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This 6 page Class Notes was uploaded by Mr. Jacklyn Kuphal on Monday October 5, 2015. The Class Notes belongs to FIN302A at Central Michigan University taught by HeatherKnewtson in Fall. Since its upload, it has received 42 views. For similar materials see /class/218893/fin302a-central-michigan-university in Finance at Central Michigan University.
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Date Created: 10/05/15
Chapter 1 0 Finance is maximizing wealth and planning for the future 0 Firms How to raise money which projects to undertake ect 0 Major Financial Players in Firm 0 Stockholders I Diffuse ownership hire BOD o BOD I Work 4 stockholders contract w CEO declare dividends o CEO I Ultimate mgt responsibility decision making power in the firm 0 CFO I Resp for best financial analysis for CEOFirm 0 Audit Committee I Required for public trade firms hire external auditor 0 External Auditor I Provide independent audit ensure financial numbers are accurate 0 Alignment Methods to encourage CEO s effort on behalf of shareholders o Bonuscompensation at end ofyear Performance reviewmonitor Fire CEOthreat Stock Options direct alignment Hungry senior executives Takeover marketthreat 0 Institutional ownership OOOOO Role of Financial Manager caretakers of owners money intermediaries between investors and firm 0 Pick projects to invest in capital budgeting decisions 0 Pay with debt or equity nancing decisions 0 Day to Day Mgt Working Capital Mgt Decisions Taking actions that generate benefits in excess of costs firms generate wealth for their investors Skills needed for finance jobs written and verbal communication ability to work in teams proficiency with computers and intemet Finance Career Opportunities 0 Corporate Finance concerned with the duties of financial managers in business 0 Commercial Banking 2 types I Consumer banking serves the financial needs of a bank39s individual customers in its branch network increasingly via electronic media such as the Internet O O O I Commercial banking on the other hand involves extending credit and other banking services to corporate clients ranging from small family owned businesses to Fortune 500 Investment Banking high income potential involves 3 main types of activities I Helping corporate customers obtain funding by selling securities such as stocks and bonds to investors I Providing advice to corporate clients on strategic transactions such as mergers and acquisitions I Trading debt and equity securities for customers or for the rm39s own account Money Management the money management industry encompasses any person or institution that acts as a duciary I Growing demand 0 baby boomershave entered their peak earning years and are beginning to invest large sums to prepare for retirement 0 past individuals held most nancial assets especially common stocks today institutional investors dominate the markets Consulting hired by companies to analyze rms39 business problems processes and strategies to make and possibly to implement associated recommendations I Work with a broad range of issues compensation rivals investment bankers 0 Five Basic Corporate Finance Functions 0 0 Financing raising capital to support a company39s operations and investment programs I Determining and maintaining the miX of debt and equity I Raise money either extemallycreditors or shareholders or intemallyretaining and reinvesting pro ts Financial Management managing the rm39s operating cash ows as ef ciently as possible I Key ensure rm has enough money on hand to keep daytoday operations Capital Budgeting selecting the best projects in which to invest the rm s funds based on their expected risk and return aka investment function I Steps Identifying potential investments Analyzing the set of investment opportunities and selecting those that create shareholder value 0 Implementing and monitoring the selected investments I Area where managers have greatest opportunity to create value for shareholders 0 Risk Management identifying measuring and managing the rm39s exposure to all types of risk to maintain an optimal riskretum tradeoff and therefore maximize share value I Most sophisticated of all corporate nance practices I Accept risks or manage them 0 Corporate Governance developing companywide structures and incentives that in uence managers to behave ethically and make decisions that bene t shareholders I strong board of directors is essential in wellfunctioning governance system cuzits the board39s duty to hire re pay and promote senior managers I board develops xed salary and incentive bonus and stockbased compensation packages to align managers and shareholders39 incentives Securities and Exchange CommissionSEC o a federal agency established in 1934 is charged with oversight of the fair reporting of nancial information to investors in public companies those whose shares are listed for trading in a public securities market I I Equity Capital 39p interest r J by an investor usually in the form of common or preferred stock that is expected to remain permanently invested Debt Capital longterm borrowed money from creditors Financial Intermedia n institution that raises capital by issuing liabilities against itself and then uses the capital raised to make either loans to corporations and individuals or to buy various types of investments 0 Banks insurance companies savings and loan institutions credit unions mutual funds and pension funds PrimaryMarket Transactions Cash sales ofsecurities to