Finance

Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised Statement of cash flows
Can the firm meet all its short-term obligations using its current assets Balance sheet
Income statement Also known as the profit and loss (P&L) statement provides snapshot of financial performance of a company for a specific period of time. Prepared using GAAP
If a firm has a lot of net cash flow, does that mean the firms balance sheet cash account must be high? (yes/no) No
Shareholders equity The sum of the shareholders capital provided by shareholders and retained earnings
The difference between the company’s assets and liabilities Shareholders equity
Sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years Shareholders equity
Book value The net value, or difference between the machines historical cost and its accumulated depreciation expense
When book value refers to the entire company, what does it mean? Total vale of the shareholders equity as reported in the firms balance sheet
Annual cost of capital investor supplied operating capital * after tax percentage cost of capital
How is the market value of shareholders equity calculated? The shares market price * # of shares outstanding
Which source of investor income is susceptible to double taxation? Dividends
To offset taxable income in a given year, ordinary corporate operating losses can be carried back ____ years and carried forward ____ years 2, 20
The applicable tax rate for S corporations is based on the: Stockholders individual tax rates
Debt financing versus equity financing Debt financing is taking out loans that you must pay back. Equity financing involves investors that take on all the risk
From a corporations point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing? Debt financing
Weaknesses of ratio analysis A firm may operate in multiple industries and different firms may use different accounting practices
Does an increase in current ratio over time always mean that the company’s liquidity position is improving? (yes/no) No
Net working capital formula (NWC) current assets-AP-NP
Net Operating Working Capital (NOWC) current assets-accounts payable
FCF formula [EBIT (1-tax rate)]+depreciation-capital expenditures -add depreciation and accruals
EVA -if the benefits of their investments exceed the cost of raising the necessary capital-Estimate of a firm’s economic profit for the year
MVA Excess of market value over book value
ROE Net income/ common equity
ROIC [EBIT (1-T)] / total invested capital
Times-Interest-Ratio (TIE) EBIT/interest charges
Company A uses long-term debt to finance its assets, and company B uses capital generated by shareholders to finance its assets. Which company would be considered a financially leveraged firm? Company A
unleveraged companies -companies that function without the use of borrowed money -financed by equity alone and have no debt
leveraged companies -riskier-take advantage of investment opportunities-have borrowed money or debt
would creditors prefer to give loans to companies with high or low debt ratios? Low debt ratios are better
Do you want a high or low TIE ratio? High
Do companies with high research and development expenses usually have a high or low price/earnings ratio? High
Is it possible for a company to have a negative EPS and therefore a negative P/E ratio? Yes
If expected future ROE increases, will the stock price increase? not necessarily
Is a company with one key customer more or less risky than a company with several customers? more
when conducting trend analysis do you compare the financial ratios of other companies in the industry or the financial ratios over time of the company in focus? (comparative analysis vs trend analysis) financial ratios over time
what does ROE not include? risk and amount of invested capital
if risk and amount of invested capital are the same, how would you chose a project? the one with the higher ROE
benchmarking comparison of company with subset of top performers in industry
3 areas of finance financial management, capital markets, and investments
financial management decisions on what types of assets to acquire
capital markets markets where interest rates along with stock and bond prices are determined. involves banks, investment banks, stockbrokers, mutual funds, insurance companies
investments (3 activities) security analysis, portfolio theory, market analysis
security analysis finding proper values for individual securities
Market analysis wether stock or bond prices are too high, too low, or just right (behavioral finance)
portfolio theory best way to structure basket of stocks and bonds
S Corporation allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation
What is an LLC? (C Corporation) -hybrid between a partnership and a corporation-limited liability protection but taxed as partnership-dont have full control, have votes in proportion to their amount of ownership
what are the benefits of a business turning into a corporation? -limited liability reduces risk-corps can attract more capital and create growth opportunities-more liquid
main financial goal creating value for investors
intrinsic value vs market price intrinsic value is a stocks true value and market price is the price it is being traded at. intrinsic value is a long-run concept
should management want to increase stock price or intrinsic value? intrinsic value
effective executive compensation plans that motivate managers to act in their stockholders’ best interest 1) reasonable compensation packages 2) firing of managers that don’t perform well 3) threat of hostile takeover 4) direct investor intervention
corporate raiders individuals who target corporations for takeover because they are undervalued
hostile takeover the acquisition of a company over the opposition of management
two types of stockholder-debtholder conflict stockholders want go towards riskier investments and take out more debt
how do bondholders protect themselves? covenants in bond agreements
B (benefit) corporation put stakeholders (employees, customers, and communities) on equal footing with shareholders
Tasks of CFO make sure accounting system provides good numbers, ensure firm is financed in a proper manner, evaluate operating units to make sure they are performing in an optimal manner, evaluate all proposed capital expenditures to make sure they will increase the firm’s value
Sarbanes Oxley Act A law which strengthens U.S. financial reporting and corporate governance regulations
financial intermediary bank, insurance company, or mutual fund (deals with loans) so they take in money and lend out money, its a two way street
