Professional Documents
Culture Documents
1 ) Activity Ratios
2) Liquidity Ratios
3) Solvency Ratios
4) Profitability Ratios
5) Valuation Ratios
1) Activity Ratios
Annual Sales
Average Receivables
365
Receivable Turnover
Note Collection period too high means customer are too slow in paying their bill.
Collection period too low means credit policy too rigorous.
365
Inventory Turnover
Note A hight period means too much capital is tied up in inventory and inventory is obsolete.
A low period means the firm have indeaquate stock on hand.
1.3 Payable Turnover
Purhcase
Average Trade payables
365
Payable Turnover
1.4.1 Revenue
Average Total Assets
Note Low asset turnover ratio means too much capital tied up in its asset base.
High asset turnover ratio means too few assets for potential sales.
1.5.1 Revenue
Average Net fixed Assets
Note Low asset turnover ratio means too much capital tied up in its asset base.
High asset turnover ratio means the firm has obsolete asset.
1.6.1 Revenue
Average working capital
2) Liquidity Ratios
Current Assets
Current Liabilites
The higher the current ratios the company will be able to pay the short term bills.
A current ratio of less than 1 means the company is facing liquidity crisis.
The higher the current ratios the company will be able to pay the short term bills.
The higher the current ratios the company will be able to pay the short term bills.
Expenditure includes cash expenses for cogs, sg&a and research and development.
Cash Conversion Cycl = days of sale outstanding + days of inventory on hand - numbers of days payable
3) Solvency Ratios
(include debt ratios and coverage ratios)
Total debt
Total shareholder's equity
Increase or decrease in this ratio suggest a greater or lesser reliance on debt as a source of financing.
Total debt
Total debt + Total shareholder's equity
Increase or decrease in this ratio suggest a greater or lesser reliance on debt as a source of financing.
Total debt
Total assets
Increase or decrease in this ratio suggest a greater or lesser reliance on debt as a source of financing.
Total debt
EBITDA
The lower this ratio, the more likely the firm will have difficulty meeting its debt payment.
4) Profitability Ratios
Net Income
Revenue
Operating cash flow + Investing Cash Flow + Financing Cash Flow = Change in cash flow + beginning balance = E
Gross profit
Revenue
EBT
Revenue
Net Income
Average total Assets
EBIT
Average total capital
Net Income
Average total equity
DuPont Analysis
Net Realizable value = expected sale price - (estimated selling cost + completion cost)
If NRV < Inventory value , Inventory is written down to NRV. And loss is recognised in income statement.
If there is recovery in value, the inventory can be written up and the gain is recognised in the income statement
FIFO Net Income = LIFO Net Income + Increase in LIFO reserve x (1-Tax rate)
Identifiable Intangible asset Intangible asset with finite useful life is amortised and tested for imp
patents,trademarks and copyrights
Unidentifiable Intangible asst Intangible asset with infinite useful life is not amortised. Must be tes
goodwill Goodwill is not amortized but must be tested for impairment at leas
Depreciation Methods
1) Straight-line depreciation
2) Accelerated depreciation
3) Units-of-production method
1) Straight-line depreciation
Depreciation expenses = original cost - salvage value =
depreciation life
3) Units-of-production method
original cost - salvage value x output units in the period
Depreciation expenses = life in output units
Estimated average total useful life = Estimates of the average remaining useful life + average
Impairment
Asset is impaired when when its carrying value (original cost - accumulated depreciation ) exceeds the recovera
The recoverable amount is the greater of (its fair value less any selling costs) and its value in use.
The value in use is the present value of its future cash flow stream from continued use.
If impaired, the asset’s value must be written down on the balance sheet to the recoverable amount.
An impairment loss, equal to the excess of carrying value over the recoverable amount, is recognized in the inco
The impairment of intangible assets with finite lives affects: both the balance sheet and the income statement
The carrying amount of the asset on the balance sheet is reduced by the amount of the impairment loss, and th
Impairment = max(Fair value less costs to sell; Value in use) – Net carrying amount
Under US GAAP, companies are required to disclose the estimated amortization expense for the next five fiscal
What Is Capitalize?
To capitalize is to record a cost or expense on the balance sheet for the purposes of delaying full recognition of
Revaluation
if the fair value at the first revaluation date is greater than carrying value, the difference is recorded as revaluati
Deferred Tax Liabilities = Balance sheet amounts that result from an excess of income tax exp
Deferred tax assets = Balance sheet amounts that result from an excess of income taxes p
Deferred Tax Liabilities = Balance sheet amounts that result from an excess of income tax ex
--Liabilities
revenue areoccur when in the income statement before they are included on the tax return due to temporary
recognised
- Expenses (or losses) are tax deductible before they are recognized in the income statement.
Deferred tax assets = Balance sheet amounts that result from an excess of income taxes
Revenues (or gains) are taxable before they are recognized in the income statement.
Expenses (or losses) are recognized in the income statement before they are tax deductible.
Deferred tax assets are expected to provide future tax savings, while deferred tax liabilities are expected to res
Valuation allowance. Reduction of deferred tax assets (contra account) based on the likelihood that the future
Increase valuation allowance > decrease DTA > Increase income tax expenses > decrease net income
Tax loss carryforwards : a tax provision that allows firms to carry forward losses from prior years to offset futu
Tax base is the amount that will be deducted on the tax return in the future as the economics benefits of the as
The carrying value is the value of asset reported on the financial statements net of depreciation and amortizatio
If tax base > carrying value, DTA is created.
accelearated depreciation for tax purpose > lower taxble income > lower tax payable
A permanent difference is a difference between taxable income and pretax income that will not reverse in the f
A temporary difference refers to a difference between the tax base and the carrying value of an asset or liability
Bond
Two types of payments are involved: (1) periodic interest payments, and (2) repayment of principal at maturity.
