BUS 331 Finance
Marginal Tax Rates
% tax paid on the next dollar earned
Problems with Financial Analysis
-Conglomerates -Global Competitors -Different Accounting Procedures -Different Fiscal Year ends -Different in capital structure -Seasonal variations and one-time events
Basic Areas of Finance
-Corporate Finance -Financial Institutions -Inestments
Four basic Areas of Finance
-Corporate Finance/Business Finance -Investments -Financial Institutions -International Finance
Sarbanes-Oxley Act
-Driven by corporate scandals -Intended to strengthen protection against accounting fraud and financial malpractice -Compliance can be very costly
Managerial Compensaition
-Incentives can help align manager and stockholder interests
Major Financial Ratio Categories
-Liquidity Ratios -Financial Leverage Ratios -Asset management ratios -Profitability Ratios -Market Value Ratios
Goal of Financial Management
-Maximize profit -Minimize costs -Maximize market share -Maximize the current value per share of the company's existing stock -Maximize the market value of the existing owner's equity
Profit margin
-Measures operating efficiency
International Finance
-Relevant to all areas of finance -Must become familiar with exchange rates -Must understand the customs of other countries
Corporate Control
-Threat of a takeover may result in better management
TIE
A company's ability to honor its debt payments
Internal Corporate Forms
All of these forms feature public ownership and limited liability
Noncash item
An expense that lowers net income but does not affect a firm's cash flow is referred to as a:
Book Value
Balance sheet value of the assets, liabilities, and equity
Sole Propietorship
Business owned by one person Advantages -Easiest to start -Least regulated -Owner keeps all profits -Taxed once as personal income Disadvantages -Limited to life of owner -Equity capital limited to owner's personal wealth -Unlimited liability -Difficult to sell ownership interest
Partnership
Business owned by two or more persons Advantages -More than one owner -More capital available -Relatively easy to start -Income taxed once as personal income Disadvantages -Unlimited liability -Partnership dissolves when one partner dies or wishes to sell -Difficult to transfer ownership
Net working capital
Can be positive, negative, or zero.
Dividend policy
Choice of how much to pay to shareholders vs how much to reinvest in the firm
Financial Leverage
Choice of optimal debt
Inventory
Classified as a current asset
Building
Classified as tangible fixed asset
GAAP
Common set of standards and procedures for preparing audited financial statements.
Market to book ratio
Compare a company's current market price to its book value.
Net working capital
Current assets minus current liabilities.
The purchase of inventory for cash
Decreases the liquidity level of a firm
General Parners
Get into day to day work
Current Ratio
Give an idea of the company's ability to pay back its liabilities (debt and accounts payable) with its assets
Return on Assets
Gives an idea as to how efficient management is at using its assets to generate earnings.
Compound Interest
Interest earned on principal and interest on interest
Simple Interest
Interest earned only on the original principal
Debt/Equity
Is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.
Inventory Turnover
Is a measure of the number of times inventory is sold or used in a time period such as a year
Depreciation
Is a noncash expense.
Payable Turnover
Is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers.
Profit Margin
Is an accounting measure designed to gauge the financial health of a business or industry.
Receivable Turnover
Is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts
Cash Coverage
Is another measure of a company's ability to pay its interest expense
Capital Intensity Ratio
It reveals how much assets your business needs to generate a dollar in sales
Corporation
Legal "person" distinct from owners and a resident of a state Advantages -Limited liability -Unlimited life -Separation of ownership and management -Easy to Transfer ownership -Easier to raise capital Disadvantage -Agency problem -Double taxation of income
Total Asset Turnover
Measures asset use efficiency
Income Statement
Measures performance over a period of time
Quick ratio
Measures the dollar amount of liquid assets available for each dollar of current liabilities.
Equity Multiplier
Measures the financial leverage
Cash Flow
One of the most important pieces of information we get from financial statements
Treasurer
Oversees cash management, credit management, capital expenditures, and financial planning
Controller
Oversees taxes, cost accounting, financial accounting, and data processing
Limited Partner
Provides capital..Only lose what they put in
Bonds payable
Shareholders' equity DOES NOT include
PE Ratio
Shows current investor demand for a company share.
Return on Equity
Shows how much profit each dollar of common stockholders' equity generates.
Income statement
Shows the revenue and expenses based upon selected accounting methods.
Balance Sheet
Snapshot of the firm's Assets, Liabilities, and Owners' Equity at a specific point in time
Operating cash flow
The cash generated from a firm's normal business activities is referred to as the firm's:
Income statement
The financial statement that summarizes a firm's operations over a period of time
Total Debt Ratio
The proportion of a company's assets that are financed by debt
Marginal
The tax rate applicable to the next dollar of taxable income is called the _____ tax rate.
Bill payable to a supplier for the purchase of inventory
This would be included in net working capital
Average Tax Rates
Total Tax bill/ taxable income
Average tax rate
Total taxes divided by total taxable income
Market Value
True value (price) at which the assets, liabilities, or equity can actually be bought or sold -More important to look at