Chapters 1, 3, & part of 16
Chapters 1, 3, & part of 16 FIN 326
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This 4 page Bundle was uploaded by Kali Muren on Monday February 1, 2016. The Bundle belongs to FIN 326 at University of Missouri - Kansas City taught by David Nicol in Spring 2016. Since its upload, it has received 33 views. For similar materials see Financial Management 2 in Finance at University of Missouri - Kansas City.
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Date Created: 02/01/16
Finance 326 C HAPTER 1 - O VERVIEW OF F INANCIAL MANAGEMENT Basic areas of finance: corporate finance = business finance, investments, financial institutions, and international finance. Investments: work with financial assets such as stocks and bonds; value of financial assets, risk versus return, and asset allocation; job opportunities: stock broker/financial advisor, portfolio manager, or security analysts. Financial institutions: companies that specialize in financial matters: banks, insurance companies, brokerage firms. International finance: an area of specialization within each of the above areas discussed. Need to be familiar with exchange rates, political risk, languages, and customs of other countries. Why study finance? Marketing: budgets, marketing research, marketing financial products. Accounting: dual accounting and finance function, preparation of financial statements. (Where did all the money come from, and where did it go? Where should it go? Should I invest?) Management: strategic thinking, job performance, profitability. Personal finance: budgeting, retirement planning, college planning, day-to-day cash flow issues. Financial management decisions: what long-term investments or projects should the business take on (capital budgeting)? What is going to benefit the company the most? How should we pay for the assets, using debt or equity (capital structure)? How do we manage day-to-day finances on the firm (working capital management)? Financial managers try to answer some, or all, of these questions. Positions include: Chief Financial Off(top financial ma;ager) treasurer(oversees cash management, credit management, financial; or controlle(oversees taxes, cost accounting, financial accounting, and data pro.essing) 3 major forms of business organization: Sole proprietorship: easiest to start, least regulated, single owner keeps all the profits & unlimited liability, equity capital limited to owner’s personal wealth, difficult to sell, taxed once as personal income, limited to the life of the owner. Partnership: general & limited. Two or more owners, more capital available, relatively easy to start, income taxed once as personal income, unlimited liability (general or limited partnership), partnership dissolves when one dies or desires to sell, difficult to transfer ownership. Corporation: C-Corp, LLC (limited liability), & S-Corp (small business corporation). Limited liability, separation of ownership and management (could be good or bad (depending on if there is an agency problem)), transfer of ownership is easy, easier to raise capital, unlimited life, double taxation (income taxed at corporate rate & dividends taxed at personal rate, while dividends are not tax deductible). What should be the goal of a corporation? Max profits? Min costs? Max market share? - Maximize the market value of the existing owner’s equity. - Maximize the current value per share of the company’s existing stock. What should we do to maximize owner wealth? Outsourcing? Off-shoring? Corporate support of charities? Sarbanes-Oxley Act (SarBox, 2002) - Driven by corporate scandals: Enron, Tyco, WorldCom, and Adelphia - Intended to strengthen protection against accounting fraud and financial malpractice - Compliance very costly: firms have been driven to go public outside the US & go private “go dark” The Agency Problem: Agency Relationship - Principal hires an agent to represent its interests - Stockholders (principals) hire managers (agents) to run the company Agency Problem - Potential for conflict of interest between principal and agent Management Goals and Agency Cost - Motivate the team to raise the price of the stock Do managers act in the shareholder’s interest? Managerial compensation: incentives can be used to align management and stockholder interests & the incentives need to be carefully structured to insure that they achieve their goal. Corporate control: threat of a takeover may result in better management. Other stakeholders. Primary VS Secondary markets - dealer markets (OTC) - auction markets (match buyer & seller) - listed vs over-the-counter securities: NYSE & NASDAQ C HAPTER 3 - F INANCIAL R ATIO ANALYSIS Common-size balance sheets: all accounts = percent of total assets Common-size income statements: all line items = percent of sale or revenue Standardized statements are useful for: comparing financial information year-to-year & comparing companies of different sizes, particularly within the same industry. Allow for comparison of company results through time or between companies. Ratio analyses are used both internally and externally. - what is the ratio trying to measure? why is that information important? - how do these ratios relate to each other? Categories of financial ratios: Liquidity ratios (short-term solvency) Financial leverage ratios (long-term solvency) Asset management (turn-over ratios) Profitability ratios Market value ratios LIQUIDITY R ATIOS Current Ratio = Current Assets (CA) / Current Liabilities (CL) Quick Ratio “acid test” = (CA – Inventory) / CL Cash Ratio = Cash / CL Debt/Equity = Total Debt (TD) / Total Equity (TE) Equity Multiplier (EM) = Total Assets (TA) / OR EM = 1 + D/E Total Debt Ratio = (TA – TE) / TA Times Interest Earned = EBIT / Interest Cash Coverage = (EBIT + Depreciation) / Interest Receivables Turnover = Sales / Accounts Receivable Days’ Sales in Receivables = 365 / Receivables Turnover Inventory Turnover = COGS / Inventory Days’ Sales in Inventory = 365 / Inventory Turnover Payables Turnover = COGS / Accounts Payable Days’ Costs in Payables = 365 / Payables Turnover Total Asset Turnover (TAT) = Sales / TA Capital Intensity Ratio = TA / Sales Profit Margin (PM) = Net Income (NI) / Sales Return on Assets (ROA) = NI / TA Return on Equity (ROE) = NI / TE Earnings per Share (EPS) = NI / # of shares PE Ratio = Price per Share / EPS Price/Sales Ratio = Price per Share / Sales per Share Market-to-Book Ratio = Price per Share / Book Value per Share Enterprise value: Total Market Value (of the sto+ Book Value (of all liabi– Cash) EBITDA ratio: Enterprise value / EBITDA EBITDA = EBIT + depreciation & amortization ROE = NI / TE = Net Income / Total Equity OR PM * TAT * EM (known as the DuPont Identity) PM = NI / Sales TAT = Sales / TA EM = TA / TE Profit Margin (PM) measures the firm’s operating efficiency & how well does it control costs & pricing Total Asset Turnover (TAT) measures the firm’s asset use efficiency & how well does it manage them Equity Multiplier (EM) measures the firm’s financial leverage on equity Internal and Sustainable Growth Payout and Retention Ratios: C HAPTER 16 Sources of cash: increase long-term debt, increase equity, increase current liabilities, decrease current assets, and decrease fixed assets. Uses of cash: decrease long-term debt, decrease equity, decrease current liabilities, increase current assets, and increase fixed assets. Operating cycle = inventory period + accounts receivable period. - inventory period: time inventory sits on the shelf - accounts receivable period: time it takes to collect on receivables Time required to receive inventory, sell it, and collect on receivables generated from the sale of inventory
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