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In , how many days on average did it take Bayside to sell its inventory? What is the sustainable rate of growth? What is the internal growth rate? The debt-equity ratio is 1. Why is it important for managers to understand the importance of both the internal and the sustainable rates of growth? State the assumptions that underlie the sustainable growth rate and interpret what the sustainable growth rate means. Suppose a firm calculates its external funding needs and finds that it is negative.
Robert Morris Associates publishes peer group financial information for a host of industries, yet the numbers typically only appear in common-size form. Why not report average dollar amounts instead? Suppose you calculated the following ratio for a firm: The sum of the compensation paid to the owners, directors, and managers, divided by total sales. Which class of financial ratios should this be included in and why? Who might be interested in such a ratio?
Which is a more meaningful measure of profitability for a firm, return on assets or return on equity? It is often said that anyone with a pencil can calculate financial ratios, but it takes a brain to interpret them. What kinds of things should an analyst keep in mind when evaluating the financial statements of a given firm? What is the quick ratio for ? What is the equity multiplier for ? What is the cash coverage ratio for ? What is the return on equity for ? What is the debt-equity ratio for ?
What is the times interest earned ratio for ? One reason that causes firms to go out of business is the lack of external funding to support the growth of the firm. Understanding the implications of both the internal and sustainable growth rates can help management know when to limit firm growth such that the growth does not exceed the availability of the necessary financing to fund that growth. The usual assumptions are: Costs and assets increase proportionately with sales, the dividend payout ratio is fixed or is given , the current debt-equity ratio is optimal, and no new equity sales are possible.
The sustainable growth rate is the maximum rate at which sales can increase with the restriction that no new equity sales are possible and long-term debt increases only in an amount that keeps the debt-equity ratio fixed. With a negative external financing need, the firm has a surplus of funds that it can use to reduce current liabilities, reduce long-term debt, buy back common stock, or increase dividends.
If acceptable opportunities exist, firms might also use the extra funds to add assets. The common-size numbers are inherently more useful since they can be directly compared to the financial statements of any firm. If average dollar figures were presented, these numbers would have to be converted to common-size numbers to facilitate comparisons. Plus, since RMA also publishes average sales and average total assets, the user can always work backwards to figure out the dollar amounts represented by each category.
It takes, on average, days to sell inventory once it is purchased by the firm, then it takes another 35 days to collect on the receivables. Thus, the firm must finance the inventory and receivables for days. The first 42 days are financed with payables, on average, leaving 98 days worth of inventory and receivables that it must finance using other sources. In terms of cash flow, the average cash outflow occurs 42 days after inventory is purchased while the average cash inflow occurs 98 days later, which is days after the inventory is purchased by the firm.
Most would argue ROE since it measures returns relative to the amount of money shareholders have invested in the firm. This question is totally open-ended and allows students to call into play knowledge gleaned from other courses, this course, and personal experience. As a minimum, students should include some of these considerations: type of industry, accounting methods, fiscal year end, cyclical nature of the business, industry trends and the state of the economy.
List and interpret two liquidity ratios. Choose any two of the following: 1. Product Description. Rent Monthly. Rent Day. What are my shipping options? The estimated amount of time this product will be on the market is based on a number of factors, including faculty input to instructional design and the prior revision cycle and updates to academic research-which typically results in a revision cycle ranging from every two to four years for this product.
Pricing subject to change at any time. The late Stephen A. One of the most widely published authors in finance and economics, Professor Ross was known for his work in developing the Arbitrage Pricing Theory as well as his substantial contributions to the discipline through his research on signaling, agency theory, option pricing, and the theory of the term structure of interest rates, among other topics.
A past president of the American Finance Association, he also served as an associate editor of various academic and practitioner journals. He was a trustee of CalTech. Randolph W. Westerfield is Dean Emeritus and the Charles B. Professor Westerfield came to USC from the Wharton School, University of Pennsylvania, where he was the chairman of the finance department and a member of the finance faculty for 20 years. He is a member of the board of trustees of Oaktree Capital mutual funds.
His areas of expertise include corporate financial policy, investment management, and stock market price behavior. Jeffrey F. His best-known work concerns insider trading, where he showed both that corporate insiders earn abnormal profits from their trades and that regulation has little effect on these profits.
He has also made contributions concerning initial public offerings, the regulation of utilities, the behavior of market makers, the fluctuation of gold prices, the theoretical effect of inflation on the interest rate, the empirical effect of inflation on capital asset prices, the relationship between small-capitalization stocks and the January effect, and the capital structure decision.
Bradford D. He previously held the duPont Endowed Chair in Banking and Financial Services at the University of Kentucky, where he was department chair for many years. Professor Jordan has published numerous articles in top journals on issues such as cost of capital, capital structure, and the behavior of security prices. He is a past president of the Southern Finance Association, and he is coauthor of Fundamentals of Investments: Valuation and Management, 9e, a leading investments text, also published by McGraw Hill.
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Learn more about our Textbook Rental program. It is not true in the strictest sense because taxes are an operating cash flow as well, but it does provide a reasonable estimate for analysis purposes. Previously, it was noted that investment decisions are reflected on the left-hand side of the balance sheet and financing decisions are reflected on the right-hand side. This introduces noncash deductions such as depreciation and amortization. Consequently, net income is NOT the same as cash flow.
Noncash Items The largest noncash deduction for most firms is depreciation. Time and Costs In the short run, some costs are fixed regardless of output, and other costs are variable, meaning they vary with the level of output. In the long run, all costs are variable. Tax liability:. Table 2. The first equation shows the cash flow that the firm receives from its assets.
Market vs. Example: Marginal vs. Slide 2. Market value of net fixed assets Book value of net fixed assets Book value of current liabilities Net working capital Market value of current assets. Cash Patents and copyrights Accounts payable Accounts receivable Tangible net fixed assets Inventory Notes payable Accumulated retained earnings Long-term debt. Chapter 2 Question 18 Input area: Corporation growth taxable income Corporation income taxable income.
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