Multiple Choice section of Adventis
Certification level 1 with Complete
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Equity is more expensive and more risky, so investors require a higher rate of return to mitigate their
risk. Equity holders are not guaranteed to get their investment back if the company goes bankrupt--
risky!
Net Debt -- not on balance sheet explicitly
calculation:
Net debt is primarily used in ___ anaylsis, ____ - ✔✔Total debt - cash.
If cash were used to pay down debt, net debt would be the resulting amount.
primarily used in credit analysis, as creditors assume the firm's cash balance could be applied to debt
repayment in the event of a liqudity crunch of bankruptcy.
CF Statement shows _____.
It reconciles _____.
it breaks down cash into three categories
The CF statement is useful in determining the short-term ___. - ✔✔how much cash is generated or lost
during a period of time. It shows how changes in balance sheet accounts and net income affect cash and
breaks down cash into operating, investing, and financing activities.
It reconciles net income to change in cash.
viability of a company and the ability of a firm to pay its bills.--the company's liqudity
Cash from operating activities
,made up of 3 components! - ✔✔is the amount of cash generated from a firm's normal business
operations.
-net earnings
-depreciation & ammoritization
-change in working capital
Cash from investing activities
most common components - ✔✔is cash flow related to the acquistion and disposal of an
organization's long-term investments, including property, plant and equipment and M&As.
-Capital Expenditures
-Acquistion
Cash from financing activities
most common line items - ✔✔is cash flow between the firm and its owners and creditors.
-debt & equity issuance and repayments
-dividends
-share repurchases
Change in Cash is - ✔✔the sum of the cash from operating, investing, and financing activities.
Why is depreciation & amortization a source of cash on the CF statement? - ✔✔D &A is the method of
allocating cost of an asset over its useful life. While its an expense on the income statement, it does not
actually represent cash leaving the company ecause cash only leaves the company for the asset's intial
purchase (in CAPEx), so D & A is added back
, Capital Expenditures are - ✔✔funds used by the firm to purchase or upgrade physical assets such
as plants, property, and equipment.
Change in working capital consists of
a decrease represents
an increase represents - ✔✔the impact to cash results from all non-cash current assets and non-
debt current liability accounts.
A decrease represents a source of cash and is positive on the CF statement.
An increase in working capital represents a use of cash and would be negative on the CF statement.
working capital is a ______ that _____ cash. - ✔✔a sponge that absorbs cash.
squeeze sponge--> decrease working cap--> more money for the business
so incr working cap, decr cash
airlines are a negative working capital business. they recieve cash long before the service.
Share repurchases helps shareholders because - ✔✔when shares are repurchased, the
remaining shareholders have a higher ownership percentage. thus each shareholder has a higher
portion of earnings.
So, share repurchases are a form of returning capital to shareholders
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