investment banks buy stocks from company directly and sells securities to individuals, one way street but three people involved, investment banks underwrite
direct transfer one way street with two people involved
financial markets places where people wanting to borrow money and people with a surplus of money are brought together
financial asset market stocks, bonds, notes, and derivative securities
derivative securities derives values from changes in the price of other assets; stock OPTIONS
what is a benefit of buying futures? can reduce (hedge) risk
money markets vs capital markets money markets are short term (up to a year) and money markets are long term (1-10 years)
private markets vs public markets private is b/w two people (bank loans) and public is where standardized contracts are traded on organized exchanges (common stock and corporate bonds)
crowdfunding raise money from investors w/o intermediaries
Investment Banks help corps design securities that are attractive to investors, buy securities from corporations and resell to savers. also called underwriters
Commercial Banks Wells Fargo
Financial services corporations large conglomerates that combine many different financial institutions
Credit Unions members have common bond such as all being employees of the same firm. members saving are loaned to other members for cheap
pension funds retirement plans funded by corps or government agencies. typically make safer investments
Life insurance companies take saving from annual premiums (pay into it each year)
Mutual funds pool investor funds to purchase financial instruments that thus reduce risk through diversification
money market funds mutual funds that invest in short term, low-risk securities and allow investors to write checks against their accounts
Exchange Traded funds (ETFs) Buy a portfolio of stocks of a certain type and sell their own shares to the public. (an investor can buy shares in an ETF that contains a bunch of different stocks from a particular market that the investor is interested in)
Hedge Funds largely unregulated, have large minimum investments (1 mil), made to hedge (avoid) risk
Private Equity companies buy and manage entire firms with borrowed money that investors contribute
NYSE physical location exchanges, people have seats on the trading floor
NASDAQ electronic dealer-based market, known for trading tech companies
what does a dealer market consist of? 1) relatively few dealers 2) thousands of brokers who act as agents, bringing dealers together with investors 3) computers, terminals, and electronic networks that put brokers and dealers in communication with each other
bid ask spread the difference between bid and ask prices, represents the dealer’s markup, or profit
Dutch Auction individuals place bids for shares directly, the actual transaction price is the highest price that causes all of the offered shares to be sold (did math activity about this) Google used this
efficient market prices are close to intrinsic value and stock seems to be at an equilibrium
are large, popular companies more or less efficient than small, obsolete companies they are more efficient
Efficient markets hypothesis on average asset prices are about equal to their intrinsic value
behavioral finance instead of assuming all investors are rational, it explores how irrational behavior can be sustained over time
EMH criticism (two key points based off behavioral finance) 1)it is difficult/risky for investors to take advantage of mispriced assets (mispricings may persist)2) mispricings can occur in the first place
Why is it good for the economy that markets be efficient? When markets are efficient, investors can buy and sell stocks and be confident that they are getting good prices. and they will invest b/c they arent scared to do so
4 elements of written annual report balance sheet, income statement, statement of cash flows, statement of stockholders equity
Balance sheet A statement of a firm’s financial position at a specific point in time.
two stockholder equity equations SE= paid in capital +retained earnings SE= total assets- total liabilities
what is working capital? current assets
Net Working Capital current assets – current liabilities
Net operating working capital current assets- (current liabilities -current notes payable)
time dimension in terms of balance sheets the balance sheet is a snapshot of financial position at a given point in time
NWC vs NWOC NWOC only subtracts non interested bearing liabilities (subtract notes payable from current liabilities)
amortization A noncash charge similar to depreciation except that it represents a decline in value of intangible assets.
EBITDA earnings before interest, taxes, depreciation, and amortization
income statement snapshot of the firm’s operations
Long-term investing activities on a cash flow sheet they cancel each other out so its zero
four sections shown in the statement of cash flows Operating Activities, financing activities, investing activities,
statement of stockholders’ equity A statement that shows by how much a firm’s equity changed during the year and why this change occurred
Free cash flows (FCF) The amount of cash that could be withdrawn without harming a firm’s ability to operate and to produce future cash flows.
NOPAT net operating profit after taxes (no debt and only held operating assets)
NOPAT Formula EBIT (1-T)
why is FCF so important? it shows how much free cash the firm has to distribute to its investors
Difference between EVA and NI NI doesnt take out equity cost but EVA does
marginal tax rate The tax rate applicable to the last unit of a person’s income.
average tax rate Taxes paid divided by taxable income
how is interest income taxed? added to other income and taxed at federal rates
how is short term capital gain taxed? at the same rate as ordinary income
how are long term capital gains taxed? considerably less than short term
Traditional IRA Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age 59 1/2 (income is tax deductible but capital gains it not)
Roth IRA Individual retirement arrangements in which contributions are not tax deductible but the future income and capital gains within these accounts are not taxed if the money is withdrawn after age 59 1/2(tax income not capital gains)
Alternative Minimum Tax (AMT) Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
If a corporation owns 80% or more of another corporation’s stock, it can aggregate income and …..? file one consolidated tax return
how are interest payments taxed? they are not taxed or are tax deductible so people prefer debt financing over equity financing

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