Principles of Finance

What’s the equation for total assets?

total liabilities + stockholders equity

how do you calculate net working capital?

Current Assets - Current Liabilities

How do you find gross profit?

Revenues - Expenses

What is EDBITDA?

earnings before interest taxes depreciation and ammorization

What is EBIT?

earnings before interest and taxes

What is EBT?

Earnings before taxes

What is Net Income?

Earnings before taxes - taxes

How do you calculate common size balance sheet

asset line/ total assets or liability line / total liabilities x 100

How do you calculate common size income statement?

line on income statement / sales x 100

What is the current ratio?

current assets/ current liabilities

what is the quick ratio?

current assets - inventory / current liabilities

what do liquidity ratios tell us?

a firm’s ability to pay short-term obligations with short-term assets without endangering the firm. In general, higher ratios are a favorable indicator

What do efficieny ratios tell us? (turnover ratios)

indicate’s a firm’s ability to use assets to produce sales. Higher numbers are a favorable indicator. For Days Sales in Inventory, a lower number is favorable

What is the equation for inventory turnover?

cogs / inventory

What is the equation for Days Sales in Inventory

365 days/ Inventory turnover

What is the equation for Accounts Receivable Turnover?

Net Sales / Accounts receivables

What is the equation for Days Sales Outstanding?

365/ Accounts Receivable Turnover

What is the equation for Total Asset Turnover?

net sales / total assets

What is the equation for fixed asset turnover?

net sales / net fixed assets 

What do leverage ratios tell us?

indicate whether a firm is using the appropriate amount of debt financing. In general, higher ratios indicate greater potential return and bankruptcy risk

What is the equation for total debt ratio?

total debt (total liabilities) / total assets

What is the equation for debt to equity?

total debt / total equity

what is the equation for equity multiplier?

total assets / total equity 

What is the equation for Times Interest Earned?

operating income / interest expense

What is the equation for cash coverage?

EBITDA / Interest expense

what do profitability ratios tell us?

indicate whether a firm is generating adequate profit from its assets, higher rations = better performance

what is the equation for gross profit margin?

net sales - COGS (gross profit) / net sales

what is the equation for operating profit margin?

EBIT/ net sales

what is the equation for net profit margin? AKA how do you know how much revenue is left as profit after expenses

net income/ revenue

what is the equation for return on assets?

net income/ total assets

what is the equation for return on equity? (ROE)

net income / total equity

what is the equation for earnings per share?

net income/ shares outstanding

what is the equation for prices to earnings ratio?

price per share/ earnings per share

what is the equation for market to book ratio?

Market value of EPS / book value per share

What does the DuPoint Equation tell us

breaks down Return on Equity (ROE) so you can see what is driving profitability

What is the DuPoint Equation for ROE

Profit Margin x Asset Turnover x Equity Multiplier 

What’s another equation for ROE simplified (DuPoint)

Net Income / Equity

what is direct financing?

the lender (saver) contracts directly with a borrower (spender)

What are some sources of direct financing for companies?

Investment banks or money center banks

what is the process of direct financing?

originate, underwrite, and distribute

what does originate mean?

to find a lender, such as a investment bank

what does it mean to underwrite?

take on the risk of another party for a fee

what is the equation for underwriting profit?

offering price - price paid by investment bank 

what is indirect financing?

when money goes from savers to borrowers through a financial institution(bank), the institution is the borrower and lender

what is a primary market?

wholesale market where firms new securities are issued and sold for the first time

what is a secondary market?

retail market where previously issued securities are resold

what is marketability?

ease with which a seller or buyer for an asset can be found

what is liquidity?

ease with which an asset can be converted into cash without loss of value

what is a broker?

someone who brings a seller and buyer together but does not buy or sell in the transaction → don’t take on any risk

what is a dealer?

someone who participates in trades as a buyer or seller using their own inventory of securities → they do take on risk

what is a money market?

maturities less than one year

what is a capital market?

maturities longer than one year

what is strong form efficiency?

security prices always reflect all information, from every source including inside, confidential information is reflected

what is semi-strong efficiency

security prices always reflect all public information, private/inside information is not reflected

what is weak form efficiency?

security prices always reflect the information in past prices, no other information is reflected.

what is the fisher equation?

nominal interest rate = real rate of interest + expected inflation (change in price level) 

what is time value of money say? 

a dollar someone has today can be spent for consumption or loaned to interest (more valuable today then future)

how do you find simple interest?

principle x rate

how do you find interest on interest?

Total Interest - simple interest

How can you find total interest?

FV - PV = total interest

What is the rule of 72?

72 / interest rate = how long it will take for your interest to double