networking capital definition
current assets- current liabilities *represents the capital available in the short term to run the business
operating leverage high
high fixed costs, lower variable costs
operating leverage low
low fixed costs, higher variable costs
discount
yield to maturity greater than coupon rate
price less than face value
premium
yield to maturity greater than coupon rate
price greater than face value
interest rate and bond prices
INVERSELY related
investors view _____ bonds to be riskier than _____ bonds
long-term riskier than short-term
market capitalization
the total market value of equity; market price per share X number of shares
US Treasury Bills
zero-coupon bonds issued by the US govt, with a maturity of up to one year
risk- free interest rate
the interest rate at which money can be borrowed or lent without risk over given period
equity multiplier
a measure of leverage; total assets/ total equity
important differences between corporation and other forms of businesses
a) income of corporation can be subject to double taxation
b) investors in corporation may remain anonymous
c) there is no limit on number of owners a corporation can have
internal rate of return
interest rate that sets the net present value of the cash flows equal to zero
c corporations
no restrictions on who owns their shares; subject to direct taxation
dividend yield formula
div1/P0
capital gain formula
(p1-p0)/p0
price of stock due to dividend valuation model
equal to the present value of all the expected future dividends it will pay, along with the cash flow from the sale in year N
as the growth of the company increases
stock price rises
NPV greater than zero
accept the project
NPV less than zero
reject the project
the higher the discount rate
the lower the NPV
the lower the discount rate
the higher the NPV
internal rate of return greater than the cost of capital
accept the project
internal rate of return less than cost of capital
reject the project
networking capital
current assets- current liabilities
or
cash + inventory + receivables - payables
dividend yield definition
the expected annual dividend of a stock divided by its current price; the percentage return an investor expects to earn from the dividend paid by the stock
capital gain definition
the amount by which the selling price of an asset exceeds its initial purchase price
pro forma
describes a statement that is not based on actual data but rather depicts a firm's financials under a given set of hypothetical assumptions
what is considered a cash outflow in the calculation of the free cash flow
capital expenditures, increase in networking capital
as a company grows, its
working capital needs usually expand
if sales increases then using percent sales forecast, what would increase?
accounts payable
required rate of return and stock price have
inverse relationships
ranks of assets from highest to lowest average annual return over the past 75 years?
small company stocks, large company stocks, corporate bonds, US Treasury Bill
holding all other things constant, what would increase a company's operating leverage?
moving to a more capital intensive, and less labor intensive, labor production
the matching principle
short-term needs should be financed with short-term debt and long-term needs should be financed with long-term debt
the yield curve is normally
upward sloping, indicating that interest rates on short-term borrowing are lower than on long-term borrowing
used as a measure of the risk free return rate
US Treasury Bills
the internal rate of return for a project is
the discount rate that makes NPV of the project equal to zero
given the divined valuation model, price of stock rises if
required rate of return falls
what can a corporation subtract as an expense before taxes are calculated on taxable income
interest payments to bondholders
systematic risk
must be affecting all of the market, NOT just one specific company
The CAPM asserts that the price of a stock is based on
the risk of that company compared to the average market risk
beta is a measure of
systematic risk
the concept behind the dividend valuation model is that the price of a stock should reflect the
present value of the expected future dividends
if the discount rate used in a capital budgeting problem decreases
the NPV will fall
a company's current ratio will be greater than
its quick ratio
beta measures
how an individual stock moves compared to the stock market average
a company's sustainable growth rate will increase if
it's payout ratio decreases
cost of equity is found using
CAPM model
dividend payments
a part share of the profits or earnings of a company paid to each shareholder on the basis of the number of shares they hold
free cash flow formula
Net Income + Depreciation - Expenditures - Net Working Capital
NPV=
dollars today
to increase shareholder wealth, a manager should try to
choose projects with a positive NPV
depreciation is
considered a cash inflow in incremental earnings calculations and as a cash outflow in free cash flow calculations
sustainable growth rate formula
ROE * (1- payout ratio)
the coupon payment for a bond is calculated by
multiplying the coupon interest rate by the face value of the bond
asset turnover rate has to do with
the amount of hours and amount of staff working
lower ROE=
more shareholder's equity
higher quick ratio=
the more liquid the company
internal growth rate
the maximum growth rate a firm can achieve without resorting to external financing
depreciation
decrease in the exchange rate. more expensive for you to buy. $1 would be able to buy you LESS of the foreign currency.
appreciation
increase in the exchange rate. less expensive for you to buy. $1 would be able to buy you MORE of the foreign currency.
WACC definition
the average of a firm's equity and debt costs of capital, weighted by the fractions of the firm's value that correspond to equity and debt, respectively
leverage
the relative amount of debt on a firm's balance sheet
how much of the market does S&P 500 measure?
99%
unsystematic risk can be reduced
through diversification
more diversified portfolio,
less volatility
investing in positive NPV means that
IRR > Cpn Rate
current ratio is greater than
quick ratio
depreciation is inflow or outflow?
inflow, account expense?
$1= 1.35 euro
$1= 1.60 euro
dollar has appreciated and euro has depreciated
$1= 2.5 euro
$1= 2 euro
dollar has depreciated and euro has appreciated
volatility
systematic risk consists of the day-to-day fluctuations of a a stock price
volatility is a measure of risk because it
refers to the behavior of investment not the reason behind it