Exam #1 Review
Exam #1 Review FIN 330
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This 6 page Study Guide was uploaded by Callie Lusk on Monday September 19, 2016. The Study Guide belongs to FIN 330 at Western Kentucky University taught by Rhoades in Fall 2016. Since its upload, it has received 68 views. For similar materials see Print of finance management in Finance at Western Kentucky University.
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Date Created: 09/19/16
Finance 330 Exam #1 Preparation Study Guide for Exam #1 CPA #1 What is a financial analyst? o Financial Analysts work closely with accounting departments but they focus more on the cash flow of the business. They often decide whether to undertake a new product line, acquisition, or divestment. What is a loan officer? o A loan officer works in banks or other lenders and is responsible for analyzing financial statuses as well as advising people about borrowing money. What are the distinctions between a corporation’s shareholders, directors, and officers? o Shareholders are the “owners” of the corporation They risk investing money in the company with the hope to gain a profit o Directors manage the corporation o Officers run the corporation Corporations are responsible for 80% of revenue in businesses What is the difference between an “S” and a “C” corporation? o “S” corporations are pass-through entities because the business owners are required to file and pay the taxes on personal returns o “C” corporations file a corporate tax return and pay taxes at corporate tax rates Shareholders pay taxes upon dividend distributions when they sell their shares No more than 100 shareholders in an “S” corporation **Refer to and know tax bracket information o 0-50k 15% Tax rate o 50-75k 25% o 75-100k 34% o 100-335k 39% o 335-10M 34% o 10-15M 35% o 15-18.33M 38% o 18.33M- 35% **The KY “C” corporation tax bracket for state income taxes are: o Net income up to 50k= 4% tax rate o Net income from 50k-100k= 5% tax rate o Net income from 100k+ = 6% tax rate Corporations incorporate in Delaware for the following reasons: o Cheaper startup cost o Better sense of privacy o More flexible laws o Low corporate income tax rates o Greater legal certainty The primary goal of financial management is to maximize and increase shareholder value Stakeholders include the following: o Suppliers o Customers o Owners o Employees o Anyone else directly involved in the financial aspects of a business CPA #2 Individuals are net suppliers for a company because they save more than they spend and the money the save is used by the banks for investments for businesses and governments o If individuals consume more than they are saving, there will be less money to be used for investments and this would drive up the required return. This would cause overtime, employment, salaries, and GDP to decline. Money markets are short-term markets o Firms use the funds from short-term markets for less than one year. Capital markets are typically used for fixed assets o Used over several years Transactions in short-term debt instruments or marketing securities take place in the money market. Investment banking institutions are able to use the expertise developed through acquisition. Financial institutions, such as investment banks, provide expertise in the acquisition funds CPA #3 Financial Crisis o Mortgages are typically issued by commercial banks to secure the loans made o A subprime mortgage is a type of loan granted to those with credit scores less than 600, which was done. o The investment banks grouped mortgages together into mortgage- backed securities, which were made by investment banks The securities were then sold to investors. o Rating agencies were being paid by the investment companies Capital Gains and Losses o Can be long-term or short-term If it’s more than one year, it’s a long-term gain/loss If it’s less than one year, it’s a short-term gain/loss o If you sell investments that were held for less than a year, you’ll pay regular income tac rates on your gains CPA #4 The income statement is also called the profit-and-loss statement because it shows the number of gains and losses that a company has in a given period. IN reviewing the income statement of a profitable company, once can see it begins with sales revenue at the top and ends with net profits after taxes at the bottom. Had there been a loss for the year, the final result would have been a net loss after tax. Diluted earnings per share is the profit for a reporting period per share of common stock outstanding during that