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
