finance quiz 1 prep

what is the cash conversion cycle

the amount of time it takes a company to convert its investments in inventory into cash

cash conversion cycle formula

Days in inventory + collection days + payable days

days in inventory formula

inventory / (COGS*365)

what does inventory days measure

the number of days it takes a company to turn its inventory into sales

collection days formula

AR/ (sales*365)

collection days meaning

number of days it takes a company to collect payment after a sale

payment period definition

number of days to payback payables

cash conversion cycle interpretation

shorter is better

economic value added

measures whether a company earns more than its full costs of capital, after paying for operating costs and capital required to run the business, did the company actually create economic value?

EVA formula

NOPAT - (invested capital * WACC)

NOPAT

net operating profit after tax (before interest)

when is economic value added

when returns exceed the opportunity cost of capital

what does EVA evaluate on

profitability, capital intensity, and required return

profitability EVA

how much profit does the business generate?

capital intensity EVA

how much money must be invested to generate that profit

required return EVA

is the profit high enough to compensate capital providers for risk?

other EVA formula

(ROIC - WACC) * invested capital

operating strategies

increase revenue or reduce operating costs

investment strategies

reduce capital requirements by doing more with less

financing strategies

reducing capital costs

annualized cost of credit definition

the cost of an early payment/ the cost of taking the discount

what does the annualized cost of credit help determine

whether to take advantage of discount

when to take discount

when the cost of credit is higher than the bank

annualized cost of credit formula

(d/ 1-d ) * 365/ (N -D)

what are the 5 cs of credit policy

character, capacity, capital, collateral, conditions

character

borrower’s integrity and willingness to pay (historical track record)

capacity

ability to generate sufficient cash to meet obligations, looks at a borrower’s ability to generate cash flow relative to their total obligations

capital

owner’s financial investment and the firm's financial cushion, looks at capital structure and unencumbered assets

collateral

assets available to secure the loan

conditions

loan’s purpose and the economic and industry environment

internal growth rate definition

how much the firm can grow assets using retained earnings as the only source of financing

internal growth rate formula

(ROA b) / (1- ROA *b)

sustainable growth rate defintion

how much the firm can grow assets using retained earnings and new debt, but only so much debt that the debt ratio stays the same.

sustainable growth rate formula

(ROE b) / (1 - ROE *b)

net profit margin

net income / revenues

operating profit margin

operating profit/ revenues

ROA

net income / total assets

ROE

net income / equity

current ratio

CA / CL

quick ratio

(CA - inventory) / CL

inventory turnover

COGS/inventory

FA turnover

revenues / net PPE

total asset turnover

revenues / total assets

times interest earned

operating income / net interest expense

equity multiplier

ROE/ROA

implied interest rate formula

interest expense / previous total debt

annual purchases

COGS + (EI - BI)

depreciation rate

annual depreciation / previous NFA