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Ch. 4 Notes

by: Caitlyn Myers

Ch. 4 Notes EC 309

Caitlyn Myers
GPA 3.35
Intermediate Macroeconomics
Daniel Otto

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Intermediate Macroeconomics
Daniel Otto
Class Notes
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This 3 page Class Notes was uploaded by Caitlyn Myers on Friday February 6, 2015. The Class Notes belongs to EC 309 at University of Alabama - Tuscaloosa taught by Daniel Otto in Spring2015. Since its upload, it has received 127 views. For similar materials see Intermediate Macroeconomics in Economcs at University of Alabama - Tuscaloosa.


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Date Created: 02/06/15
Chapter 7 Accounting for Financial Management Free cash ows can help to determine the value of a rm Net CFNnon cash renues noncash carges Hope that expendatures on xed assets will improve the rm in the future leading to more cash ows in A net change in cash that is negative is not good What is free cash ow FCF Why is it important FCF is the amount of cash available from operations for distribution to all investors after making th enecessary investments to support operations A company39s value depends on the amount of FCF it can generate 5 Uses of FCF Cac Pay interest on debt Pay back principle on debt Pay dividends Buy back stock Buy nonoperating assets eg Marketable securiteis FCF 1 Earning before int and taxes1tax rate net operating pro t after taxes 2 Operating current assetsoperating current liabnet operating working capital 3 Net operating working capitaloperating long term assetstotal net operating capital 4 total net operating capital this yeartotal net operating capital last yearnet investment in operating capacity 5 net operating pro t after taxesnet investment in operating capitalfree cash ow Ex NOPATEBT1tax rate NOPAT12 17 490104 10464 NOPAT11125460 change10464125460125460 9165 What are operating current assets Operating Current Assets are the CA needed to support operations 0 OP CA inc cash inventory receivables 0 Op CA not inc shortterm inv because not part of operations What are operating current liabilities Operating current liabilities are the CL resulting as a normal part of operations Total Net Op Cap Operating CapitaNOWC Net xed assets Operatig Capital this is equal to investor supplied capital 0 Notes payabeLT bonds preferred stock common stock Chapter 4 The Monetary System 0 Money the stock of assets that can be readily used to make transactions 0 Store value 0 Unit of account 0 Medium of exchange Two Types of Money 0 There are two types of money 0 Fiat money no intrinsic value believe it to have value ex Dollars o Commodity money intrinsic value ex Gold How the Quantity of Money is Controlled The governments control over the money supply is called monetary policy 0 The federal reserve is the central bank of the US 0 The primary way the Fed Controls the money supply is through openmarket operations 0 This is through the buying and selling of gov39t bonds 100 Reserve Banking 0 The money supply is not affected Fractional Reserve Banking 0 People save the money they don39t need right now People borrow the money they don39t have right now Banks make loans and charge interest Banks still keep some reserves on hand for depositors to make withdrawals 1rr1000 Total Money Supply Bank Capital Leverage amp Capital Required o It takes nancial resources to get a bank going 0 A bank can be started with a combination of money and some debt 0 Bank39s capital owners equity 0 Equity meaning essentially having stok in the bank reap pro ts and losses Leverage Ratio Total assetscapital Leverage is the use of borrowed money to supplement exisiting funds for the purposes of investments 0 What happens when the bank s assets fall just 5 o The assets are now worth 950 instead of 1000 0 Use capital to balance 0 This causes investors to pull their money out causing a bank run 0 Another regulation can be around the quotsafety of assets heldquot A model of the Money Supply 0 Money supply M currency C Demand Deposits D 0 Monetary Base B Currency C Reserves R c We want to solve for the money supply as a fraction of three exogenous variables B rr cr 0 rr the fraction of deposits that banks hold in reserveRD A re ection of bank policy and government regulation 0 cr the amount of currency people hold as a fraction of their demand depositsCD a re ection of the preference of households about the form of money they wish to hold MCD BCR Ratio of MBCDCR1D1Dcr1crrr MBcr1crrr Mcr1crrrB money multiplier mcr1crrr The lower the reserve to deposit ratio rr the more loans banks make thus a decrease in this ratio increases the money supply The lower the currency to deposit cr ratio the fewer dollars in the monetary base that the public holds in currency This means that banks hold mor eof the base and therefore they make more loans Instruments of Monetary Policy OpenMarket Operations purchases and sales of gov39t bonds 0 Primary thing the FOMC uses to control money supply 0 Selling bonds taking money out of the system buyingputting money in the system Discount window banks can borrow from the Fed to meet their reserve requirement 0 The lower the rate the more banks are willing to borrow Term Auction Facility the Fed determines the amount they are willing to lend The loan goes to the highest bidders ie Those with acceptable collateral and with the highest offered rate Reserve Requirementthe higher the reserve requirement the lower the money supply 0 The reserce reqirement is different from the reserve ratio 0 The min amt banks have to keep in the bank as per rules from gov39t


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