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by: Daphne Vantine


Marketplace > University of Delaware > Finance > FINC311 > FINC 311 WEEK 1 CHAPTER 1
Daphne Vantine
GPA 3.4
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FREE!! Notes from Week 1 of the Spring 2016 semester in Dr. Kwansa's FINC 311 class.
Intro to Finance
Dr. Kwanza
Class Notes




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This 5 page Class Notes was uploaded by Daphne Vantine on Thursday February 25, 2016. The Class Notes belongs to FINC311 at University of Delaware taught by Dr. Kwanza in Fall 2015. Since its upload, it has received 86 views. For similar materials see Intro to Finance in Finance at University of Delaware.


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Date Created: 02/25/16
FINC311: WEEK 1 CHAPTER ONE: INTRODUCTION TO CORPORATE FINANCE     Capital Budgeting : which long term investment projects should the firm take on Capital Structure: where to get money to finance investments Working Capital Management : managing everyday needs Goal of the Firm: Maximize shareholder wealth/maximize price of common stock Benefits of Maximizing Shareholder Wealth: •   Direct benefit to shareholders •   Society benefits because businesses compete to create wealth o   Capital resources are scarce o   Stock market directs resources to areas/companies that are doing better (more efficient) o   Market = mechanism of distribution •   Stock price = result of financial and operational decisions Profit Maximization •   Efficient use of resources •   How business makes decisions rationally •   Not specific to time frame •   Goals are not precise •   Ignores uncertainty and timing Business Organization 1.   Sole Proprietorship •   Owned by individual - holds title to assets •   Lots of control •   Taxes on individual level •   Unlimited liability •   Individual's assets are fair game •   Difficult to raise capital 2.   Partnerships •   General Partnership o   Each partner equally responsible (joint unlimited liability) o   Easy to form o   Partners have absolute control o   Single taxation o   Pool larger amount of funds •   Limited Partnership o   Several partners can have limited liability but one must have unlimited liability o   Name of limited partners may not appear in name of firm o   Limited partners don’t make decisions 3.  orporations C Corporation •   Separate legal entity o   Can sue, be sued, purchase/sell/own pr operty •   Shareholders are the legal owners •   Life continues with transfer of ownership •   Limited liability •   Easy to raise large amounts of funds o   Issue stock, bonds •   Taxed separately (on profits and again on dividends) •   Difficult to form (regulations) S Corporation •   Hybrid-characteristics of partnership/corporation Do not pay corporate taxes •   •   Owner must be US citizen •   Benefits of legal status   Owners can protect personal assets • •   Limited liability •   No more than 100 owners – owners receive salaries LLC •   Do not pay corporate income taxes •   Unlimited owners Benefit Corporation •   Triple bottom line o   Operate at corporate level o Maximize shareholder wealth   o   Benefit to society Small Business have large impact (60.9% of firms) •   Create jobs •   Govt Must provide environment for them to flourish •   Politicians focus on them issue additional Board of stock; declare dividends; set Directors company direction CEO financial planning VP VP VP Human Marketing Finance/CFO Resources Traditional Statement of Cash Flows •   Sections o   Operating: day to day operations o   Investing: sale/purchase of fixed assets o   Financing: cash from long term loans, cash proceeds from issue of stock and bonds, payment of interest and dividends •   Everything takes longer/costs more than what management anticipates o   Be conservative: underestimate revenues, overestimate expenses o   Keep cash flows adequate o   Payroll is a top financial priority – adequate cash at all times to meet payroll o   Companies must have cash flows to make tax payments o   Pay debts on time Evaluating a Firm’s Financial Performance •   Public firms must provide public financial statements •   Private firms must supply statements when seeking loans •   Provides shareholders/principals a mechanism to evaluate the performance of stewardship/agents/management/CEO •   Predict future profitability •   Confirmatory: IRS, SEC, etc. confirm what companies say •   Creditors are concerned about… o   whether a company will square up – analyze financial statements (what is company’s capital structure – mix of debt vs. equity?) o   How well has company serviced its debt (on time)? o   What are the sources of debt repayment? Want to see companies with adequate cash flows from operations •   Investors are concerned about… o   Future earnings capacity of the business – make buy/sell decisions on their stock o   What is the past financial performance of the company? – look to financial statements o   What is the growth and stability of earning in the company (steadily making profits year to year? o   How competitive is the company within its industry? •   Managers are concerned about… o   What are the creditors/investors are concerned about? o   Strengths/weaknesses of company o   What changes need to be made in order to improve performance? Analysis 1.  