fi 302 exam 1
Cash Coverage Ratio
(EBIT + Depreciation)/Interest Expense
What is it's relation to consumer theory?
(it is painful to have to wait to consume and if we experience that pain then we have to wait to be compensated)
what are the goals of financial managers?
- Maximize the value of the business -They create financial reports, direct investment activities, and develop plans for the long-term financial goals of their organization.
book value
- balance sheet valuations - book value looks BACKWARDS - WHEN A TRANSACTIONS OCCURS -based on historical or original values
agency issues example
- doctor malpractice - In 2001, energy giant Enron filed for bankruptcy -a manager might make hiring and firing decisions based on their own interests rather than those of the shareholders and incur unnecessary costs in the process
shareholder value analysis
- how much value does the firm generate? - market value added market to book ratio the process of analyzing how decisions affect the net present value of cash to shareholders.
Investment Analysis
- how profitable? -economic value added -return on capital, assets, and equity Analyzing a particular property to evaluate its investment potential.
Why does money have time value?
-Inflation, depreciating real assets, investment opportunity -There is a utility cost of forgoing consumption today and you must be compensated for the disutility -the rate of return/ interest rate/ discount rate captures this tradeoff
financial markets can be classified by:
-Type of asset traded (equity, fixed income, etc) -Maturity of the financial asset (money vs. capital markets) -Owner of the financial asset (primary vs secondary markets) -Nature of transaction (OTC VS AUCTION)
who do the financial managers answer to?
-ceo -board of directors -shareholders -stakeholder
Corporations
-limited liability - double taxed, earned & payout - corporate tax on profits plus personal tax on dividends. -many owners - only assets of company are liable, not personable
Insurance companies
-massive investors in corporate stock and bonds, and they often make long term loans directly to corporations - they are more important than banks for long term financing of business
average day in inventory
365/cogs/inventory
Compound Interest Formula
A = P(1 + r/n)^(n x t), r is the rate, n is the number of times compounded, t is time
income statement
A financial statement showing the revenue and expenses for a fiscal period. help indicate tax liability
Balance sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date. -shows the value of the firms assets and liabilities at a particular time. - measured from an accounting prespective -assets left, liability right assets liability se rev exp
Cash Flow Statement
A financial statement that shows the flow of money in and out of the business. it starts w profits and converts to cash flows
stakeholder
A person or organization with an interest in a particular place or issue.
Personal Finance
All of the decisions and activities of an individual or family regarding their money, including spending, saving, budgeting, etc.
Agency Issues
Arise when actions of managers are not in shareholders' best interests Many times result from corporate political spending that is not in the best interest of the company
D. Finding "waiting time" (n) and the interest rate
F. Rule of 72The Rule of 72 estimates the number of years required to double a sum of money at a given rate of interest. • r is the percent not the decimal𝐷𝑜𝑢𝑏𝑙𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑 = 72/r
Future Value Formula
FV = PV(1 + r)^t
assets =
Liabilities + Owner's Equity The cardinal rule for a balance sheet is that your total assets should equal the sum of your total liabilities and total equity (i.e., assets = liabilities + equity)
ROC (return on capital)
Net Income / total capital total capital= longterm debt + common stock + retained earnings -Overall Investors
ROE (Return on Equity) formula
Net Income/Equity -MANAGERIAL EFFICIENCY
Present Value Formula
PV=FV/(1+r)^t
Types of Business Organizations
Sole Proprietorship, Partnership, Corporation, Non-profits. ; Sole Proprietors.
Top two ownership groups in both US debt and equity markets
The two largest ownership groups in both the US debt and equity markets are likely to be institutional investors, such as pension funds, insurance companies, and mutual funds, and high net worth individuals, such as wealthy individuals, families, and trusts.
Present Value and Discounting
The value of a future cash flow at the start of the stated period. - involves discounting the interest that would have earned over a given period at a given interest rate -useful in determining the value/price of an asset that produced cash flows in the future.
agency cost
Value lost from agency problems or from the cost of mitigating agency problems
Finance is about making decisions regarding ____ assets to buy/sell and ____ to buy/sell these assets
WHAT WHEN
investment decisions example
a firm decides to buy equipment and machinery to boost production.
An agency relationship is
a relationship between a principal and an agent, where the principal gives the agent legal permission to act on the principal's behalf
Cash flow and earnings are two different
accounting concepts, featuring the time difference between cash movements and business transactions. A cash flow may not be reported as earnings unless it happens at the same time as a sale or expense transaction. On the other hand, earnings may be non-cash accounting income.
financial statements
balance sheet, income statement, statement of cash flows
Financing Analysis
can the firm finance future growth?
