New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Finance 300 Notes

by: Emily Taylor

Finance 300 Notes 300

Emily Taylor

GPA 2.5

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Chapters 1, 3, and 4
Class Notes
25 ?




Popular in Finance

Popular in Finance

This 16 page Class Notes was uploaded by Emily Taylor on Wednesday September 21, 2016. The Class Notes belongs to 300 at Tennessee State University taught by Farley in Fall 2016. Since its upload, it has received 2 views. For similar materials see Finance in Finance at Tennessee State University.


Reviews for Finance 300 Notes


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 09/21/16
CHAPTER 1: INTRO TO FOUNDATIONS OF FINANCIAL MANAGEMENT  Goal of a business is to create value for the company’s owners o i.e. shareholder  Financial manager is to create wealth for the shareholders by making decisions that will maximize the price of the existing common stock.  Financial decisions ultimately affect the firm’s stock price -Five Principles of Finance- 1. Cash Flow is what matter a. Cash flows, not profits represent money that can be spent b. Incremental cash flow i. Look at marginal cash flow ii. The difference between the cash flows a company will produce both with and without the investments it is thinking about making 2. Money Has a Time Value a. Example i. Suppose you have a choice of receiving 1,000 either today or one year from now b. Opportunity cost i. Any choice you make is the highest valued alt. that you had to give up when you made the choice c. We focus on the creation and measurement of value d. to measure value we use the concept of the time value of money to bring the future benefits and cost of a project measured by its cash flows back to the present e. if the cost or cash outflows outweigh the benefits or cash inflows the project destroys wealth and should be rejected 3. Risk Requires a Reward a. They will want a return that satisfies two requirements i. Return for delaying consumption 1. Investors will want to receive at least the same return that is available for risk free investments such as the rate of return being earned on US securities ii. An additional return for taking on risk 1. Risky investments are less attractive unless they offer the prospect of higher returns 2. Higher returns they will demand for making that investment 4. Market Prices are generally right a. Efficient Market i. Is one in which the prices of the assets traded in that market fully reflect all available information at any instant in time 5. Conflicts of Interest Cause Agency Problems a. Agency problem i. Problems and conflicts resulting from the separation of the management and ownership of the firm ii. Example 1. A large firm may be run by professional manager or agents who have little or no ownership in the firm 2. This separation between decision makers and owners managers may make decisions that are not in line with the goal of maximizing shareholder wealth 3. They may approach work less energetically and attempt to benefit themselves in terms of salary and perquisites at the expense of shareholder  Problems that firms encounter in times of crisis are often brought on and made worse by not paying close attention to foundational principles of finance 1. Forgetting Principle 1 Cash Flow is what matters (focusing on earnings instead of cash flow) 2. Forgetting Principle 2 Money has time value a. Focusing on the short run 3. Forgetting Principle 3 Risk requires a reward a. Excessive risk taking due to underestimation risk 4. Forgetting Principle 4 Market Prices are generally Right a. Ignoring the efficiency of financial markets 5. Forgetting Principle 5 Conflicts of interest cause agency problems a. Unchecked agency problems in the subprime housing market and problems with executive compensation  Though not one of the five principles of finance, ethics and trust are essential elements of business world  Ethics or rather a lock of ethics in finance is a recurring theme in the news -Role of Finance in Business-  Study of Finance addresses three basic types of issues o What long-term investments should the firm undertake? This area of finance is generally referred to as capital budgeting  Capital budgeting  The decision-making process with respect to investment in fixed assets o How should the firm raise money to fund this investment? The firms funding choices are generally referred to as capital structure decisions  Capital Structure decision process with funding choices and the mix of long term sources of funds o How can the firm best manage its cash flows as they arise in its day to day operations  This area of finance is generally referred to as working capital management  Working capital management o The management of the firm’s current assets and short term financing  Financial markets o Institutions and procedures that facilitate financial transactions