Managerial Finance Midterm

Operating cash flow

Cash flow that results from the firm's day-to-day activities of producing and selling

Net capital spending

Ending net fixed assets - Beginning net fixed assets + Depreciation
Money spent on fixed assets less money received from the sale of fixed assets

Change in net working capital

Ending NWC - Beginning NWC

Cash flow from assets

Operating cash flow - Net capital spending - Change in NWC
The total of cash flow to creditors and cash flow to stockholders, considering the following: operating cash flow, capital spending and change in NWC.

Cash flow to creditors

Interest paid - Net new borrowing

Cash flow to stockholders

Dividends paid - Net new equity raised

Average tax rate

Total taxes paid/total taxable income
The percentage of your income that goes to paying taxes

Marginal tax rate

Amount of tax payable on the next dollar earned
The tax rate that is relevant for most financial decisions

Current ratio (Don't need to memorize)

Current assets/Current liabilities
Measure of short-term liquidity. To a creditor (especially a short-term creditor), a higher current ratio is preferable. To a firm, a high current ratio indicates liquidity, but it can also indicate an inefficient use of

Inventory turnover (Don't need to memorize)

Cost of goods sold/Inventory
Calculates how many times a company sells off or turns over it's entire inventory. The higher the better.
Days' sales in inventory = 365/Inventory turnover

Debt to equity ratio (Don't need to memorize)

Total debt/Total equity

Asset turnover

Sales/Total assets
Shows how much money in sales each dollar in assets generates. Better to be higher.

Capital intensity ratio (Don't need to memorize)

Total assets/Sales
The amount of assets needed to generate $1 in sales. Better to be lower.

Profit margin

Net income/Sales
Tells you how much profit each dollar in sales generates. Better to be higher.

Equity multiplier

Total assets/Total equity
1+debt/equity ratio

Return on equity

Net income/Total equity
Measure of how the stockholders fared during the year.

Du Pont formula

ROE = (Net income/sales) x (Sales/Assets) x (Assets/Total equity)
ROE = ROA x (Assets/Total equity)
ROE = Profit margin x Total asset turnover x Equity multiplier

Sustainable growth rate

(ROE x b)/(1- ROE x b)
The maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio

Internal growth rate

(ROA x b)/(1- ROA x b)
The maximum growth rate a firm can achieve without external financing of any kind

Return on assets (Don't need to memorize)

Net income/Total assets
Measure of profit per dollar of assets. The higher the better.

Dividend payout ratio

Cash dividends/Net income

Retention ratio, plowback ratio, b

1-dividend payout ratio
Addition to retained earnings/net income

Fisher Effect

(1+nominal rate)=(1+real rate)*(1+inflation rate)

Current yield for bonds

Annual coupon payments/current price

Price of stock with constant dividend growth rate

P0 = D1/(R-g)


Average net income/Average book value


PV cash inflows/-initial investment

BV of asset

Cost of asset - sum(depreciation)

Approximate real rate

Coupon rate-inflation