today. How many years will it take?Â 6,225/15,000=.4150 13 years You have $10,000 to invest for five years. Â— How much additional interest will you earn if the investment provides a 5% annual return, when compared to a 4% annual return? Â— How long will it take your $10,000 to double in value if it earns 5% annually? Â— What annual rate has been earned if $1,000 grows into $4,000 in 20 years? 1. 12763-12167=596 2. 72/5=14.4 years 2. 4,000/1,000 = 4 Â Â ~7.5% Future value of unequal payments 1 - $1000 - 5yrs - 6% 2 - 500 3 - 700 $1000*1.06^(.5) + 500*1.06^(4)+ 700*1.06^(3) =2803 Present Value unequal payments 4-800 - int 12% - 3-600 2-400 1-200 =1432.93 800/1.12^(4) + 600/1.12^(3).... Future valueÂ - Annuities series of equal payments at regular intervals Beg. of period - annuity due End of period - ordinary annuity Table 4 - rate and time period C*table Rule of 72 Take 72 and divide by interest rate = number of years it takes to double investment Present value annuities PV * table PV=C[1-1/(1+r)^t]/r What is a bond? Coupon interest payment made on a bond in % Face value primciple amount of bond that is paid at end of term Coupon rate annual coupon divided by face value of bond Maturity specified date when principle is repaid Yield to maturity YTM rate required in maket on a bond Value of bond equation Bond value = Coupon * [1 - 1/ (1+r)^r] / r + F / (1+r)^t r=rate per period t=#periods F=bond par value Indenture written agreement between firm and lender detailing terms of debt issue. 1. Basic Terms 2. Total amonut of bonds issued 3. Description of property as security 4. Repayment arrangements 5. Call provisions 6. Details of protective covenants reigstered form form of bond issue which registrar of firm records ownership of each bond. Payments made directly to the owner. bearer form form of bond issue which bond is issued without record of owners name. payment made to current holder of bond debenture an unsecured debt, usually with maturity of 10+ years note unsecured debt with maturity under 10 years sinking fund account managed by bond trustee for early bond redemption call provision agreement giving corporation option to repurchase bond at specified price before maturity call premium amount which call price exceeds par value of bond deferred call provision call provision preventing cmpany from redeeming bond before certain date call protected bond bond during certain period cannot be redeemed by issuer. protective covenant part of indenture limiting certain actions that might be taken agains during term of loan to protect lenders interest. governement bonds Treasury nots, maturity 2-30yrs, federal tax only, municipal bonds zero coupon bonds bond tht pays no coupon and offered at price lower than par value floating rate bond coupon payment is adjustable. income bond coupon payment depend on company income convertible bond can be swapped for fixed amount of shares of stock before maturity put bond allows holder to forec issuer to buy back at stated price Sukuk Islamic law where no charging or paying interest. Instead buying bond and promist repurachse of asset at maturity and paying rent on asset. TRACE Trade report and compliance engine Bid ask spread difference between bid price and asking price clean price price of bond net accrued interest is price that is typically quoted dirty price price of bond including accrued intreest- full price, what buyer actually pays real rates interest rates that are adjusted for inflation nominal rates interest rates not adjusted for inflation Fisher effect relationship between nominal returns and real returns and inflation= 1+ R = (1+r)*(1+h) R-nominal r-real rate term structure of interest rates relationship between nominal interest on default free, pure discount securities and time to maturity (pure time value of money) -long term hogher is upward sloping/downward sloping inflation premium portion of nominal interest rate that represents compensation for expected inflation interest rate risk premium compensation investors demand for bearing interest rate risk treasury yield curve plot of yields on treasury notes relative to maturity default risk premium portion of a nominal interest rate or bond yield that represents compensation for possibility of default taxability premium portion of nominal interest rate the represents compensation for unfacorable tax status liquidity premium portion of nominal that reps compensation for lack of liquidity