FIN Cheatsheet for mid-terms (Taiming).docx - Capital budgeting process of planning and managing firm\u2019s LT investments Capital structure specific

FIN Cheatsheet for mid-terms (Taiming).docx - Capital...

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Capital budgeting: process of planning and managing firm’s LT investments.Capital structure: specific mixture of LT debts and Equityused to finance operations.Working Capital Management: ensuring firm has sufficient resources to continue operations and avoid costly interruptions.Goal: max the current value per share of the existing stock = max shareholders’ wealthPrimary market: original sale of securities by governments and corporationsSecondary market: transaction involving one owner or creditor selling to anotherAmount of cash flow expected by shareholdersTiming of the cash flow streamRiskiness of cash flow stream(ALL of which determines stock’s intrinsic value)Intrinsic value: estimate of stock’s true value based on accurate risk and return dataMarket price:based on perceived information as seen bymarginal investorMarket value of Shareholders’ equity = Market Capitalisation = Share Price X No. of outstanding sharesEnterprise value = Market value of equity + Debt – excesscashNet Working Capital = Current assets – Current liabilities Current Assets + Net fixed Assets = Current liabilities + LTdebts + common stock + retained earningsTherefore, Net Working Capital + Net fixed assets = LT debts + common stock + retained earnings∆Cash = ∆RE + ∆CL - ∆CA other than cash - ∆net FA + ∆LT debt + ∆common stockCash Flow From Assets(CFFA) = Operating Cash Flow (OCF) – Net Capital Spending (NCS) - ∆ in Net OperatingWorking Capital (NOWC)Where,OCF= Earnings before interest and tax (EBIT) + Depreciation – (EBIT x Tax rate)NCS= Ending net fixed assets – Beginning net fixed assets + Depreciation∆ NOWC= Ending NOWC – Beginning NOWCCFFA or free cash flow: cash free to distribute to creditorsand stockholders because it is not needed for working capital or fixed asset investmentsInterest Tax Shield = Interest expense x Tax rateCash flow to creditors= Interest paid – Net new borrowing (LT Debt and Notes payable)Cash flow to stockholders= Dividends paid – Net new equity raisedCash flow from assets= cash flow to creditors + cash flow to stockholders – Interest Tax Shield1.ST Solvency/Liquidity:Ability to convert assets to cash quickly without a significant loss in value, the firm’s ability to meet its maturing ST obligations.Current Ratio=Current AssetsCurrent liabilitiesQuick Ratio=Current AssetsInventoCurrent liabilitiesCashRatio=CashCurrent liabilitiesNWC¿Total Assets=NWCTotal AssetsInterval Measure=Current AssetAvgdailyoperating2.LT Solvency:Financial leverage – extend that the firm relies on debt financing rather than equityTotal Debt Ratio=Total AseetsTotalTotal AssetsDebtEquity Ratio=Total DebtTotal EquityEquity Multiplier=Total AssetsTotal Equity=1+D¿Debt Ratio=¿Debt¿Debt+Total Equity¿interest earned ratio=EBITInterestCashCoverage Ratio=EBIT+DeprecInterest3.Asset Management:Measures how effectively firm’s assets are being managedInventoryTurnover=COGSInventoryDay s'SalesInventory=365DaInventory Tu
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