FIN-365

common-size balance sheets

all accounts= % of total assets (everything divided by total assets) good for comparing year to year and with industry average

common-size income statements

all line items= % of sales good for comparing year to year and with industry average

cash flow

the difference between $ in and $ out. *our focus is how cash is generated from utilizing assets and how it is paid to those who finance the asset purchase

liabilities

the sources of funds

cash flow from assets (CFFA)

the total of cash flow to creditors and cash flow to stockholders CFFA= OCF-NCS-ΔNWC CFFA=CF/CR + CF/SH

assets

the uses of funds

corporate tax rates

taxed by intervals

book value

the balance sheet value of the assets, liabilities, and equity (historical cost)

marginal tax rate

% tax paid on the next dollar earned

ratio analysis

*allow for better comparison through time of between companies *used externally and internally

corporate finance

-how much and what types of assets to acquire -how to raise capital needed to purchase assets -how to run the firm to maximize shareholder and stakeholder value

how to have managers actin in shareholders' interests

-managerial compensation: incentives for CEO's like stock options over a few years -corporate control and market intervention: proxy fights--threat of a takeover may result in better management -other stakeholders bondholders, suppliers, customers -regulatory intervention:

the agency problem

-principal(stockholders) hire an agent(managers) to represent their interests in the company -goals are different. a ceo with a comfy salary has no incentive to take risks for the company in the interest of job security, whereas stockholders need growth

capital budgeting

-what long term investments should business take on (what type of fixed assets, net cash flow, production costs?) -- like a business plan with decision criteria

current ratio

=current assets/current liabilities *liquidity ratio-- ability to pay back CL w CA

ROA

=net income/TA *% of profit in relation to overall resources

ROE

=net income/TE *% of profit in relation to overall equity

profit margin

=net income/net sales *measures the amount of net income earned with each dollar of sales generated

total asset turnover

=sales/total assets *measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.

equity multiplier

=total assets/total equity *leverage ratio a high equity multiplier indicates that a larger portion of asset financing is attributed to debt

debt-equity ratio

=total debt/total equity *leverage ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders' equity

total debt ratio

=total liabilities/total assets *leverage ratio the proportion of a company's assets that are financed by debt

Market values: A. reflect expected selling prices given the current economic situation. B. are affected by the accounting methods selected. C. are equal to the initial cost minus the depreciation to date. D. either remain constant or increase over time. E. are equal to the greater of the initial cost or the current expected sales value.

A. reflect expected selling prices given the current economic situation.

A corporation: A. is ultimately controlled by its board of directors. B. is a legal entity separate from its owners. C. is prohibited from entering into contractual agreements. D. has its identity defined by its bylaws. E. has its existence regulated by the rules set forth in its charter.

B. is a legal entity separate from its owners.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the: A. average tax rate. B. variable tax rate. C. marginal tax rate. D. fixed tax rate. E. ordinary tax rate

C. marginal tax rate.

Cash flow from assets is defined as: A. the cash flow to shareholders minus the cash flow to creditors. B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C. operating cash flow minus the change in net working capital minus net capital spending. D. operating cash flow plus net capital spending plus the change in net working capital. E. cash flow to shareholders minus net capital spending plus the change in net working capital.

C. operating cash flow minus the change in net working capital minus net capital spending.

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: A. dealer market. B. over-the-counter market. C. secondary market. D. primary market. E. tertiary market.

C. secondary market.

An agency issue is most apt to develop when: A. a firm encounters a period of stagnant growth. B. a firm downsizes. C. the control of a firm is separated from the firm's ownership. D. the firm's owner is also its key manager. E. a firm is structured as a general partnership.

C. the control of a firm is separated from the firm's ownership.

The primary goal of financial management is to maximize: A. current profits. B. market share. C. current dividends. D. the market value of existing stock. E. revenue growth.

D. the market value of existing stock.

CFO

chief financial officer, top financial manager

Net working capital decreases when: A. a new 3-year loan is obtained with the proceeds used to purchase inventory. B. a credit customer pays his or her bill in full. C. depreciation increases. D. a long-term debt is used to finance a fixed asset purchase. E. a dividend is paid to current shareholders.

