Corporate Finance
focuses on financial decision making by a firms management
Investments
various types of financial instruments (stocks, bonds,
... [Show More] etc)
Banking or Financial Institutions
make money by paying depositors a smaller interest rate than the interest rate charged to borrowers
Treasury Securities
generally bonds that are issued by the US government
Corporate Bonds
firms borrowing from the public
Stocks
a share of ownership in a company
Primary financial markets
markets where securities are first issued
Syndicate
a group that is temporarily formed to handle a bond or stock issue: generally large investment bank or institutional investors
Underwriter
responsible for determining the value of the security; may purchase all the securities & then resale to investors
Competitive sale
underwriters submit bids offering highest price/lowest interest rate; underwriter resales a slightly higher price
Negotiated sale
underwriters submit bids, go thru interview to be selected
Secondary financial markets
where securities are traded after the initial offering (stock market)
Auction market
has a physical location & prices are determined by the highest price an investor is willing to pay (New York Stock Exchange)
Dealer market
no physical location- securities are bought & sold thru a network of dealers that trade for themselves; multi dealers per stock (NASDAQ)
Role of financial markets
they reduce the cost of borrowing from the public or selling ownership to the public
Role of Specialist (NYSE) or Dealers
provide liquidity for a fair & orderly market; may increase the spread to do so (charge a lower price to seller and a higher price to buyer)
Financial market liquidity
the ease of trading in the market (high frquency traders)
Market orders
time sensitive; sales at current bid price/buys at current asking price when order is placed-immediately
Limited orders
price sensitive; sell occurs when price of stock matches order price
Role of price
convet information to consumers; affect incentives &affect the distribution of income
Dollar Returns
Pt - Pt-1 + CFt (Pt= sold price, Pt-1=bought price, CFt=cash flow-coupons for bonds/dividians for stocks)
Percentage Returns
Pt - Pt-1/Pt-1 + CFt/Pt-1 x 100 (1.2)
(figure for dollar return and divide into bought price)
Goal of company/firm
to maximize shareholder value or maximize profit
Agency costs
costs that are incurred when management doesn't act in the best interests of shareholders
Profit maximizarion
the potential effect of focusing soley on profits
Accounting
is backward-looking and risk free
Finance
is forward-looking and involes massive uncertainty
Income Statement
show results of operation over time; revenues - expenses = net income
Balance Sheet
a "snap shot" of a firm's assests & financing at a paticular point in time; Assets= Liabilities + Owner's Equity
Statement of Cash Flows
tracks all cash in and out of the firm
Cash Accounting
cash in =revenue; cash out=expense
Accrual Accounting
revenues are recognized when the earnings process is complete; expenses are "matched" to recongized revenues
Cash-based income
an informal metric based on cash in & cash out of the firm
Income for tax purposes
based on the government's definition of income, this is the amount of income the government will tax
Accounting income
the income calculated using accrual accounting (aka, GAAP); best & most complicated metric for understanding the operations of the firm
On the Income statement
Revenues- Cost of goods sold= Gross profit
- Operating expenses= earning before interest & taxes
- interest expenses, - taxes= Net income
Revenue
recognized when "earned"
Cost of Goods Sold
direct costs of materials & labor
Gross profit
revenue - cost of goods sold
Operating Expenses
expenses not directly associated with production (office expenses, administrative expenses, depreciation, research & development)
EBIT
Earnings before interest & tax; Gross profit - operating expenses (also known as operating income)
Net Income on balance sheet
EBIT - interest - taxes
Current Assets
cash marketable securities, A/R, inventory
Fixed Assests
gross fixed assets- accumulated depreciation
Current Liabilities
A/P, accruals, notes payable
Equity
Commonstock, paid-in capital, retained earnings
Accumulated depreciation
total of all depreciation claimed against the firms fixed assets
Net PP&E
original cost (Gross PP&E) - accumulated depreciation
Net Income (linking balance sheet & income statement)
income statement)
dividends + change in retained earnings
New Retained earnings
0d retained earnings + change in retained earnings or
old retained earnings + net income - dividends
Gross PP&E
orginal cost of property, plant & equipment
Statement of Cash Flows
cash flow reveals the true health of a company; explains cash in & cash out from operations, investing & financing
CFO + CFI + CFF = change in cash - beginning cash = end cash
Operational
decisions on what/how/whom to sell & buy from
Investing
decisions on purchasing & selling of long term assets
Financing
decision on debt & equity, repayment of debts, repurchasing stock & payment of dividends
Core activities
firm's core activities will impact the way cash flows are catagorized
Cash flow management
some managers will "manage" (increase/decrease) reporting of cash flows
Market pressure
pressures to manipulate cash flow categorization in the market place
Differences in CFO & Net Income
1. revenue is not the same as cash
2. gains/losses are only seen in net income
3. depreciation is only seen in net income
Calculating CFO from balance sheet
Net income + non-cash expenses (depreciation) + decrease in operating asset accounts (other than cash) - increase in operating asset accounts (other than cash) + increase in operating liability accounts (other than notes payable) - decrease in operating liability accounts (other than notes payable
Increase in assets (A/R, inventory)
out flow of cash
Increase in liabilities (A/P, accrued wage)
increases cash
Calculating CFI
Change in Gross PP&E or change in Net PP&E + depreciation
Dividends
(Old RE + NI)- New RE
Change in RE
Net income - dividends
Calculating CFF
change in equity + change in debt - new RE
Free Cash Flow (FCF)
distributable cash
Free Cash Flow Firm (FCFF)
Net Operating Profit after taxes (NOPAT) + depreciation - capital expenditures on PP&E (CFI) - increases in Net working capital (current assets- current liability)
Free Cash Flow Equity holders (FCFE)
Net income + depreciation - capital expenditures on PP&E (CFI) - increases in Net working capital (current assets- current liability) + increase in debt (new borrowings-repayment of old debt)
Standardization
to gain insight when comparing companies & finance
Flexibility
ratio analysis is not governed by GAAP; best analysts achieve the greatest benefits
Focus
ratios allow for quick discover of area that need investigation
Liquidity
ability to meet short-tem obligations
Current Ratio (liquidity)
Current assets/current liabilities
higher ratio= likelyhood of ability to meet short term obligations
Quick Ratio (liquidity)
Current assets - inventory/current liabilities
higher ratio= greater ability to meet short term obligations [Show Less]