Managerial Finance Week 2 Notes
Managerial Finance Week 2 Notes Fin 301
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This 2 page Class Notes was uploaded by Catherine Minter on Saturday September 3, 2016. The Class Notes belongs to Fin 301 at University of Illinois at Chicago taught by Stanley Waite in Fall 2016. Since its upload, it has received 44 views. For similar materials see Managerial Finance in Finance at University of Illinois at Chicago.
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Date Created: 09/03/16
August 29, 2016 Chapter 2 continued Income Statement: lists the firm’s revenues and expenses over a period of time - Bottom line of income statement shows net income - Earnings Calculations o Gross Profit Revenues (Net Sales) - Cost of Sales = Gross Profit o Operating Expenses Gross Profit – Operating Expenses = Operating Income o Earnings Before Interest and Taxes (EBIT) Operating Income +/- Other Income = Earnings Before Interest and Taxes o Pretax and Net Income EBIT +/- Interest income (Expense) = Pretax Income Pretax Income – Taxes = Net Income o Earnings per share: Net income/ shares outstanding EPS increases number of shares by issuing stock to employees and when shares are issued due to conversion of convertible bonds Statement of cash flows: uses info from income statement and balance sheet to determine how much cash the firm has generated and how the cash was allocated. - Cash is used to pay bills and maintain operations - Operating: o A/R, A/P, Inventory - Investing: o Subtract the actual capital expenditure that the firm made - Financing activities: o Dividends paid, sale on stock, short-term and long-term borrowing o Retained Earnings = Net Income – Dividends o Payout Ratio= Dividends/ Net Income - Bottom line of sheet combines the cash flows from the three activities to calculate the overall change in the firm’s cash balance Other Financial Statement Information - Statement of Stockholders’ Equity o Change in Stockholders’ Equity o = Retained Earnings + Net Sales of Stock - Investors use accounting statements to compare the firm with itself and others - Profitability ratios: o Gross margin= gross profit/ sales o Operating margin= operating income/sales o Net profit margin= net income/sales - Liquidity ratios: o Current ratio= current assets/current liabilities o Quick ratio= (current assets- inventory)/ current liabilities o Cash ratio= cash/ current liabilities - Asset efficiency ratios o Asset turnover= sales/ total assets o Fixed asset turnover/ sales/ fixed assets - Working capital ratios o Accounts receivable days= Accounts receivable/ average daily sales o Inventory turnover= COGS/ Inventory - Interest Covering Ratios: o TIE= earnings/ interest - Leverage Ratios: o Debt to equity ratio= total debt/ total equity o Debt to capital ratio= total debt/ (total equity+ total debt) o Net debt= total debt- excess cash and short term investments o Debt to enterprise value ratio= net debt/ (market value of equity + net debt) - Valuation Ratios: o Price earnings ratio - Operating returns: o Return on equity= net income/ book value of equity o Return on assets= net income/ total assets o Return on invested capital= (1- tax rate)/ (book value of equity + net debt) - The Dupont Identity: ROE can be thought of as net income per dollar of sales (profit margin) times the amount of sales per dollar of equity
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