period. o The measurement includes the number of shares that would have been outstanding during that period if the company had issued common shares for all potential dilutive common stock outstanding during the period. Dilutive common stock outstanding reflects all common stock outstanding plus the common stock that would also be outstanding if executive stock options, equity warrants, and convertible bonds were converted into common shares. Balance sheets balance the forms assets against its financing, which can be either debt or equity. o “Capital” can either be debt capital or equity capital. The total value of all of the firm’s assets should equal the sum of the short- term debt plus stockholders equity An integral part of shareholder’s equity is the amount of outstanding shares a company owns, meaning the amount of company stock that has been sold to investors and not re-sold to the company. CPA #5 Gross Profit Margin o Sales-COGS/Sales o Also computed: GP/Sales Net Profit Margin o Net income/Sales Return on Total Assets o Also known as ROI o Net income/sales Return on Equity o Earnings available to common stockholders/common stockholders’ equity Earnings per Share o Earnings available to common stockholders/number of shares of common stock outstanding Inventory turnover o Cost of goods sold/inventory Average payment period o Accounts payable/(annual purchases/365) Total Asset turnover o Sales/total assets Current Ratio o Total liquid assets (current assets) /total liquid liabilities (current liabilities) Quick Ratio o Current assets-inventory/current liabilities Debt Ratio o Debt/total assets Debt-to-Equity Ratio o Debt/common stock o Similar to the current ratio, the difference is that it does not include assets that cannot be converted to cash quickly. Fixed-payment Coverage ratio o (Earnings before interest and taxes + lease payments)/ annual interest payments Price-to-earnings ratio o Market price per share of stock/earnings per share Market to Book o Market price per share of common stock/ book value per share of common stock Cross-sectional analysis o A type of analysis an investor, analyst, or portfolio manager may conduct on a company in relation to that company’s industry or industry peers CPA #6 DuPont analysis system o Consists of very general measures, drawing from the broadest values on the balance sheets and income statements. o Profitability ratios measure the rate at which either sales or capital is converted into profits at different levels of the operation. o Turnover or efficiency ratios are important because they indicate how well the assets of a firm are used to generate sales and/or cash. o Leverage ratios measure the extent to which a company relies on debt financing in its capital structure. Operating Cash Flow o Cash generated from normal operations of a business. Cash flows from: Operating activities Investing activities Financing activities Operating cash flow = Net income + depreciation – taxes (+/-) change in working capital Net Operating profit after tax o Also known as NOPAT o A measure of profit that excludes the costs and tax benefits of debt financing. NOPAT = Operating income x (1 – tax rate) Free Cash Flow o The amount of cash a firm has after the cost of its operations and spending on capital. CPA #7 CPA #7 deals with using the financial calculators. Here are the keys to remember o N- the number of periods o I/Y- the interest rate per period o PV- present value o PMT- the amount of payment (only used for annuity calculations) o FV- future value o CPT- compute key An annuity is a stream of equal periodic cash flows over a specified time period. There are two types of annuities o The first is called an ordinary annuity The cash flow occurs at the end of each period. o The second is called an annuity due The cash flow occurs at the beginning of each period. Perpetuity o An annuity with an infinite life It never stops providing its holder with a cash flow at the end of each year. CPA #8 Mixed Stream o A stream of unequal periodic cash flows that reflect no particular pattern. VERY IMPORTANT TABLE TO KEEP IN MIND TIME AMOUNT NUMBER OF ENTRIES INTO THE FINANCIAL PERIOD (X) YEARS (Y) CALCULATOR ARE AS FOLLOWS: Year 0 $0 CFo: 0 ENTER Year 1 $x Y Co1: 30000 ENTER FO1: 1 ENTER Year 2 X Y Co2: 25000 ENTER FO2: 1 ENTER Years 3-9 X Y Co3: 10000 ENTER FO3: 7 ENTER Year 10 X Y Co4: 25000 ENTER FO4: 1 ENTER If CO5 appears and is not 0, then: 0 ENTER THEN: NPV 12 ENTER CPT Present value = CF / r **Know how to prepare a cash flow worksheet
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