Legal Forms of Business Organizations  Sole Proprietorships o Business owned by a single individual o Owner retains the title to the business’s assets and is responsible generally without limitation for the liabilities incurred  Partnerships o An association of two or more persons coming together as co-owners for the purpose of operating a business for profit  Two types  General partnerships o Partnerships in which all partners are fully liable for the indebtedness incurred by the partnerships  Limited Partnerships o One or more of the partners have to have limited liability restricted to the amount of capital invested in the partnership o Several conditions  At least one general partner must have unlimited liability  The limited partners may not participate in the management of the business  Corporation o An entity that legally functions separate and apart from its owner o Corporation can individually sue and be sued and purchase, sell, or own property o Ownership is reflected in common stock certificates each designating the number of shares owned by its holder  S-Corporation o Corporation that because of specific qualification is taxed as though it were a partnership o Restrictions  Cannot be used for a joint venture between two corporation between two corporations  Been losing ground  Limited liability company o A cross between a partnership and a corporation under which the owners retain limited liability but the company is run and is taxed like a o Partnership Chapter 3: Understanding Financial Learning Objectives: Statements and Cash Flows  Incomes statements  Income statement  The Balance sheet- o Indicates the amount of profits determine firm’s financial generated by a firm over a position based on it  Measures a companies cash given period of time o Shows profit or loss for a period flow that is available for a company  Explain the difference owner (shareholders) between GAAP and IFRS o Represented as  Compute taxable income and  Sales-Expenses= Profits income taxes owed o Make up of an income  Describe the limitations of statement finical statements- limitations 1. Sales or revenue of financial statements 2. Subtracted Cost of Goods accounting malpractice Sold  Calculate a firm’s free cash flows and financing cash flows 3. To yield gross profit margin 4. Operating expense are deducted to determine operating income 5. Determine the Earnings before tax/ taxable income a. By deducting the interest expense paid on the firms debt. 6. Last is net income/ earnings available to common stock holders a. Represents income that may be reinvested in the firm or distributed to shareholders 7. After this the income statement is complete expect shareholders like to know how much the company made for them  Earnings per share a. Earnings per share i. Net income on a per share basis ii. Net income/ number of common shares of stock outstanding 8. Investors also want to know the amount of dividends a firm pays for each share outstanding or Dividends per share a. Dividends per share i. the amount of dividends a firm pays for each share outstanding ii. total dividends/ shares outstanding 9. Not mentioned were the fixed cost and Variable cost a. Fixed cost i. Cost that do not change as the quantity of the output produced changes b. Variable Cost i. Cost that change as the quantity of the output produced changes  Cost of goods sold-  Cost of producing or acquiring a product or service to be sold in ordinary course of business  Gross Profits  Sales or revenue minus the cost of goods sold o Sales/Revenue- Cost of Goods Sold = Gross Profit  Operating expense  Marketing and selling expenses o Products or service to customers  General and administrative expenses and depreciation expense o Salaries and rent expenses  Operating Income (earnings before interest and taxes)  Sales less the cost of goods sold less operating expenses  Financing expense its interest expense resulting from borrowing money o Has no effect on operating income o Operating income of a firm reports the results of the following activities  Sales (revenues)- equal to selling prices of the products or services to be sold times the number of units  Selling price X unites sold = Total sales  Cost of goods sold- which is the cost of producing or acquiring the goods or services that were sold  Operating expenses-  Marketing and selling expense  The firm’s overhead expense o General, administrative, and depreciation expense  Earnings before tax  Taxable income  Operating income minus interest expense  OP-IE=EBT  Net income/ Earnings available to common stockholders  The earnings available to the firm’s common stockholder  Conclusions from Income statement o Helpful to look at each item in the income statement as percentage of sales  Common sixed income statement  Common sized income statement  Income statements in which a firm’s expense and profits are expressed as a percentage of its sales.  