Chapter 16 Corporate Finance

Activities that increase Cash

Securing a 90 day loan, collecting an account receivable, increasing trade credit, accruing wages and taxes to be paid

Activities that decrease cash

Paying for raw materials, paying a six month insurance premium, reducing the balance of a short term debt, making the acquisition of PPE

Revolver

Is a credit agreement, usually provided by a syndicate of banks, that allows a firm to access to funds in exchange for a fee

Return on Equity (ROE)

Net Income/Total Equity

Net Profit Margin

Net Income/ Revenue

Asset Turnover Ratio

Revenue/ average total assets

Financial Leverage Ratio

average total assets / average total equity

Cash Conversion Cycle

Inventory Conversion Period + Average Collection Period - Payables Deferral Period

Inventory Conversion period

Inventory/(COGS/365)

Average Collection Period (DSO)

Receivables/ (Sales/365)

Payable Deferral Period

Payables/ (COGS/365)

Inventories

Supplies, raw materials, work in process, finished goods

Working Capital Financing

Cash Conversion Cycle x Unit Cost x Number of Units

Accounts Receivable

Average daily Sales x Days Sales Outstanding

nominal annual cost of trade credit Formula

(Discount %/100 - Discount %) x (365/Days Credit is Outstanding - Discount Period)

Effective annual cost

(1+ discount %/(100-discount%)) ^ (365/ Days credit is outstanding- discount period)

Effective annual cost of trade credit

The Interest rate the buyer is paying for delaying the payment for goods

Effective annual Rate (EAR)

(1+rate/ # of compounds)^ # of compounds -1

Line of Credit

Financial tool that lets you borrow money up to a certain limit

revolving credit agreement

a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement

Inventory Turnover Ratio

COGS/ average inventory

Return on assets (ROA)

net income/ total assets

Total Assets

Cash + Inventory + Net Fixed assets