Study Guide for test 3
Study Guide for test 3 Fin 4310
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BUSN 1301 - 006
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This 5 page Study Guide was uploaded by Laura Notetaker on Sunday November 1, 2015. The Study Guide belongs to Fin 4310 at University of Texas at El Paso taught by Dr. Oscar Varela in Summer 2015. Since its upload, it has received 54 views. For similar materials see Managerial Finance in Finance at University of Texas at El Paso.
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Date Created: 11/01/15
Study Guide Test 3 Pro Forma: Common stock: has 2 elements. Both of these elements are the price the stock was sold for by the firm. Common stock at par Paid in surplus Example: If a stock being sold for $10 and the par value is $1: Common stock at par would be $1 and paid in surplus would be $9. When is stock sold? As an IPO or on seasonal offering after the IPO To calculate cash and marketable securities and notes payable: August: Assets: Accounts receivable + inventory + net plant and equipment = $5010 August: Liabilities: Accounts payable + income tax payable + other accrual + mortgage payable + common stock + retained earnings = $5013 This means that we have more financing Cash should be $50*. That gives total assets = $5010 +$50= $5060 *this $50 are stated in the plans of the company. It says that the company should have at least $50 on their balance sheet. So, liabilities and stockholder’s equity = $5060-$5013= $47. Notes payable will be $47 on the balance sheet. For September: Total assets = $4773 Total Liabilities and stockholder’s equity= $4932 This means that we have more financing and there is no need for a loan. Cash= $159* *$4932- $4773= $159. Order to make pro forma statements: 1. Income statement 2. Balance sheet 3. Cash Budget Determine cash and marketable securities and notes payables last. Study Guide Test 3 Sample questions: 1. If retained earnings = 80,000 Net income = 20,000 Dividends = 29,000 The new balance of retained earnings = (80,000 +20,000) – 29,000 = $71,000 2. Conceptually, inventory for July 2016 = June inventory 2016 + production – Cost of goods sold. 3. 20% of sales is collected on the same month, 80% remaining is collected as: 40% is collected one month later and 60% is collected two months later. Cash = (48 + 72 + 64) = 184 Accounts Receivable = September (240 – 48) + August(160 – 64) = $288 Sales: July August September 150 200 240 20% collected 30 40 48 80% remaining 120 160 40% collected 48 64 60% collected 72 4. April November Cash & mkt sec 0 379 Note Pay 767 0 Total assets 5468 4604 Total liabilities 4701 4983 Chapter 2: Study Guide Test 3 There are savers and borrowers. Primary securities are sold with no financial intermediaries, are sold by deficit units and are sometimes called indirect. Secondary securities are what intermediaries sell and are sometimes called direct. Efficiency function: Allocational: are you free to allocate your money as you wish, getting the highest return for that risk. It is a secure capital. Operational: Can you transfer savings to investors in a less costly way. Promotional: Whether markets require full disclosure and they have the least fraud. Inside trading laws. Efficiency Prices: Weak form: Price reflects historical information well. Semi-strong form: Price reflects current public information well. Strong form: Price reflects all information, including inside information. End of year effect is an exception to the efficient price. Airline crashes do not affect the stock price. Security Act 1933 Security Exchange Act 1934 Investment Company Act 1940: Regulate the investing company. Tried to get wealth back into the market. It was the basis for hedge funds. Investment Advisor Act 1940 The supply of funds equals to the demand of primary securities. Surplus units are the ones that buy primary securities. The demand of funds equals to the supply of primary securities. Deficits units sell primary securities. Intermediaries sell secondary securities. A mortgage is a primary security. Efficiencies: Semi-strong: it contains public and current securities Promotional needs to be free of fraud and full disclosure. Study Guide Test 3 If you use a credit card to sell a primary security it is considered a transaction in the primary market. The primary market is where brand new securities are sold such as IPOs. A secondary market is where transactions that already been traded such as the transactions in the NYSE. The equilibrium is at the interest rate. Example: Earnings 1 100,000 Earnings 2 110,000 Expenditures 1 Expenditures 2 The interest rate 5% What is the maximum expenditure that you can spend at the end of year 1? 100,000 + (110,000/(1.05)) = $204,761.90 What is the maximum expenditure that you can spend at the end of year 2? 100,000 (1.05) + 110,000 = $215,000 What is the slope of the budget constraint? $204,761.90- 0/ 0- $215,000 = -0.95238. This also equals to 1/1.05. If a person wants to spend $103,000 at the end of year 1, what is the maximum that person can spend in year 2? Payoff the loan of 3,000 Earnings in year 2: 110,000 Pay interest 5% 150 Amount borrowed: 3,150 Total 3,150 Total expenditure in year 2: $106,850 What happens if the interest rate 10%? The line will have a flatter slope. The slope will equal to 1/1.10 Expenditures in year 1 will be lower Expenditures in year 2 will be higher Because the interest rate increased, this will cause the spending to decrease. Sample questions: Earnings yr 1 = 30,000 Study Guide Test 3 Earnings in yr 2 = 35,000 Interest = 10% 1. 30,000 + (35,000/ 1.10) = 61,818.18 2. 35,000 + (30,000 x 1.10) = 68,000 3. 1.00 4.1.10 5. 5,000 x 1.10 = 5,500 + 35,000 = 40,500
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