Finance 1

What three sound, reasonable concepts, must be understood before studying this course?

- More value is preferred to less - The sooner cash is received, the better - Less risky assets are preferred or more valuable than risker assets

earnings per share

- Net income available to common shareholders/ Total shares of common stock outstanding

Consider a firm with an EBIT of $12,500,000. The firm finances its assets with $54,000,000 debt (costing 8 percent) and 12,000,000 shares of stock selling at $6.00 per share. The firm is considering increasing its debt by $27,000,000, using the proceeds to buy back shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $12,500,000.

27,000,000/6= 4,500,000 12,000,000 -4,500,000= 7,500,000 (shares of stock) after capital change Change EBIT Less: interest (x) EBIT Less taxes (x) Net income Dividend by # of shares EPS

Partnership

A business in which two or more persons combine their assets and skills

Income Statement

A financial statement showing the revenue and expenses for a fiscal period. - Total Revenue- total expenses= Net income (loss) - income statement says "For the year ending 2018"

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date. That is why the date on the balance sheet is "December 2018"

Retained Earnings Statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.

Proprietorship

A form of business organization with one owner who takes all the risks and all the profits.

The Balance Sheet Identity is:

Assets= Liabilities + Owners equity

Mr. Husker's Tuxedos Corp. began the year 2018 with $276 million in retained earnings. The firm earned net income of $43 million in 2018 and paid dividends of $4 million to its preferred stockholders and $13 million to its common stockholders. What is the year-end 2018 balance in retained earnings for Mr. Husker's Tuxedos? (Enter your answer in millions of dollars.)

Balance of retained earnings for 2018 is as follows: 276m Plus: Net income for 2018: 43m Less: Cash dividend Preferred stock. 4m Common Stock 13m Total cash dividends paid: 17m Balance of retained earnings, December 31,2018 302m

You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information: Beginning Cash: Ending Cash: $285 Net cash increase: $102 Calculate the Beginning Cash.

Beginning Cash: $183 Ending Cash: $285 Net cash increase: $102

Advantages of Sole Proprietorship

Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income

What are the four general areas of finance?

Financial Markets and Institutions Investments Financial Services Managerial Finance

Oakdale Fashions, Inc. had $275,000 in 2018 taxable income. Using the tax schedule in Table 2.3 to calculate the company's 2018 income taxes. (Round your answer to the nearest dollar amount.)

From table 2.3, the 275,000, of taxable income plus Oakdale fashion, Inc has a 39% tax bracket. Tax liability= Tax base on amount+ Tax rate (amount over base): = 22,250+ 0.39 * (275,000-100,000) =90,500 Average tax rate- 90,500/275,000= 33.00% Marginal tax rate- 39%

You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information: Beginning Cash: $220 Operating Activity: $497 Investment Activity $598 Financing Activity: −$212 Calculate the Net cash increase/decrease:

Increase: $883 The Beginning cash amount is not part of the calculation. Operating Activity: $497 Investment Activity$598 Financing Activity: − $212 Net Increase in cash: $883

Advantages of a corporation

Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital

You are considering a stock investment in one of two firms (NoEquity, Inc. and NoDebt, Inc.), both of which operate in the same industry and have identical operating income of $28.5 million. NoEquity, Inc. finances its $60 million in assets with $59 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc. finances its $60 million in assets with no debt and $60 million in equity. Both firms pay a tax rate of 30 percent on their taxable income.

No equity No debt Operating income: 28.5m 28.5 Less: interest. (59x0.1%) 5.90m 0.00m Taxable income 22.60 28.5 Less taxes (30%) -6.78 -8.55 Net income _______ ______ 15.82m 19.95m Return on assets 15.82 /60m.= 26.37% 19.95/ 60m.=33.25%

cash equivalents

Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.

Market Value

The amount the firm would get if it sold the assets.

financial leverage

The extent to which debt securities are used by a firm. Leverage in the financial sense refers to the extent to which a firm chooses to finance its ventures or assets by issuing debt securities. The more debt a firm issues a percentage of its total assets, the greater financial leverage. Using leverage can increase shareholder value (wealth), but if a company fails to make payments on its debt, shareholder can be reduced

Advantages of Partnership

Two or more owners More capital available Relatively easy to start Income taxed once as personal income

Financial Management involves decision about

What type of capital should be raised, which project to fund, and how to minimize taxation.

double taxation

a situation in which two taxes must be paid on the same income The shareholders pay taxes again at the personal level when corporate profits are paid out as dividends.

An income statement prepared using GAAP will show revenue when it is:

accrued

Book Value

cost - accumulated depreciation

Net Working Capital

current assets - current liabilities

A _________ __________ is one that has a life of less than one year, meaning they must be paid within the year.

current liability

EBIT

earnings before interest and taxes

stockholder wealth maximization

i) Requires efficient, low-cost operations providing a high-quality product ii) Requires providing products and services that consumers want iii) Requires efficient, courteous service, appropriate levels of inventory, convenient locations, and/or fast, reliable, and secure websites.

coporation

is a form of business organization recognized by law as a separate legal entity having all the rights of a individual

The first thing reported on an income statement would usually be:

revenues

The market value of an asset depends on:

riskiness and cash flows

Agency Problem

the possibility of conflict of interest between the stockholders and management of a firm

Finance

the study of money; how it's made, how it's lost, and how it's managed

Agency relationship

whenever one party (the principal) hires someone else (the agent) to work for him/ her. Always supposed to act in the principals best interest. For example, an apartment complex manager should ensure that tenants aren't doing willful damage to the property. Best for the apartment manager