Corporate Finance - Kap 2
Asset Turnover
A measure of how efficiently the firm is utilizing its assets to generate sales, which is calculated as Sales/Total Assets.
What are the four financial statements that all public companies must produce?
All public companies must produce four financial statements: the balance sheet, the income statement, the statement of cash flows, and the statement of changes in shareholders' equity.
Market Capitalization
Also known as the total market value of equity, it equals the market price per share times the number of shares. The market capitalization does not depend on the historical cost of the firm's assets; instead, it depends on what investors expect those assets to produce in the future. The book value of equity should not be confused with the market value of equity: The market value of equity may be different because the book value of assets does not perfectly match the market value of the assets and because many of the firm's intangible assets are not captured on the balance sheet.
What is the role of an auditor?
An auditor is a neutral third party hired by the company to check the annual financial statements, ensure that they are prepared according to the generally accepted accounting principles (GAAP) or accounting standards, and verify that the information is reliable.
What is the balance sheet equation?
Assets = Liabilities + Shareholders' Equity
Short-term Debt
Debt that will be repaid within one year.
What it is the difference between a firm's gross profit and its net income (or net profit)?
Gross profit equals sales minus cost of goods sold, while net income equals sales minus all income statement expenses.
Book Value
The book value (or carrying amount) of a long-term asset is equal to its acquisition cost less accumulated depreciation. Depreciation is not an actual cash expense; it is a way of recognizing that buildings and equipment wear out and thus become less valuable as they get older. For example, net property, plant, and equipment is equal to the total book value of a firm's long-term assets after subtracting the total depreciation from previous years. The book value of equity, also known as shareholders' equity or net worth, is defined as the difference between total assets and total liabilities in the balance sheet identity.
What is meant by dilution?
The diluted earnings per share shows the earnings per share the company would have if all the share (stock) options were exercised and all the convertible securities were converted into shares. The diluted EPS must be lower than the basic EPS.
What is a firm's enterprise value?
The enterprise value of a firm assesses the value of the underlying business assets, unencumbered by debt and separate from any cash and marketable securities. It can be expressed as: Enterprise Value = Market Value of Equity + Debt − Cash
Enterprise Value
The enterprise value of a firm assesses the value of the underlying business assets, unencumbered by debt and separate from any cash and marketable securities. It can be expressed as: Enterprise Value = Market Value of Equity + Debt − Cash
Income Statement (also called the Statement of Comprehensive Income)
The income statement lists the firm's revenues and expenses over a period of time. The last line of the income statement shows the firm's net income, which is a measure of its after-tax profitability during the period.
Statement of Cash Flows
The statement of cash flows measures the change in cash over a period of time. It is divided into three sections: operating activities, investment activities, and financing activities. The first section, operating activities, adjusts net income by adding back all non-cash entries related to the firm's operating activities. The next section, investment activities, lists the net cash flows from investment. The third section, financing activities, shows the flow of cash between the firm and its investors.
The book value of a company's assets usually does not equal the market value of those assets. What are some reasons for this difference?
The value of many of the assets listed on the balance sheet is based on their historical cost rather than their true value today. Furthermore, many of the firm's valuable assets, such as the firm's reputation in the marketplace, are not captured on the balance sheet.
Financial Statements
Every public company is required to produce four financial statements: the balance sheet, the income statement, the statement of cash flows, and the statement of changes in shareholders' equity. These financial statements provide investors and creditors with an overview of the firm's financial performance.
Balance Sheet (also called the Statement of Financial Position)
The balance sheet lists the firm's assets and liabilities at a given point in time. It is divided into two parts ("sides"): the assets on the left side and the liabilities and shareholders' equity on the right. The assets list the cash, inventory, property, plant and equipment, and other investments the company has made; the liabilities show the firm's obligations to creditors. Shareholders' equity, the difference between the firm's assets and liabilities, is an accounting measure of the firm's net worth. The two sides of the balance sheet must balance according to the balance sheet equation: assets = liabilities + shareholder's equity.
What is the difference between a firm's book debt-equity ratio and its market debt-equity ratio?
The book debt-equity ratio uses the values of debt and equity from the balance sheet, while the market debt-equity ratio uses the market values of debt and equity.