Finance 311 Exam 1

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Cash Flow

Goes from investors to issuers

What is finance concerned with at a personal level?

How much money people spend, how much they save, and how much they invest

Ultimate Finance Truth

In order to get more growth, you have to take risk (the possibility of losing money)

Direct Finance

Lenders/ net savers, Financial markets, Borrowers/ net spenders

Auction Market

Many securities sell at the same time to many buyers

Net Income

Revenue - expenses

EBIT

Revenues-OPERATING expenses

Shorting Stock

Selling something you don't own

The Income Statement

Shows the expenses and revenues generated by a firm over a past period, typically a quarter or a year

3 main legal categories of business organizations

1. Sole proprietorship 2. Partnership 3. Corporation

Developing a pro forma you rely on two inputs

1. The priors year's financial statements and the relationship of the account balance to each other 2. The projected sales for the coming year

Accounting vs Finance

Accounting: backward looking and precise Finance: Future orientated, approximated, cash oriented

Margin Trading

Borrowing part of the purchase price from your broker

4 main interconnected and interrelated areas

1. Corporate Finance (our focus) 2. Investments (the game) 3. Financial Institutions and markets 4. International Finance

Dealer Market

an individual buying and selling securities

What is the goal of a corporation?

improve the condition/position of our owners. We want to maximize the shareholders wealth

Capital Budgeting

planning, evaluating, comparing, and selecting the long term operating projects of the company

Working capital management

the process of managing the day to day operating needs of the company through its current assets and liabilities

What is finance?

the science and art of managing money

Indirect Finance

Financial Intermediaries

Capital Markets

Financial assets that have over a year to mature -Where firms go to raise "capital": cash for long term projects -Debt or equity -Variety of terms -Variety of risks and returns

Money Markets

Financial assets that will mature within a year -Where governments and big firms can borrow funds -All Debt -Short term -Very low risk and low return -Pretty dull -Banks, not directly us

Pro Forma financial statements

Firms need forecast their operating cash flow and net income for the forthcoming period

Derivatives Markets

Future contract or options contracts are bought and sold

AFN Formular

(A*/S0) (DS) - (L*/S0) (DS) - (S1) (M) (RR) - A* Spontaneously Growing Assets - L* Spontaneously Growing Liabilities - M Net Profit Margin - RR Retainage Ratio - DS Change in Sales - S0 Actual Sales this year - S1 Sales forecast for new year

Additional Funds Needed

-A good overall test for the cash impact of growth, but not as sophisticated as we will show later -The assets needed to support change in revenue less the liabilities that will be created by the change less the internally generated funds

Depository Institutions

-Commercial Banks -Thrifts: Savings and loans, saving banks -Credit Unions

Purpose of Ratios

-Gives an idea of how well the company is doing -Standardizes numbers; facilitates comparisons -Used to highlight weaknesses and strengths

Mechanisms to motivate managers to act in shareholders best interest

-Managerial compensation -Shareholder intervention -Threat of takeover

Auction Markets

-Most Big stock exchanges -Physical location -Specialists -NYSE, Tokyo, London

Debt

-No ownership -Creditor Debtor relationship -usually lower risk, lower return

Three major components of a cash flow

-Operating cash flow -Net Capital spending -Change in net working capital

Zoological Analogy

-Our natural prey is marketing -Our predator is the markets

Dealer Markets

-Over the counter -Most bonds -Nasdaq -No physical location -Virtual networks

Equity

-Ownership -Shareholder -No fixed period of time -Usually higher risk, higher return

Ratios Importance

-Ratios are accounting numbers translated into relative values -Ratios are designed to show relationships between financial statement accounts within firms (longitudinally) and between firms (cross sectional)

Balance Sheet

-Represents the assets owned by the company and the claims against those assets -A full finical picture of a firm at one specific moment in time -But, all numbers are historic, not market

Signaling Theory

-There are 8000 stocks and 8000 mutual funds, all trading everyday. -Hard to get noticed

Secondary Markets

-Used -After the first time its on the market -used cars, used house -Cash Flow: goes from investor to investor -Issuer gets no direct benefit

Finance defined

-art and science of managing money -making decisions regarding what assets to buy/sell and when to buy/sell these assets -Main objective is to make individuals and their businesses better off

Finance in a business is concerned with

-how firms raise money from investors -how firms invest money in an attempt to earn profit -how they decide whether to reinvest profit in the business or distribute them back to investors

Primary Markets

-new -First time it's on the market -Analogy: new cars, new houses

Money Cycle

Bank (Financial intermediary)--> Lender/ investor-->Borrower

What do intermediaries do?

Companies established to ease the transfer of funds

Right side of balance sheet

Three subdivisions -current liabilities: what the company will need to pay in the next year -long term liabilities: what the company will eventually need to pay -Shareholders Equity: what the owners have contributed (historic numbers)

Debt Markets

Where bonds are bought and sold

Foreign Exchange Markets

Where currencies are bought and sold

Equity Markets

Where stocks are bought and sold

Capital Structure

a company finances its business activities. Where do we raise the money to conduct our business activities?

Financial Ratios

are the relationship between different accounts from financial statements, usually the income statement and balance sheet, that serve as performance indicators

Liquidity ratios

can the company meet its obligations over the short term?

Cash flow from assets

cash flow from creditors + cash flow to owners


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