Quick Ratio
cash and securities + accounts receivables / current liability
financial assets
claims on real assets or the income generated by them - ex) stocks/ bonds
Financial ratio analysis
computing ratios that compare values of key accounts listed on a firm's financial statements A method of evaluating a company's financial performance and position by comparing various numerical values taken from its financial statements. Ratios are calculated by dividing one financial value by another, and they provide insights into a company's liquidity, profitability, solvency, efficiency, and leverage.
Sole Proprietorship and partnerships
con: unlimited liability and pro: personal tax on profits -One owner - can EASILY be sued, business & personally - subject to income tax
Financing Decision
determines the best capital structure for the firm and includes examining various methods by which the firm can raise capital - decision on the sources and amounts of financing -capital structure of the firm (mix of debt and equity) -financial assets (claim on future cash flows from real assets)
Liquidity Ratios
includes: current, quick, and cash ratios Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
Financial Institutions
indeed intermediaries but traditionally do more than simply pool/invest savings. entities that provide financial services, such as taking deposits, managing investments, brokering financial transactions, or making loans
Earnings before interest and taxes (EBIT)
indicate a company's profitability. EBIT is calculated as: Total rev - costs - depreciation EBIT is also called operating earnings, operating profit, and profit before interest and taxes.
financial institution vs financial intermediaries
institutions= banks & insurance companies intermediaries= mutual funds & pension funds
Free Cash Flow formula
interest expense + cash flow from operations - capital expenditure
free cash flow=
interest payments + shareholders operating cash flow- capital expenditures
Commercial banks vs Investment banks
investment banks typically raise money by selling securities (like stocks and bonds). they underwrite stock On the other hand, commercial banks use consumer deposits to fund loans and mortgages, and the interest on those loans becomes profit for the bank
compound interest
is the eight wonder of the world, he who understands it, earns it. he who doesnt, pays for it.
basics of company structure
managers answer to -> CEO answer to -> Board of Directors answer to -> Shareholders *keeping stockholders happy = max stock price in usse
Market to Book Value Ratio
market cap/book value of equity (share price x shares outstanding) / (common stock + retained earnings) -most recent year
Financial Markets
markets where financial securities, such as stocks and bonds, are bought and sold *financial securities are really easy to trade non- security- house, not easily traded
Role of Financial Manager
maximize shareholder wealth Make decisions on behalf of the firm's investors For good decisions, the benefits exceed the costs - creates/ preserves economic value
oppurtunity cost of capital
minimum acceptable rate of return on capital investment- the rate of return that investions could earn in finance. markets, look at proj. of similar risk, return
financial intermediaries come in all shapes and sizes such as:
mutual funds - raise money to invest, lots regulations hedge funds- less regulations pension funds - after retirement
Free Cash Flow
net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid cash available for distribution to investors after firm pays for new investments or additions to working capita.
ROA (return on assets):
net income / total assets - profitability of operations
Sole Proprietorship and partnerships: who runs the company?
owner and manager
Corporations, owners or managers?
owners and managers are seperate
shareholders
owns stock
Financing
provides the necessary cash and credit to produce, transport, store, promote, sell, and buy products
financial intermediaries
raise money from investors and provide financing for individuals, companies, and other organizations. an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund.
cash reinvested can also be called
retained earnings
Financing Decision example
securing a bank loan or selling debt in the public capital markets. when a firm selects a funding method. such as bank loans, equity shares, debentures, and preference shares.
Investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
A leverage ratio is
the amount of debt financing -debt ratios, interest coverage ratios any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations.
what is finance
the art and science of managing money
investment decision
the decision to build, buy, or lease plants and equipment; to enter or exit an industry Decision to invest in real assets, tangible (capex) or intangible assets How a firm builds the asset side of the balance sheet by allocating funds, time, and other resources.
Financial Management
the job of managing a firm's resources so it can meet its goals and objectives
market value
the price at which property would sell -FORWARD looking, future cash flows -current value of assets and liability
Cash flow from operations is
the section of a company's cash flow statement that represents the amount of cash a company generates (or consumes) from carrying out its operating activities over a period of time. Operating activities include generating revenue, paying expenses, and funding working capital.
Corporate Finance
the study of the relationship between business decisions and the value of the stock in the business
Future value and compounding
the value of money at the end of the stated period -determines the attractiveness of alternative investments - figure out the effect of inflation on the future cost of assets, such as a car or a house the amount to which current savings will increase based on a certain interest rate and a certain time period
Payout (Dividend) Decision
typically determined through forecasting long-term earnings and calculating a percentage of earnings to be paid out how much of the profit earned by the company after paying the taxes is to be distributed to the shareholders. I