Allows us to express expense and profits on a relative basis so it is easily compare a firm’s income performance across time and with competitors o Profit to sales relationship = Profit margins  Profit Margins  Financial ratios that reflect the level of the firms profits relative to its sales  Examples include the o Gross profit margin  a ratio that measures the gross profits of the firm as percent of sales  Gross profit/ Sales o Operating Profit margin  Ratio serves as an overall measure of the company’s operating effectiveness  Operating income/ sales o Net profit margin  Ratio that measures net income of the firm as percent sales  Net income / sales  BALANCE SHEET o Provides a snapshot of the firms’ financial position at a specific point in time presenting its assets, liabilities, and owner supplied capital (aka equity) o Balance sheet represented by the follow equation  Total assets= total Liabilities (debt) + Total shareholders equity  Total assets represent the resources owned by the firm  Total liabilities and total equity indicates how those resources were financed o Reports historical transactions at their cost o Reports a company’s accounting book value  Simply equal to firm’s total assets as listed in it balance sheet  Book value  Value of an asset as shown on a firm’s balance sheet  It represents the historical cost of the asset rather than its current market value or replacement cost o Types of assets  On balance sheet they are listed from most liquid to the least liquid  Liquidity  Refers to the ability to convert an asset into cash quickly without significant loss of its value  Liquidity is important because holding liquid assets reduces the chance that a firm will experience financial distress  Two basic categories of assets  Current Assets o Also known as gross working capital o Current assets consist primarily of  Cash  Cash on hand, demand deposits, short term marketable securities that can quickly be converted into cash  Marketable securities  Accounts receivable  Money owed by customers who purchased goods or services from the firm on credit  Inventories  Raw materials, work in progress and finished goods help by the firm for eventual sales  Other current Assets  Other short term assets that will benefit future time periods such as prepaid expenses  Long-term Assets o Fixed assets  Assets will be used over a number of years  Property, plant, and equipment  Some of these assets will depreciate in value over time  Depreciable assets  Original cost of an asset is allocated as an expense in the income statement over the asset’s expected useful life  (On the income statement) The amount allocated as the cost each is shown as Deprecation expense  Accumulated deprecation o Sum of all depreciation expense taken for a depreciable asset up to the date of the financial statement  Gross fixed asset o The original cost of a firm’s fixed assets  The cumulative depreciation taken over the asset’s life is reported as accumulated depreciation  Subtract the accumulated depreciation each year from the gross fixed asset to determine  Net fixed assets o Other long term assets  Long term investment  Intangible assets  Company’s patents, trademarks and goodwill o Types of Financing  Debt  Liabilities consisting of such sources as credit extended by suppliers or a loan from a bank  Money that has been borrowed and must be repaid at some predetermined date  Debt capital is financing provided by a creditor  It is divided into o Current or short term debt  Includes borrowed money that must be repaid within the next 12 months  Sources are  Accounts payable o Represents the credit suppliers extended to firm when it purchased inventories o Purchasing firm may have 30,60, or 90 days to pay for inventory it is also known as  trade credit.  Accrued expenses o Expenses that have been incurred but not yet paid in cash o Short term liabilities that have been incurred in the firms operations but not yet paid o Like company employees might have done work for which they will not be paid until the following week or month  Short term notes o Represent amounts borrowed from a bank or other sources that are due and payable within 12 months  Other current liabilities o May include any additional debt payable within the next 12 months o Like  Taxes payable  Interest payable o Long term debt  Loans from banks or other sources that lend money longer than 12 months  Like a mortgage  A loan to finance real estate in which the lender has first claim on the property in event the borrower is unable to repay the loan  Equity  Stockholder’s investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet.  