Finance 311 Exam 1
Cash Flow
Goes from investors to issuers
What is finance concerned with at a personal level?
How much money people spend, how much they save, and how much they invest
Ultimate Finance Truth
In order to get more growth, you have to take risk (the possibility of losing money)
Direct Finance
Lenders/ net savers, Financial markets, Borrowers/ net spenders
Auction Market
Many securities sell at the same time to many buyers
Net Income
Revenue - expenses
EBIT
Revenues-OPERATING expenses
Shorting Stock
Selling something you don't own
The Income Statement
Shows the expenses and revenues generated by a firm over a past period, typically a quarter or a year
3 main legal categories of business organizations
1. Sole proprietorship 2. Partnership 3. Corporation
Developing a pro forma you rely on two inputs
1. The priors year's financial statements and the relationship of the account balance to each other 2. The projected sales for the coming year
Accounting vs Finance
Accounting: backward looking and precise Finance: Future orientated, approximated, cash oriented
Margin Trading
Borrowing part of the purchase price from your broker
4 main interconnected and interrelated areas
1. Corporate Finance (our focus) 2. Investments (the game) 3. Financial Institutions and markets 4. International Finance
Dealer Market
an individual buying and selling securities
What is the goal of a corporation?
improve the condition/position of our owners. We want to maximize the shareholders wealth
Capital Budgeting
planning, evaluating, comparing, and selecting the long term operating projects of the company
Working capital management
the process of managing the day to day operating needs of the company through its current assets and liabilities
What is finance?
the science and art of managing money
Indirect Finance
Financial Intermediaries
Capital Markets
Financial assets that have over a year to mature -Where firms go to raise "capital": cash for long term projects -Debt or equity -Variety of terms -Variety of risks and returns
Money Markets
Financial assets that will mature within a year -Where governments and big firms can borrow funds -All Debt -Short term -Very low risk and low return -Pretty dull -Banks, not directly us
Pro Forma financial statements
Firms need forecast their operating cash flow and net income for the forthcoming period
Derivatives Markets
Future contract or options contracts are bought and sold
AFN Formular
(A*/S0) (DS) - (L*/S0) (DS) - (S1) (M) (RR) - A* Spontaneously Growing Assets - L* Spontaneously Growing Liabilities - M Net Profit Margin - RR Retainage Ratio - DS Change in Sales - S0 Actual Sales this year - S1 Sales forecast for new year
Additional Funds Needed
-A good overall test for the cash impact of growth, but not as sophisticated as we will show later -The assets needed to support change in revenue less the liabilities that will be created by the change less the internally generated funds
Depository Institutions
-Commercial Banks -Thrifts: Savings and loans, saving banks -Credit Unions
Purpose of Ratios
-Gives an idea of how well the company is doing -Standardizes numbers; facilitates comparisons -Used to highlight weaknesses and strengths
Mechanisms to motivate managers to act in shareholders best interest
-Managerial compensation -Shareholder intervention -Threat of takeover
Auction Markets
-Most Big stock exchanges -Physical location -Specialists -NYSE, Tokyo, London
Debt
-No ownership -Creditor Debtor relationship -usually lower risk, lower return
Three major components of a cash flow
-Operating cash flow -Net Capital spending -Change in net working capital
Zoological Analogy
-Our natural prey is marketing -Our predator is the markets
Dealer Markets
-Over the counter -Most bonds -Nasdaq -No physical location -Virtual networks
Equity
-Ownership -Shareholder -No fixed period of time -Usually higher risk, higher return
Ratios Importance
-Ratios are accounting numbers translated into relative values -Ratios are designed to show relationships between financial statement accounts within firms (longitudinally) and between firms (cross sectional)
Balance Sheet
-Represents the assets owned by the company and the claims against those assets -A full finical picture of a firm at one specific moment in time -But, all numbers are historic, not market
Signaling Theory
-There are 8000 stocks and 8000 mutual funds, all trading everyday. -Hard to get noticed
Secondary Markets
-Used -After the first time its on the market -used cars, used house -Cash Flow: goes from investor to investor -Issuer gets no direct benefit
Finance defined
-art and science of managing money -making decisions regarding what assets to buy/sell and when to buy/sell these assets -Main objective is to make individuals and their businesses better off
Finance in a business is concerned with
-how firms raise money from investors -how firms invest money in an attempt to earn profit -how they decide whether to reinvest profit in the business or distribute them back to investors
Primary Markets
-new -First time it's on the market -Analogy: new cars, new houses
Money Cycle
Bank (Financial intermediary)--> Lender/ investor-->Borrower
What do intermediaries do?
Companies established to ease the transfer of funds
Right side of balance sheet
Three subdivisions -current liabilities: what the company will need to pay in the next year -long term liabilities: what the company will eventually need to pay -Shareholders Equity: what the owners have contributed (historic numbers)
Debt Markets
Where bonds are bought and sold
Foreign Exchange Markets
Where currencies are bought and sold
Equity Markets
Where stocks are bought and sold
Capital Structure
a company finances its business activities. Where do we raise the money to conduct our business activities?
Financial Ratios
are the relationship between different accounts from financial statements, usually the income statement and balance sheet, that serve as performance indicators
Liquidity ratios
can the company meet its obligations over the short term?
Cash flow from assets
cash flow from creditors + cash flow to owners
