RATIOS - ability to its debt obligations out of current...

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RATIOS 1. Return on Investment (aka ROI; ROA) - An ROI performance measure motivates managers to accept projects that generate the highest percentage returns relative to other projects. Consequently, managers may reject projects with lower percentage returns that nevertheless yield amounts of cash flows in excess of required ROI. Thus, a disadvantage of using ROI rather than Residual Income (RI) to evaluate performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows. 2. Quick Ratio Cash, Receivables, and Marketable Securities (excludes inventory) / Current Liabilities 3. Times Interest Earned = EBIT / Interest Expense A leverage ratio that measures a firm’s use of debt to finance its assets and operations and its
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Unformatted text preview: ability to its debt obligations out of current earnings (long-term debt-paying ability). For example, EBIT = NI, minus any gains, + Tax +Interest. 4. EVA [EBIT x (1-T)] – [WACC x (TA – CL)] OR [EBIT x (1-T)] – (Cost of Equity x TE) – [Cost of Debt x (1-T) x TL] 5. The Economic Rate of Return on Common Stock is calculated by (1) adding the dividends received over the period of ownership to the change in the stock price during the period of ownership and (2) dividing this amount by the original price paid for the stock. (Dividends + change in price) divided by beginning price...
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