Introduction to Finance: Final Preparation Exam with correct Question and Answers

Introduction to Finance: Final Preparation Exam with correct Question and Answers What counteracts the challenges of corporate governance? External auditors, board of directors and regulators Financial ratios under liquidity or working capital Measures a firm's ability to meet its payment obligations and cash management efficiency Financial ratios under efficiency and management Measure how efficient assets are utilized Financial ratios under debt management Measure the level of debt and ability to service it Financial ratios under performance Measure the profitability in relation to revenue and investment Accounting vs. finance Accounting emphasizes net profit and looks at what happened where finance looks toward cash flows and looks towards the future using time value of money What are finances two issues with accounting? 1. Conservatism (accounting encourages companies to record lower assets and higher liabilities) 2. Rules of accrual accounting (tries to smooth out revenue and costs when not always in sync) 3 Ways to Measure Cash EBITDA Operating Cash Flow Free Cash Flow EBITDA Earnings before interest, taxes, depreciation, and amortization Net profit + Interest, Taxes, Depreciation and Amortization Operating Cash Flow EBIT + Depreciation - Taxes Free Cash Flow (FCF) The amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows NOPAT (net operating profit after tax) EBIT - Taxes + Depreciation and Amortization Cash Conversion Cycle (CCC) =Days Inventory + Day's Receivable - Day's Payable Days Payable (1-2) Day's Inventory (1-3) Day's Receivable (3-4) Cash Conversion Cycle (2-4) Problems Managing Cash Conversion Cycle Potential loss of sales, production stoppages, stretching payables, forgoing cost saving discounts, higher price by vendors, reliance on A/P, refusal to sell to weak customers Trend in Finance on measuring companies profitability Revenue Net Profit EBIT EBITDA Operating Cash Flow Free Cash Flow 3 Sections of Statement of Cash Flows Operating (cost of working capital, tax, interest payments), investing (ongoing investments), financing (debt, stock, dividends) Working Capital Management The managing of short-term assets and liabilities to ensure firm has liquidity Discounted Cash Flow Analysis Fundamental way to figure out how much a company is worth Advantages to DCF Important when market based approach is not available and calculates the intrinsic value Disadvantages to DCF Dependent on accuracy of FCF and terminal value, management's projections could be laced