Fin 3080 Professor Xin Li Study Guide for Exam 1
Fin 3080 Professor Xin Li Study Guide for Exam 1 FIN 3080C
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This 3 page Study Guide was uploaded by Brady Zuver on Thursday September 8, 2016. The Study Guide belongs to FIN 3080C at University of Cincinnati taught by Xin Li in Fall 2016. Since its upload, it has received 18 views. For similar materials see Business Finance in Finance at University of Cincinnati.
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Date Created: 09/08/16
Fin 3080 Professor Xin Li Exam 1 Study Guide Chapter 1 Capital Budgeting: The process of planning and managing a firm’s long term investments Capital Structure: The mixture of long term debt equity maintained by a firm Working capital: A firm’s short term assets and liability Sole Proprietorship o Simplest form of business and least regulated form of organization o All business income is taxed as personal income and the owner has unlimited liability Unlimited liability where the owner might have to give up personal assets as a form of payment to creditors o Owners are managers and the business is limited to the owner’s life o Difficult to transfer ownership o Difficult to raise capital funds General Partnership: All partners have equal share in gains and losses, and all have unlimited liability in all debts Limited partnership: One or more general partners will run the business and have unlimited liability and One or more limited partners who do not actively participate in the business Corporation: Business that is created as a distinct legal entity (the company is basically its own person) that has perpetual life, with limited liability (debt spread among shareholders), also has with double taxation Agency relationship: Relationship between stockholders (the principal) and management (the agent) Agency Problem: The possibility of conflict of interest between the stockholders and management of the firm o The goals of managers may be different than those of stockholders o Stockholders want maximization of stock prices o Utilities might not only be tied to money May be tied to convenience, level of difficulty, time to complete, etc. Financial Assets: Securities issued by firms, individuals and governments to raise funds o Stocks, Bonds, Debts Real assets: Physical Assets such as Land, Real Estate, Inventory and Human capital Primary Market: Original sale of securities by governments or corporations o Corporation is the seller and the transactions raises money for the corporation Securities and Exchange Commission (SEC) o Public offerings of debt and equity need be registered with the SEC Initial Public Offering (IPO) o Associated with high first day returns Seasoned Equity Offerings (SEO) o Firms sell additional shares directly to the public through another public offering Secondary Market: One owner or creditor selling to another. Securities bought after the original date with cash flowing between investors Dealers: Buy and sell for themselves at their own risk – Car dealers Brokers and Agents: Match buyers and dealers, not own them – Real Estate Auction markets: Physical location (ex: Wall St) where buying and selling is done by a dealer o Most large firms have equity in Auction Markets (ex: NYSE) Dealer Markets: Over-the-Counter Market o Most trading in debt securities takes place in OTC (ex: NASDAQ) Chapter 2 Balance Sheet: Summary of what the firm owns (assets), what they owe (liabilities), and the difference between the two (equity) o Left Side Assets Cash, Accounts Receivable (Money owed to the firm by customers), Inventory, Fixed Assets o Liquidity: How easy and fast the asset can be cashed without significant loss of value Cash is perfectly liquid (always first), Fixed assets hardest to transfer (always last) Always in decreasing order of liquidity o Right Side Liabilities Current Liabilities: Accounts Payable, Notes Payable Long-Term Debt Shareholder Equity Listed in order of shortest life to longest (Needs paid first needs paid last) o Equity: The Difference between the total value of the assets and the total value of liabilities Income Statement: Measures a firm’s performance over a period of time (usually a quarter of a year) o First thing reported is generally Revenue or Net Sales, followed by Cost and Expense from the firm’s primary operation. Corporate Taxes: Table 2.3 in CH 2 notes shows the marginal tax rates o Average Tax Rate: Tax Bill divided by the taxable income o Marginal Tax Rate: The rate of the extra tax you have to pay if you earned one more dollar Cash Flow: The difference between the number of dollars that came in and the number that went out o Operating Cash Flow: Cash flow from normal business activities (See formula sheet provided by instructor) o Capital Spending: Net spending on fixed assets o Change in Net Working Capital: Net change in current assets to liabilities for the period of interest Chapter 3 Source: Cash Inflow o Decrease in assets (selling assets) o Increase Liabilities (borrowing more) Use: Cash Outflow o Increase in Assets o Decrease Liabilities and Equity Ratio Analysis: Financial ratios help compare firms of different sizes ROA Measures profit per dollar of assets input ROE Measures how stockholders did during the year Market Value Measures o Market-to-book ratio (Market value is only available for publicly traded companies) Uses of Financial Statements o Performance Evaluations, Planning for future o For creditors, investors and suppliers to look at, comparing to competitors and identifying merger targets Chapter 5 Future Value (FV): Cash value of an investment at some time in the future Principal: The original investment amount Simple Interest: The interest is not reinvested, the interest earned is only on the initial principal Compound Interest: The process of leaving money and any accumulated interest in an investment for more than one period Present Value: The current value of future cash flows discounted at the appropriate discount rate. Single Period Present Value Formula PV=$1/(1+r) Multiple Period Present Value Formula PV=$1/(1+r) t PV calculated by each CF discounted separately o $1000 FV every year for 5 years, interest 6% o To find the present value for first year o $1000/1.06 o For any year after the first year o $1000/1.06N o N=number of compounding o 2nd year N=2, 3rd N=3 and so on o After finding PV for each cash flow, ADD them all up to find the total Present Value Start in final year (5th) with $1000 Discount ($1000/1.06) = 943.4 o Add $1000 for the FV of the second year for total of $1943.4 Discount (1943.4/1.06) = 1833.4 o Add $1000 for 3rd year for total of 2833.4 Discount (2833.4/1.06)= 2673.01 o Add $1000 for second year =3673.01 Discount (3673.01/1.06)= 3465.11 o Add $1000 for first year of investment = 4465.11 Discount for final PV (4465.11/1.06) =4212.37 o You need to invest 4212.37 today at 6% to be able to withdraw $1000 each year for 5 years
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