Represents the shareholders investment in the company  Kinds of stockholders o Preferred stockholders  Stockholders who have claims on the firm’s income and assets after creditors but before common stockholders o Common stockholders  Investors who own the firm’s common stock  Residual owners of the firm  These stockholders will receive only what is left over after the creditors and preferred stockholders are paid  The amount of firm’s common equity is equal to the sum of two items  Amount a company receives from selling its stock to investors o May be shown as common stock on the balance sheet o May be divided into par value which is arbitrary value a firm puts on each share of stock prior to its being offered for sale o May be paid in capital  Amount a company receives above par value from selling stock to investors o Finally the amount of common stock issued will be offset by any stock that has been repurchased by the company from its shareholders  Treasury Stock  The amount of a firm’s retained earing’s o Cumulative profits retained in a business up to the date of the balance sheet o Retain earnings at the end of a given year is determined as  Beginning retained earning’s + net income for the year – dividends paid during the year = end retained earnings o Profits and cash are not the same o Retained earnings is not a big bucket of cash  Common stockholder equity can be represented as  Common equity = common shareholders’ investment + cumulative profits – cumulative dividends paid to common stockholders  Common Sized Balance sheet o A balance sheet in which a firm’s assets and sources of debt and equity are expressed as a percentage of its total assets o Debt ratio is apart of common sizing a balance sheet  Debt ratio  A firm’s total liabilities divided by its total assets  It is a ratio that measures the extent to which a firm has been financed with debt  Working Capital  Net Working Capital o The difference between a firm’s current assets and its current liabilities o When the term working capital is used o It is frequently intended to mean net working capital o Net Working capital= Current Assets – Current Liabilities  Measuring Cash Flows o You need to be aware that the profits shown on a company’s income statement are not the same as it cash flows o An income statement is not a measure of cash flows because it is calculated on an accrual basis rather than a cash basis o Accrual basis accounting  Profits are recorded when earned whether or not the profits have been received in cash and expenses are recorded when they are incurred even if money has not actually been paid out o Cash basis accounting  Profits are reported when cash is received and expenses are recorded when they are paid o Profits based on accrual accounting system will differ from the firm’s cash flow for these reasons  Sales reported in an income statement include both cash sales and credit sales  Some inventory purchases are financed by credit so inventory purchases do not exactly equal cash spent for inventory  The depreciation expense shown in the income statement is a noncash expense o Knowing when a change in the balance sheet is a source or use of cash  Sources of Cash  Decrease in an asset o Example  Selling inventories or collecting receivables provides cash  Increase in a liability or equity o Example  Borrowing funds or selling stock provides the firm with cash  Use of Cash  Increase in an Asset o Example investing in fixed assets or buying more inventories uses cash  Decrease in a Liability or equity o Example  Paying off a loan or buying back stock uses cash o Statement of Cash Flows  Two common approaches for measuring a firm’s cash flows  Statement of Cash Flows o Which is always included in the financial section of a firm’s annual reports o Method for presenting cash flows focuses on IDing the sources and uses of cash that explain the change in a firm’s cash balance reported in the balance sheet o Statement that shows how changes in balance sheet accounts and income affects cash and cash equivalents o Breaks the analysis down to operating, investing, and financing activities  Free cash flows/ Financing Cash Flow o Free Cash Flows  Amount of cash available after the firm pays for the investment it has made in working capital and fixed assets  This is cash available to distribute to the firm’s creditors and owners o Financing cash flows  The amount of cash received from or distributed to the firm’s investors  Usually in the form of interest, dividends, issuance of debt, or issuance or repurchase of stocks o Are measurements that managers and investors alike consider critically important o Once a firm has paid all of its operating expense and taxes and made all of its investments o Any remaining cash is free to be distributed to the creditors and of its investments, any remaining cash is free to be distributed to the creditors and shareholders o If the free cash flows are negative management will have to acquire financing from creditors or shareholders o Three Key Activates determine the cash inflows and outflows of a business  Generating cash flows from day