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Cards In This Set
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What is ROE? What qualities does it measure in a company's valuation?
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Key indicator of a firm's performance thats calculated by dividing net income by average equity
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Define Cost of equity. What role does it play in a company's valuation?
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It is used as a benchmark of company performance to determine whether investing in the firm was worthwhile or not
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What is the role of opportunity cost in financial analysis decision-making? What is the term that describes this?
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When measuring a firm's performance, we look for confirmation that investing in this firm was more profitable than having invested money elsewhere and receiving a high return. Cost of Equity
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What does the equity component of balance sheet tell us about the company?
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"What the shareholders would receive if the firm disposed of its assets and met its obligations & the amount of wealth the shareholders have invested--and is thus stored in the firm."
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In plain terms, define the ROE
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Net income over the resources committed to the firm by the shareholders.
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What are the three measurement issues?
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-Subject to potential mismeasurement-Using Equity at the beginning or ending of the period does not account for major changes during the period: this is why we use the avg equity- Did the firm correctly measure wealth created and wealth committed? Adjustments must be made to resolve that.
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 What does this image represent? |
Dupont Model: Contains the formula for ROA, which is sales/ assets times nopat/sales" ROE composition to answer whether the ROA and the ROE are linked
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What are reasons for a high ROE?
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Good management of liabilities, assets or both.
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What are the two ways to increase ROA?
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Increase sales or increase profit margins * normally, there's a tradeoff between the two. Strategy is reflected in the numbers
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Describe the sales efficiency ratio
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Ratio of sales to assets should be high; this is a high volume strategy, where you are selling high volumes of low prices items
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Describe operating efficiency ratio
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This is a profitability focused strategy where NOPAT/Sales should be high because you are selling low volumes of high priced items
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