Finance 2

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Author:
pcdembin
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175820
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Finance 2
Updated:
2012-10-08 19:17:05
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Finance
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Finance 2
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  1. Current asset
    what the firm owns (life of less than 1 year)
  2. Current Liability
    must be paid within one year
  3. bonds and bondholders are also referred to as
    long term debt and long term debt creditors
  4. Owners Equity= Shareholders Equity= (difference of assets and liabilities)
    if the firm was to sell all of the assets and pay it debt, the residual value that remained would belong to the shareholders
  5. net Working Capital
    difference of current assets and current liabilities

    positive when assets exceed liabilities
  6. Fixed Asset
    long term asset
  7. Liquidity
    refers to the speed and ease with which an asset can be converted to cash.

    2 dimensions- ease of conversion verses loss of value

    highly liquid asset can be sold quickly without a substantial price reduction

    highly illiquid assest is one that cannot be quickly converted to cash without a substantial price reduction
  8. Order of liquidity- Assets
    • Current Assets
    • Cash
    • Accounts Receivable
    • Inventory (least liquid for most businesses)

    • Fixed Assets
    • Buildings and Equipment (tangible)
    • Trademark (intangible)
  9. Residual Equity
    The portion of equity left to shareholders have all of the debts have been satisfied

    assets-liabilities= shareholders equity
  10. The use of debt in a firm's capital structure is called
    financial leverage
  11. The more debt a firm has (as a percentage of assets), the              its degree of financial leverage
    greater
  12. Financial Leverage
    • increases the potential reward to shareholders
    • increases the potential for financial distress and business failure
  13. Market Value
    True value- amount of cash we would get if we sold it
  14. Book Value
    • Value listed on the balance sheet (bc of GAAP)
    • Historical cost- what the firm paid for them
  15. The fact that the balance sheet assets are listed at cost means that there is no necessary connection between the total assets shown and the market value of the firm
    true
  16. When we speak of the value ofthe firm we are speaking of the
    market value
  17. Balance sheet
    • snapshot of the firm
    • convenient means of organizing and summarizing what a firm owns (assets), what a firm owe's (liabilities) and the difference between the two (the firm's equity) at a given point in time.
  18. Income Statement
    Measures performance over some period of time, usually a quarter or a year.

    Revenues-Expenses=Income

    shows a before and after picture
  19. Net Income
    bottom line- last item on the income statement
  20. Net income is oftern expressed on a per-share basis and called
    earnings per share
  21. The difference between net income and cash dividends is the addition to retained earnings
    true
  22. Earnings per share
    =Net Income/Total Shares Outstanding
  23. Dividends per share
    =Total Dividends/Total shares outstanding
  24. When looking at the income statement the financial manager needs to keep in mind the following 3 things
    • GAAP
    • Cash Vs. Non Cash items
    • Time and Costs
  25. GAAP and the Income Statement
    • Revenue is recognized at the time of the sale
    • (not the same as the time of collection)
    • Expenses are based on the matching principle
    • Figures shown may not be at all representative of the actual cash inflows and outflows that occurred in a particular period
  26. Non Cash Items
    • Primary reason that accounting income differs from cash flow
    • most important is depreciation
    • Expenses charged against revenues that do not directly affect cash flow
  27. Product Costs
    • raw materials
    • direct labor expenses
    • manufacturing overhead
    • (reported on the income statement as COGS)
    • Include both fixed and variable costs
  28. Period Costs
    • incurred during a particular period and might be reported as:
    • selling expense
    • general expense
    • administrative expense

    Can be fixed or variable

    example: Company president salary, period cost and fixed (in the short run)
  29. Average tax rate
    your tax bill divided by your taxable income

    the percentage of your income that goes to pay your taxes.
  30. Marginal tax rate
    extra tax you would pay if you earned one more dollar
  31. Cash Flow
    The difference between the number of dollars that came in and the number that went out.

    (Not the same as the statement of cash flows, does not represent the same information)
  32. Cash flow from assets= cash flow to creditors plus the cash flow to stockholders
    True
  33. Cash flows from assets
    • involves 3 components:
    • Operating cash flow
    • capital spending
    • Change in net working capital
  34. Operating Cash Flow
    cash flow that results from the day to day activities of producing and selling

    • Revenue - costs
    • (Don't include depreciation or interest bc not a cash expense, interest is a financing expense)
    • (include taxes)

    EBIT+ Depreciation-Taxes+ Operating Cash Flow

    Shows whether a firms cash inflows are able to cover its everyday cash outflows

    *Accounting principle include interest
  35. Capital Spending
    refers to the net spending on fixed assets(purchases of fixed assets less sales of fixed assets)

    =ending net fixed assets- beginning net fixed assets+ depreciation= net investment in fixed assets

    can be negative if the firm sold more assets than it purchased
  36. Change in net working capital
    amount spent on net working capital

    (measured as the change in net working capital over the period being examined and represents the net increase or decrease in current assets over current liabilities.)
  37. Cash Flow from Assets aka Free Cash Flow
    "free" because it is not needed for working capital or fixed asset investments

    • Operating cash flow
    • -net capital spending
    • -change in net working capital
    • = cash flow from assets

    not unusual to see a negative cash flow for a growing corporating (meaning the firm raised more money by borrowing and selling stock than it paid out to creditors ad stockholders that year 
  38. Cash Flow to Creditors and Stockholders
    net payments to creditors and owners during the year
  39. Cash Flow to Creditors
    interest paid less net new borrowing
  40. Cash Flow to Stockholders
    Dividends paid less net new equity raised
  41. Equations
    Cash Flow From Assets= Cash Flow to creditors + Cash Flow to Stockholders

    Cash Flow from Assets= Operating Cash Flow- Net Capital Spending- Change in net working capital

    where Operating cash flow= EBIT+ Depreciation- Taxes

    Net Capital Spending= Ending Net Fixed Assets- Beginning Net Fixed Assets+ Depreciation

    Change in Net working Captial- Ending NWC- Begininng NWC

    Cash Flow to Creditors= Interest Paid-Net New Borrowing

    Cash Flow to Stockholders= Dividends Paid- Net New equity raised
  42. Income Statement

    and operating cash flow
    • Net  Sales
    • -Cost of Goods Solds
    • - Depreciation
    • = EBIT
    • +Interest Paid
    • =Taxable Income
    • -Taxess
    • =Net Income

    • Operating Cash Flow
    • EBIT
    • + Depreciation
    • -Taxes

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