to day business operation  Convert the company’s income statement from an accrual basis to a cash basis  Be completed in 6 steps o Add back depreciation expense since it is not a cash expense o Subtract (add) any increase (decrease) in accounts receivable o Subtract (add) any increase (decrease) in inventory o Subtract (add) any increase (decrease) in other current assets o Add (subtract) any increase (decrease) in account payables o Add (subtract) any increase (decrease) in other accrued expenses  Why do we add back depreciation? o It simply is not a cash expense  Investing in fixed assets and other long-term investments  Financing the business  GAAP AND IFRS o Generally accepted Accounting Principles o International Financial Reporting Standards  Income Taxes and Finance o Taxable income  Gross income from all sources expect for allowable exclusions less any tax deductible expenses o Capital Gains  Gains from selling any asset that is not part of the ordinary operations  Example o A company sells a piece of equipment o Computing the taxes owed  Marginal tax rates  The tax rate that would be applied to the next dollar of income o Example  If a firm had earnings of 60K and is contemplating an investment that would yield 10K in additional profits the tax rate to be used in calculating the taxon this added income is 25%  Corporate tax rates o 15%  $0-$50K o 25%  $50,001-75K o 34% $75,001- 10,000,000 o 35%  $over 10,000,000  Free Cash Flows o The amount of cash available from operations after the firm pays for the investments it has made in operating working capital and fixed assets o This cash is available to distribute to the firm’s creditors and owners o Cash flow results from two activities  After tax cash flows from operation  Asset investment  Include o Company’s net operating working capital o Its long term assets o Computing free cash Flows  Free cash flows= after tax cash flow from operations  Less [increase in net operating working capital] or Plus [Decrease in net operating working capital  And Less [Increase in long term assets] or Plus [decrease in long term assets]  Steps for computing  Determine the after tax cash flows from operations  Calculate the change in the net operating working capital o Formula  Change in current assets- change in non interest bearing current liabilities o The total of all current assets less all non interest bearing current liabilities which includes nay short term liabilities that do not require the firm to pay interest on the loan.  Compute the change in long term assets o Computing Financing cash flows  Firm can either receive money from or distribute money to its investors or both  Cash flows between investors and the firm  Financing cash flows  Financing cash flows  Can occur in four ways o Pay interest to lenders o Pay dividends to stockholders o Increase or decrease interest bearing debt o Issue stock to new shareholders to repurchase stock from current investors Learning Objectives 1. Explain the Chapter 4: Evaluating a Firm’s Financial purpose and Performance importance of  Financial ratios financial analysis o Give us two ways of making meaningful comparison of firm’s financial data 2. Calculate and use  We can examine the ratios across time a comprehensive set of to compare a firm’s current and past measurements to performance evaluate a  We can compare the firm’s ratios with company’s those of other firms  Measuring Key Financial Relationships performance 3. Describe the limitations of financial ratio o Five question to help map out the process of using financial ratio  How liquid is the firm Liquidity o A Firm’s ability to pay its bills on time o Liquidity is related to the ease and quickness with which a firm can convert its noncash assets into cash to have the ability to pay maturing obligations  Are the Firm’s managers generating adequate operating profits on the company’s assets  How is the firm Financing it assets  Are the firm’s managers providing a good return on the capital provided by the shareholder  Are the firm’s managers creating shareholder value? o Question 1: How liquid is the firm- Can it Pay its bill  Interested in both Amount of current assets relative to current liabilities The quality of the individual current assets that will be used in meeting current debt  Current Ratio A firm’s current assets divided by its current liabilities Ratio indicates a company’s liquidity by comparing its current assets to current liabilities Formula o Current Assets/ Current Liabilities  Acid- Test or Quick ratio When we use the current ratio, we assume that the firm’s accounts receivable will be collected and turned into cash on a timely basis and that its inventories can be sold without any extended delay This ratio is a more stringent measure of liquidity than the current ratio because it excludes inventories and other current assets those that are least liquid