Face value also know as maturity value or par value is the amount of principle that will be paid to bondholder a
The coupon rate is the interest rate stated in the bond that is used to calculate the coupon payments.
The coupon payments are the periodic interest payments to the bondholders and are calculated by multiplying
Market rate = cupon rate , the bond is a par bond (priced at face value)
Market rate > cupon rate , the bond is a discount bond (priced below par)
Market rate < cupon rate , the bond is a premium bond (priced above par)
The amortization of the premium equals the interest payment minus the interest expense. The interest paymen
as the carrying amount decreases. As a result, the amortization of the premium increases each year.
rce of financing.
rce of financing.
erred equity
(leverage ratio)
x Revenue x Average total assets
Average total assets Equity
st + completion cost)
income statement.
d in the income statement by reducing cogs by the amount of recovery.
cost - residual
useful life
book value at the beginning of year x (more depreciation expenses in early years)
output units in the period (Depreciation expense is higher in periods of high usage)
ning useful life + average age of the assets
verable amount.
n excess of income tax expense over taxes payable that are expected to result in future cash outflows.
n excess of income taxes payable over tax expense that are expected to be recovered from future operations. Can also result from tax
n excess of income tax expense over taxes payable that are expected to result in future cash outflows.
x return due to temporary differences.
n excess of income taxes payable over tax expense that are expected to be recovered from future operations. Can also result from
m prior years to offset future profits, and, therefore, lower future income taxes
value of an asset or liability that will result in taxable amounts or deductible amounts in the future.
nt of principal at maturity.
ill be paid to bondholder at maturity. The face value is used to calculate the cupon payment.
oupon payments.
ense. The interest payment is constant and the interest expense decreases
ases each year.
ns. Can also result from tax loss carryforwards
25 50
DDB
accumulated
$2,300 $1,150 $1,150
$1,150 $575 $1,725
$575 $288 $2,013
$288 $144 $2,156
accumulated
DDB $2,300 $1,150 $1,150
Straight lin $1,150 $350 $1,500
Straight lin $800 $350 $1,850
Straight lin $450 $350 $2,200
unit of production
accumulated
$2,300 $550 $550
$1,750 $825 $1,375
$925 $550 $1,925
$375 $275 $2,200
exercises
pg 362 cfa 0.2
200000 80000 80000 120000
120000 48000 128000 72000
72000 24000 152000 48000
48000 24000 176000 24000
24000 12000 188000 12000
200000 80000 80000 120000
120000 48000 128000 72000
72000 28800 156800 43200
43200 17280 174080 25920
25920 10368 184448 15552
0.17 0.333333
100 33.3 33.3 66.7
66.7 22.2111 55.5111 44.4889
44.4889 14.8148 70.3259 29.6741
29.6740963 9.881474 80.20738 19.79262
0
6 0.166667 0.333333
600000 199800 199800 400200 200000
400200 133266.6 333066.6 266933.4 266693.3
266933.4 88888.82 421955.4 178044.6
178044.5778 59288.84 481244.3 118755.7
nbv
$1,150
$575
$288
$144
nbv
$1,750
$925
$375
$100
Corporate Governance
principal-agent conflict
information asymmetry
Stakeholder management
1 legal infrastructure
2 contractual infrastructure
3 organizational infrastructure
4 Governmental infrastructure
Proxy
- meaning she assigns her right to vote to another who will attend the meeting
Board Committees
audit committee
governance committee
nominations committee
compensation committee or remuneration committee
risk committee
investment committee
Board Structure
one-tier board
independent directors
two-tier board
staggered board
Board Responsibilities
1 Selecting senior management
2 Setting the strategic direction for the company
3 Approving capital structure changes
4 Reviewing company performance and implementing any necessary corrective steps.
5 Planning for continuity of management and the succession of the CEO and other senior mangers
6 Establishing, monitoring, and overseeing the firm's internal control and risk management system
7 Ensuring the quality of the firm's financial reporting and internal audit and oversight of t
Board Committees
1 audit committee
2 governance committee
3 nominations committee - for election
4 compensation committee or remuneration committee
5 risk committee
6 investment committee
Acquisitions, mergers, takeovers, and amendments to the company bylaws often require a supermajority of mo
Positive screening does not exclude any sectors but seeks to invest in the companies with the best practices.
Negative screening typically excludes some sectors.
Thematic investing refers to making an investment in a company or project in order to advance specific social o
A positive NPV project is expected to increase shareholder wealth, a negative NPV project is expected to decrea
zero NPV project has no expected effect on shareholder wealth.
For independent projects, the NPV decision rule is simply to accept any project with a positive NPV and to rejec
IRR
PV(Inflows) = PV(outflows)
The minimum IRR, above which a project will be accepted, is often referred to as the hurdle rate. Projects with
accepted, while those with IRRs below this rate will not be accepted.
A key advantage of NPV is that it is a direct measure of the expected increase in the value of the firm.
A key advantage of IRR is that it measures profitibility as a percentage, showing the return on each dollar invest
Kps = Dps/P
Kce = Rf + B(E(Rmkt)- Rf)
DOL = Q(P-V)
Q(P-V)-F
shareholders
ct with a positive NPV and to reject any project with a negative NPV.
o as the hurdle rate. Projects with IRRs above this rate will be