omparative Analysis (aka horizontal analysis) Place 2 consecutive statements side -by-side: look at each account for 2 years, notice •   differences à record differences in dollars and percentage terms 2.  ommon Size Analysis (vertical) •   Look at aggregate account on and calc ulate percentages of accounts in their relationship to these aggregate accounts Look at revenue changes •   •   Were changes in revenue due to changes in price/volume/both? Things to Consider •   Look @ COGS and inventory method (FIFO/LIFO, LIFO reflects current prices and revenues) o   What are changes in COGS relative to changes in revenue (want to be equal) •   Gross Profit changes proportional to changes in sales (stable Gross Profit Margin) •   Look at Net Income/Profit: significant declines are a red flag…why? à signify needs for better cost controls; strategy: get rid of long term assets to eliminate depreciation and interest expense and beef up net profit Net Tangible Asset (Net Worth) •   Value of company owned by shareholders/owners after debts •   ???????????? = ????????????????????  ???????????????????????? − ????????????????????  ???????????????????????????????????????????? − ???????????????????????????????????????????? − ????????????????????????????????????  ???????????????????? 3.  inancial Ratios: compare performance of companies relative to their industry •   Dun & Bradstreet: find ratios •   Risk Management Associates: comparative purposes •   Liquidity: how well company meets short term obligation ▯▯ o   ????????????????????????????  ???????????????????? = ▯▯ o ????????????????????  ???????????????????? =  ▯▯▯▯▯   quickly turned into cash; inventory is slow moving   ▯▯ à o   ????????????????????????????????  ????????????????????????????????????????  ????????????????????????????????  ???????????????????? = ▯▯ à faster collecting revenue, the better ▯▯ you are •   Solvency: how well company meets long term obligations (debt payments) ▯▯ o   ????????????????  ???????????????????? = ▯▯ ▯▯ o   ???????????????? − ????????????????????????  ???????????????????? = ▯▯▯▯▯    ▯▯▯▯▯ ▯▯▯▯▯▯▯ o   TIE: Times Interest Earned= Earnings Before Interest & Taxes /Interest Expense §  are they making enough to cover interest expense ? •   Profitability: ability to generate profits from revenues o   how good is company at running its business? o   Is management performing better or worse? o   Is company making money? o   How do profits compare with competitors’? o   Net margin: how much of total sales is the company able to keep after paying off all expenses? ▯▯▯  ▯▯▯▯▯▯ §   ????????????????????????  ???????????????????????? =  ▯▯▯▯▯  ▯▯▯▯▯▯▯ ▯▯▯  ▯▯▯▯▯▯ §   ???????????? =  ▯▯▯▯▯  ▯▯▯▯▯▯ ▯▯▯  ▯▯▯▯▯▯ §   ???????????? =  ▯▯▯▯▯  ▯▯▯▯▯▯ ▯▯▯▯▯▯ 4.  arket Ratios o   Earnings per Share ▯▯▯  ▯▯▯▯▯▯ ???????????? = ▯▯▯▯▯▯  ▯▯▯▯▯▯  ▯▯▯▯▯▯▯▯▯▯▯ o   Price Earnings Ratio: how much the stock market is willing to pay for a dollar of earnings of the company; §   investors are looking for earnings to come from normal operations (quality of earnings) §   also look to future earnings potential – market sees something more in the potential for company B (table below) §   PE=Market Price/EPS Company A Company B Mkt Price 10 20 EPS 2 2 o   Dividend Payout Ratio: high DPR is attractive to investors; when company decreases DPR, investors will become concerned §   ????????????????????????????????  ????????????????????????  ???????????????????? = ▯▯▯▯▯▯▯▯  ▯▯▯  ▯▯▯▯▯ ▯▯▯ o   Dividend Yield ▯▯▯ §   ???????? = ▯▯▯▯▯▯  ▯▯▯▯▯ 5.  sset Management Ratios: generate revenues from corporate assets o   Inventory Turnover: how many times in a year inventory is sold; wants to be higher or increasing b/c you don’t want inventory sitting on the shelves ▯▯▯▯ §   ???????? = ▯▯▯▯▯  ▯▯  ▯▯▯▯▯▯▯▯▯ o   Fixed Assets Turnover R atio: capital intensive industries (manufacturing, pharm); signify investment in equipment/machinery; shows ability of company to generate sales from fixed assets ▯▯ §   ???????????????? = ▯▯ o   Total Asset Turnover Ratio ▯▯ §   ???????????????? = ▯▯ Fundamental Analysis •   Process of looking at company at basic level: looking at ratios to get better sense; must look at industry ratios for a standard; look at trends in industry and nationally •   Earnings (=profits): investors look at EPS as an indicator to compare companies to others •   EPS helps to predict future profitability o   Dividends are a predictor of how stock prices will move


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