from current assets Formula o Acid Test/ Quick Ratio  Cash + Accounts receivable/ Current Liabilities  Days in receivables/ Average Collection Period This ratio expresses how many days on average it takes to collect receivables Days in Receivables = o Accounts receivable/ daily credit sales = accounts receivable/ (annual credit sales / 365)  Accounts Receivable turn over ratio  Ratio expresses how often account receivable are rolled over during a year  Formula o Annual credit sales/ accounts receivable  Days in inventory  Measures the number of days a firm’s inventories are held on average before being sold it also indicates the quality of the inventory  Formula o Inventory/ [daily cost of goods sold/ 365]  Inventory turnover  Ratio measures the number of times a firm’s inventories are sold and replaced during the year that is the relative liquidity of the inventory  Formula o Cost of Good Sold/ inventory o Question 2: Are the Firm’s Managers Generating Adequate Operating Profits on the Company’s Assets?  Operating returns on asset  Ratio indicates the rate of return being earned on the firm’s assets  Formula o Operating profits/ total assets  Can tell firms do better in two areas in regards to o How effectively the company’s income statement is being manage or what we will call operation management  Involves the day to day buying and selling a firm’s good or services as reflected in the income statement  How efficiently assets are being managed to generate sales or asset management  Managing operations  Serves as an overall measure of operating effectiveness  How well the firm is managing its operations as reflected in its income statement  Formula o Operating profits/ sales  Management assets  Total assets turnover o Ratio an overall measure of asset efficiency based on the relation between a firm’s sales and the total assets  Formula o Sales/ Total assets  Fixed asset turnover  Indicates how efficiently the firm is using its fixed assets to generate revenue  Formula o Sales/ next fixed assets o Question 3: How is the Firm Financing its Assets?  Debt Ratio  Measures the extent to which a firm has been financed with debt  Formula o Total Debt / Total assets  Times interested earned  Measures a firm’s ability to meet its interest payments using its annual operating earnings  Formula o Operating profits/ interest expense  When interpreting this ratio need to understand o The more less profitable a business as measured by the operating return on assets the (lower) higher the times interest eared o The more (less) debt used by a firm, lower (Higher) the times interest earned o Question 4: Are the Firm’s Managers Providing a Good Return on the Capital Provided by the Company’s Shareholders?  Return on equity  Ratio is the accounting rate of return earned on the common stockholders investment  Formula o Net income/ total common equity  Remember the  Total common equity/ total stockholder o Includes all common equity in the valance sheet, including par value, paid in capital, retained earning and less treasury stick.  Two fundamental factors affecting a firm’s return equity  The difference between the operating returns on assets and the interest rate  How much debt is used measured by the debt ratio o Question 5: Are the Firm’s managers creating Shareholder Value?  Market Value ratios  Two commonly used ratios that compare a firm’s stock price to its earning and the accounting book value of its equity  These two ratios indicate what investors think of management’s pas performance and future prospects  Price/Earnings Ratios  How much investors are willing to pay for $1 of reported earnings  Example o If a firm has an earning per share of $2 and a stock price of $30 per share its price/earnings ratio is 15 (30/2)  Formula o Market Price Per Share/Earnings Per Share  Price/ book Ratio  A second frequently used indicator of investors’ assessment of the firm  The market value of a share of the firm’s stock divided by the book value per share of the firm’s equity in the balance sheet  Indicates the market price placed on $1 of capital that was invested by shareholders  Formula o Market price per share/ equity book value per share  Economic value added  Measures a company’s economic profits as compared to its accounting profits by including as a cost not only interest expense but also the shareholders required rate of return on their investments  Formula o [Operating return assets – cost of capital] X total assets 


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."

Allison Fischer University of Alabama

"I signed up to be an Elite Notetaker with 2 of my sorority sisters this semester. We just posted our notes weekly and were each making over $600 per month. I LOVE StudySoup!"

Bentley McCaw University of Florida

"I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"


"Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.