fina 3332 exam 2

liquidity ratios

higher ratios = more liquid = generally better

current ratio

increase or >1 means there are more assets than liabilities (we are able to cover our debts)

quick ratio

if inventory gap is large than = less liquid to cover our debts
higher ratio = relatively better than a lower ratio

cash ratio

how much cash you have to take care of your liabilities
if more cash = strong liquidity position
strong cash position than peers

asset efficiency ratios

how is the firm managing its assets/investment effectively to generate sales. how fast does the firm cycle through assets?

asset turnover

falls = generates fewer $ of sale per $ of total assets
- occurs when assets grow faster than revenue
ex. investing in new equipment but not generating matching sales

increases = generates more $ of sale per $ of total assets
- occurs when revenue is growing faster/normal to assets aquired

account receivable days

shorter days are better = the shorter it takes to collect money lent back from customers the better

account payable days

longer days are better = paying suppliers more slowly and keeping cash longer

inventory days

shorter is better bc the inventory is being sold fast

inventory turnover

increasing is better bc the inventory is being sold

decreasing is bad bc the cycling through inventory is slower (goods are sitting on shelves longe)

leverage ratios

does a firm have the right mix of debt/equity?
how much debt is the firm handling?

Higher the leverage = more debt relative to equity/assets = risky

time interest earned

increase TIE means that the firm is generating more operating income (EBIT) relative to its interest expenses

low TIE means a company's ability to cover its debt payments from operating profits is weakening (AKA lower earnings)

debt-equity ratio , debt to capital ratio , equity multiplier

all increases = higher leverage = greater reliance to debt financing = risky capital structure

profitability ratios

measure efficiency of profit generations
the higher the ratios the better

valuation ratios

what do investors think the firm is worth and its future financial prospects?

P/E ratio

high P/E = investors pay more per dollar of earning = more confident in future earnings growth

enterprise value

EV = Market cap + debt - cash

you inherit the debt and subtract the cash (you are getting it back to you)

market-to-book ratio

the premium (increase in #) reflects the intangible value of the firm compared to its book value considering brand, growth, intellectual property

bond certificate

states the terms of a bond, amount and dates of all payments to be made

coupon

promised interest payments of a bond ( the frequency of coupon PMT is specified in the bond certificate)

coupon (PMT) = coupon rate x face value / # of coupon PMT per yr

maturity date

final repayment date of the bond. payments continue until this date.

principal or Face Value or Par Value

notional amount used to compute the interest payment. repaid on the maturity date (ex. FV = $1000)

term

the time remaining until the repayment date

yield to maturity

the rate of return required in the market for the bond

zero-coupon bond

only makes one payment at the maturity date
(Ex. no payments throughout the bond → PMT = 0)

ex. treasury bill

coupon bond

regular coupon interest payments + pay face value at maturity

ex. treasury note, treasury bond, corporate bond

premium bond

CR (LARGER) > YTM

discount bond

CR < YTM (larger)

at par bond

CR = YTM

interest rate risk

the risk that a change in interest rates will impact bond prices

interest rate RISE = bond prices FALL

long term to maturity (lower coupon rate)

higher interest rate risk

higher coupon payments (short term)

lower interest rate risk

default risk

risk of default so that the bonds cash flows are not known with certainty (unknown if the borrower will pay us back)

credit spread (risk premium)

corporations with higher default risk will need to pay higher coupon to attract buyers to their bonds

bond ratings

the credibility of the bond

(ex. standard & poors, moody’s and fitch)

investment grade

AAA to BBB

speculative grade

BB or worse (riskier bonds)

the higher the default risk

the lower the bond rating

the higher the credit spread and YTM

the lower the bond price

common stock

owners of the corporation, own the firm. cash flow rights (dividends) are not guaranteed, paid last

preferred stock

no voting rights + fixed dividends (paid before common) + double taxation

market order

execute immediately at the most favorable price

limit order

specify a max price you are willing to pay or a min price you are willing to sell

NYSE

auction market (whoever has the highest bid)

Nasdaq

dealer marker (whoever has the best deal)

dividend growth trade off

ROI > rE : cut dividends and invest in new projects
rE > ROI : increase dividends and not invest in new projects

limitations of the dividend discount model

uncertain dividend forecasts : future dividends carry alot of uncertainty

non-dividend paying stocks : companies dont pay dividends