C − InflationRa Totalrisk = Company Specific Risk ( Unsystematic Risk − Diversifiable )+ Market Risk ( Systematic Risk − Non Div Enterprise value of a firm assesses the value of the underlying business assets and separate from the value of any non-operating cash. enterprise value = market value of equity + debt − excess cash Cash Flow from Fixed Asset – cash flow in excess of that required to fund profitable capital project (excluded financing activities) CFFA + ITS = OCF − NCS − ∆ NOWC = cashflow ¿ stockholders + cashflow ¿ creditors OperatingCashflow = Net CapitalSpending = Ending Net ¿ As Change ∈ Net Operating WorkingCapital = ¿ Excludenotes payable ( non − operating ) Cashflow ¿ creditiors = interest paid − net newborrow Net newborrowings = ∆ LTD + ∆ Note Payables Cashflow ¿ stockholders = dividends paid − net new equi Net newequity raised = ∆Common equity InterestTax Shield = interest ∗ tax rate Liquidity ratio (short-term solvency): measure the firm’s ability to pay bills in the short run [convert assets to cash without loss of value] Liquidity Current Asset = CA CL Quick Ratio = CA − Inventory CL CashRatio = Cash CL NWC ¿ Total Asset = NWC TA Interval Measure = CA Average Daily OperatinCosts Long term solvency ratios (financial leverage): show how heavily the company is in debt [debt vs equity] Solvency Total Debt Ratio = Debt / Equity Ratio = Equity Multiplier = TA TE = 1 + ¿ Debt Ratio = LTD LTD + TE ¿ Interest Earned Ratio = EBIT Interest CashCoverage Ratio = EBIT + Depreciation Interest Asset management ratios (turnover/efficiency): measure how productively the firm is using its assets - Inventory ratios: measure how quickly inventory is produced and sold - Receivable ratios: provide information on the success of the firm in managing its collection from credit customers - Asset turnover ratios: show how effective the firm is in using its assets to generate sales Asset Management InventoryTurnover = COGS Inventory Age of Inv / Day s ' Sales ∈ Inv = 365 InventoryTurnover ReceivablesTurnover = Sales Receivables Avg collection period / Day s ' SalesOutstanding = R Net ¿ Asset Turnover = Sales ¿ Assets ¿ Total Asset Turnover = Sales Net Total Assets Profitability ratios: measure the firm’s return on its investments Profitability Profit Margin = Net Income Sales Basic Earning Power = EBIT Total Assets ROA = Net Income Total Asset ROE = Net Income Total Equity Dupont Identity : Return onEquity ( ROE )= Profit Margin ∗ Total Asset Turnover ∗ Equity Multiplier Market value ratios: provides indications on the firm’s prospects and how the market values the firm [ P/E : how much investors are willing to pay for $1 of earnings] [ M/B : how much investors are willing to pay for $1 of book value equity]
β i = Cov ( r i r M ) σ M 2 Beta measures the responsiveness of a security to movements in the market portfolio.
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