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Week 2 Notes for FIN 305 Fundamentals of Finance

by: Alia Coughlan

Week 2 Notes for FIN 305 Fundamentals of Finance FIN 305

Marketplace > Colorado State University > Business > FIN 305 > Week 2 Notes for FIN 305 Fundamentals of Finance
Alia Coughlan

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About this Document

Week 2 Notes I am uploading them early since I will not be in class on Friday
Fundamentals of Finance
John D. Hopkins
Class Notes
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This 5 page Class Notes was uploaded by Alia Coughlan on Thursday September 1, 2016. The Class Notes belongs to FIN 305 at Colorado State University taught by John D. Hopkins in Fall 2016. Since its upload, it has received 15 views. For similar materials see Fundamentals of Finance in Business at Colorado State University.


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Date Created: 09/01/16
Week 2 Notes for FIN 305 Fundamentals of Finance 8/29 Go over Balance Sheet Points – Found on Canvas Continue Chapter 4 – Review of Accounting Depreciation Cont Half­Life Concept Ex: ­Straight Line Depeciation = $200,000/5 years = $40,000 Half Life Year 1 = $20,000 Year 2 = $40,000 Year 3 = $40,000 Year 4 = $40,000 Year 5 = $40,000 Half Life Year 6 = $20,000 *Notice that even though it is a 5 year depreciation, because there is a half­life on the first year, it adds  another year to the depreciation MACRS ­Double declining basis depreciation ­Good deal for tax payers ­Also has half­year depreciation ­Tables provide annual percentages *Tables will be given to you Income Taxes ­Marginal  = Tax rate on the next dollar of income ­Average = Taxes Paid(Liability)/ Taxable Income The Progressive Tax System ­Average tax rate increases with the level of taxable income ­Marginal Tax Rate > Average Tax Rate *You will not be asked to calculate the tax liability  Differential Tax Treatment ­Interest paid on a corporate debt is a tax deductible expense ­Dividends paid to common & preferred stockholders are not tax deductible ­Dividends received by a corporation from another corporation have at least 70%  exclusion from taxable income *Corporations want dividend income Market Value VS Book Value ­Book Value is found on the balance sheet ­Gross Fixed Assets – Accumulated Depreciation = Net Fixed Assets ­Net Fixed Assets is the Book Value of Assets ­Book Value is recorded at cost Determining Factors Between Market and Book Values ­Time Since Acquisition (more time equals more difference) ­Inflation (higher inflation equals more difference) ­Tangible VS Intangible Assets (Do not need to know this) ­Time until the liability must be paid off *Market Value has a less complex relationship *At maturity, Market Value (M.V.) = Book Value (B.V.) 8/31 *Total Market Value of Equity = Market Price per Share x Number of Shares Outstanding *Book Value = Total Stockholders Equity Chapter 5 Main Points: ­Understanding financial ratios ­Compute profitability, liquidity debt, and asset utilization ­Compare financial data over time and against other companies Why Use Ratios? ­To interpret raw numbers on financial statements ­To allow comparison *Financial Ratio = Number that expresses the value of one financial variable relative to another Categories of Ratios ­Profitability ratios = Measures how much company revenue is used up by expenses ­Liquidity ratios = How quickly a company obtains cash ­Debt ratios = How much company owes to others ­Asset activity ratios = How a company uses its assets ­Market value ratios = How the market value of company’s stock compares with its accounting  value *Reminder, Ratios are not the answer, they just give us the opportunity to ask more questions Profitability Ratios ­Gross Profit Margin = Measures how much profit remains out of each sales dollar ­Show how well a firm generates revenue compared to its COGS ­Gross Profit Margin = Gross Profit / Sales ­Operating Profit Margin = Measures how much profit remains out of each sales dollar ­Operating Profit Margin = EBIT / Sales ­Net Profit Margin = Measures how much profit is left after all expenses are subtracted ­Net Profit Margin = Net Income / Sales ­Return on Assets = How much income each dollar of assets produces on average ­Return on Assets (ROA) = Net Income / Total Assets ­Return on Equity = Measures the average return on the firm’s capital  ­Return on Equity(ROE) = Net Income / Common Stockholders Equity *Return Ratios tell us the amount of money that is being returned to the company Liquidity Ratios ­Current Ratio = Compares all current assets of the firm with all current liabilities ­Current Ratio = Total Current Assets / Total Current Liabilities ­Quick Ratio = Similar to current ratio but more rigorous in liquidity ­Excludes inventory from current assets ­Quick Ratio = Current Assets – Inventory / Current Liabilities *Since inventory is the asset that is seen as the most iffy (meaning that in order to gain money for  inventory it needs to be sold, and what if people aren’t buying it?) it is left out of the quick ratio *Goal of liquidity ratios is to have just the right amount Debt Ratios ­Debt to Total Assets = Measures percentage of firms assets that is financed with debt ­Debt to Total Assets = Total Debt / Total Assets ­Times Interest Earned = Company’s ability to service the interest in its debts ­Times Interest Earned = EBIT / Interest Expense Asset Activity Ratios ­Average Collection Period = Measures how many days a company’s credit customers  take to pay their accounts ­Average Collection Period = Accounts Receivable  / Average Daily Credit Sales ­Inventory Turnover = How well the firm converts inventory to sales ­Inventory Turnover = Sales / Inventory ­Total Asset Turnover = How well a firm a firm uses its assets ­Total Asset Turnover = Sales / Total Assets Market Value Ratios ­Price to Earnings Ratio = Measures markets perception of the future earnings of  Company ­Price to Earnings Ratio (P/E) = Market Price per Share / Earnings per Share ­Market to Book Value  ­Market to Book Value (M/B) = Market Price per Share / Book Value per Share *Market ratios rely on financial marketplace data 9/02 Absent from Class


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