E. a dividend is paid to current shareholders.

A negative cash flow to stockholders indicates a firm (*harder): A. had a net loss for the year. B. had a positive cash flow to creditors. C. paid dividends that exceeded the amount of the net new equity. D. repurchased more shares than it sold. E. received more from selling stock than it paid out to shareholders.

E. received more from selling stock than it paid out to shareholders. CF= Dividends - net new equity CF=dividends - (new equity-buy backs) **CF= dividends + buy backs - new equity *positive to shareholders --dividends + buy backs *negative to shareholders

depreciation

consumption over time

net working capital (NWC)

NWC= current assets-current liabilities

DuPont Identity

ROE= (NI/Sales) x (Sales/TA) x (TA/TE)

corporation

a legal "person" distinct form owners and a resident of a state *advantages: limited liability, easy to raise capital *disadvantages: agency problem, double taxation (income taxed corporate rate and then dividends are taxed at a personal rate)

financial leverage ratios

borrowing-- the more debt you take on relative to equity, the firm can start leveraging up

sole proprietorship

business owned by one person

partnership

business owned by two or more persons *disadvantages: unlimited liability i.e. law firms

operating cash flow (OCF)

cash generated from the firm's normal business OCF=EBIT+depreciation-taxes

net capital spending (NCS)

cash spent on addition to fixed assets NCS=end NFA - beg NFA + depreciation

cash flow to stockholders (owners)

dividends paid - net new equity raised

dividends per share (DPS)

dividends paid/common shares

dodd-frank wall street reform and consumer protection act (2010)

ended "too big to fail" which privatized profits and socialized losses (that ended up being taxpayer money for bailouts)

book value per share (BVPS)

equity/common shares

non cash items

expenses charged against revenue that do not directly affect cash flow *depreciation & amortization

decreasing the retention ratio will help abc corp. increasing its internal rate of return. (t/f)

false, can't grow with less retained earnings. (addition to RE/net income) retained earnings allows for internal financing without issuing equity

working capital management

how do we manage day to day finances of firm?

capital structure

how should we pay for our assets? debt or equity-- going to assume optimality

cash flow to creditors (bondholders)

interest paid- net new borrowing

sarbanes-oxley act (2002)

managers have to sign financial statements. compliance is very costly so it drives firms to go public outside us or go private

market-to-book ratio

market value per share/book value per share

primary market

market where equity is issued and bought after IPO.

goal of financial management

maximize the current value per share of the company's existing stock/maximize the market value of the existing owners stocks

change in net working capital (ΔNWC)

net additions to currents assets/liabilities ΔNWC= end NWC- beg NWC

earnings per share (EPS)

net income/common shares

treasurer

oversees cash management, credit management, capital expenditures,

controller

oversees taxes, cost accounting, financial accounting, and data processing

demanders/users of capital

people/institutions who need funds to finance investment opportunities, corporations who issue stock

suppliers of capital

people/institutions with excess funds looking fora create of return on investments

Price-Earnings (PE) ratio

price per share/ earnings per share *how much investors are willing to pay for $1 of earnings

GAAP matching principle

recognize revenue when it is fully earned, match expenses required to generate revenue to the period of recognition

average tax rate

total tax bill/taxable income

a firm with a current ratio >1 has positive net working capital (t/f)

true because CA would be bigger than CL in CA/CL and that means that CA-CL is positive

market value

true value, the price at which the assets, liabilities, or equity can actually be bought or sold

a high PE ratio may indicate that a firm is expect to grow significantly (t/f)

true, because the higher PE ratio means that investors are willing to to pay more per dollar of earnings. (pe=pps/eps)

secondary markets

where equity is bought and resold (NY stock exchange) investment banks find value of company with price per share and find clients stock. -brokers match buyers and sellers on commission -high transaction cost liquid assets without losing value -liquid market -auction markets -over the counter markets