Chapter 4.txt
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What are short term creditors, long term creditors and equity investors interested in?
 Short term creditors: liquidity
 Long term creditors: solvency
 Equity investors: profitability

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

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 CycleDays' Purchases in AP

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)/(1D/A)
 EBIT/Interest Expense
 CFO/Gross Capital Expenditures

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(1T)
 NI/Sales
 (NI+After Tax Interest)/Avg Total Assets
 NI/Average Total Equity

ROA DECOMPOSITION
 Prefinancing Margin(Efficiency)
 x
 Asset Turnover(Effectiveness)
NI + Interest(1T)/Sales x Sales/Average Assets

Operating Cost Function Estimation
VC(v) = (Cost(t)Cost(t1))/(Sales(t)Sales(t1))
FC(F) = Cost(t)  v(Sales(t))
 If F is less than or equal to 0, then...
 use v' = Cost(t)/Sales(t)

What are the circumstances for a firm's stockholders to enjoy returns from favorable financial leverage?
The aftertax cost of interest must be less than the return on assets employed from debt.
 After tax Cost of Interest:
 i = Interest Expense(1T)/(Average Total Debt)
ROE = ROA + (ROA  i)(D/E)