Chapter 4.txt

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Chapter 4.txt
2011-02-23 23:24:28
Foundations Ratio Financial Analysis

Financial Statement Analysis
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  1. What are short term creditors, long term creditors and equity investors interested in?
    • Short term creditors: liquidity
    • Long term creditors: solvency
    • Equity investors: profitability
  2. Activity ratios:
    Inventory Turnover
    AR Turnover
    Fixed Asset Turnover
    Total Asset Turnover
    • COGS/Average Inventory
    • Sales/Avg AR
    • Sales/Avg Net Fixed Assets
    • Sales/Avg Total Assets
  3. Liquidity Ratios:
    Current Ratio
    Quick Ratio

    Defensive Interval

    Days' Sales in Inventory
    Days' Sales in AR
    Days' Purchases in AP

    Operating Cycle
    Cash Cycle
    • Current Assets/Current Liabilities
    • (Cash + Marketable Securities + AR)/Current Liab.

    • 365(Quick Assets)/Project Expenditures
    • Proj Expenditures=Pretax Exp-(dep'n+amort)
    • 365/Inventory Turnover
    • 365/AR Turnover
    • 365/AP Turnover
    • AP Turnover=Purchases/Average AP
    • Purchases=COGS + Change in Inventory

    • Days' Sales in Inventory+Days' Sales in AR
    • Operating Cycle-Days' Purchases in AP
  4. Solvency Ratios:
    Debt to Equity
    Debt to Assets

    Times Interest Earned aka Interest Coverage Ratio
    Capital Expenditure Ratio
    • Average Total Debt/Average Total Equity
    • Average Total Debt/Average Total Assets
    • D/E = (D/A)/(1-D/A)
    • EBIT/Interest Expense
    • CFO/Gross Capital Expenditures
  5. Profitability Ratios
    Gross Margin
    Operating Income to Sales

    Prefinancing Margin

    Return on Sales
    Return on Assets
    Return on Equity
    • Gross Profit/Sales
    • EBIT/Sales

    • (NI + After tax Interest)/Sales
    • After Tax Interest=Interest expense(1-T)

    • NI/Sales
    • (NI+After Tax Interest)/Avg Total Assets
    • NI/Average Total Equity
    • Prefinancing Margin(Efficiency)
    • x
    • Asset Turnover(Effectiveness)

    NI + Interest(1-T)/Sales x Sales/Average Assets
  7. Operating Cost Function Estimation
    VC(v) = (Cost(t)-Cost(t-1))/(Sales(t)-Sales(t-1))

    FC(F) = Cost(t) - v(Sales(t))

    • If F is less than or equal to 0, then...
    • use v' = Cost(t)/Sales(t)
  8. What are the circumstances for a firm's stockholders to enjoy returns from favorable financial leverage?
    The after-tax cost of interest must be less than the return on assets employed from debt.

    • After tax Cost of Interest:
    • i = Interest Expense(1-T)/(Average Total Debt)

    ROE = ROA + (ROA - i)(D/E)

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