investors by a corporation to raise capital SecondaryMarket Transactions Trades between investors that gerate no new cash ow for the rm Business Organizational Forms 0 Sole Proprietorship business with a single owner I Most common 34 I Easy to form no formal ling own boss I Dis 0 Limited life 0 Limited access to capital 2forms personal borrowing reinvested capital 0 Unlimited personal Liability 0 Partnership a proprietorship with two or more owners who have joined their skills and personal wealth I Easy to form nite small I Dis 0 Limited Life 0 Limited Access to Capital 0 Unlimited personal liability all partner legally liable for rm debt 0 Limited Partnerships most ptnrs have limited liability but their share of pro ts is taxes as partnership income I General partners have unlimited liability I Limited partner passive don t play management role limited liability Corporationa legal entity owned by the shareholderswho hold its common stock with many of the economic rights and responsibilities enjoyed by individuals I Has CEO big boss I Adv 0 Unlimited life Limited liability Separable contracting 0 Improved access to capital I Dis Double taxation 0 Hard to form 0 S Corporation ordcorp in which stockholders elected to allow shareholders to be taxed as partners while still retaining their limitedliability status as corporate stockholders I S corporations must have 100 or fewer shareholders I shareholders must be indvs or certain types of trusts not corporations I S cannot issue more than one class of equity security and cannot be a holding company which means that it cannot hold a controlling fraction of the stock in another company Limited Liability Company taX advantages of a partnership with the limited 0 liability protection of a corporation 0 Maximize Pro t or Shareholder Wealth 0 Pro t I backwardlooking re ecting what has happened rather than what will happen cant predict future I pro t info can be manipulated and is noncash based therefore are not consistent and cannot be compared 0 Shareholder Wealth I Forwardlooking looking to future so can make future predictions I Based on cash ows and shows current values of rms is consistent so can be used to compare rms 0 Agency Problems con ict of interest between ownersshareholders and managers 0 Relying on market forces to exert managerial discipline I Hostile takeover involves the acquisition of one rm the target by another the acquirer through an openmarket bid for a majority of the target s shares 0 Incurring the monitoring and bonding costs necessary to assure that executive compensation packages fairly align the interests of managers and stockholders I Monitoring Expenditures pay for audits and control procedures that alertshareholders when managers pursue their own interests too aggressively Bonding Expenditures protect against the potential consequences of dishonest acts by managers 0 Use of compensation plans to managers I Stock options give to tie managers wealth to rm Employee compliance with ethics is important sign waiver SarbanesOxley Act 0 gave SEC greater power 2 supervise corporate governance practices in companies 0 requires both CEOs and CFOs of all large companies topersonally certify their firms39 financial statements 0 prevents auditing firms from providing other servicessuch as consulting valuation and tax advisory workto the companies they are auditing Rate of Return measurements of relative payoffs from an investment 0 Chg in value of payoffsbeg Value 0 Generate CFselling goods services payout or reinvest residual CF pay remaining to owners as dividend or reinvest in business 0 Firm unprofitable when fails to generate sufficient cash ows 0 Cash Flows consider 0 Size 0 When occurtiming 0 risk Chapter 3 Time Value of Money a dollar today is worth more than a dollar tomorrow 0 Because people tend to have a time preference for current consumption over future consumption if have to wait expect something in return Interest RateRequired Rate of Return a rate of exchange of funds between two points in time 0 Interest rates determined by market forces Money is worth less in the future due to rising price levels in ation Risk of Investment more risk higher return less risk less return Compounding Present gt Future Discounting Future Present Principle amount of money on which interest is paid Simple Interest interest earned on the original principle only linear Interest on Interest interest earned on interest that is earned in previous periods Compounding the process by which interest earned on an investment is reinvested so in future periods interest is earned on the interest as well as the principle exponential Compound Interest interest earned on the original principle amount and on the interest previously earned Below 1 year simple bigger 1 year same above 1 year compound bigger Rule 72 0 When will double with interest rate of i5 to 20 o I 6 so will double in I 726 12years Cash ows valued at the same time can beaded together Annuity financial contract that calls for equally spaced cash ows over a finite number of periods rent insurance car payment mortgage retirement payment 0 Ordinary end of period 0 Due Beginning ofperiod o PVA due gtPVAordinary because a dollar today is worth more than a dollar tomorrow and annuity due s start earlier Growing Annuity used to calculate the value of cash ows that growor shrink at a level known rate Perpetuity constant stream of cash ows that go on forever 0 Consols bonds issued by British treasury dept to pay debt from Napoleon wars 0 Endowment created to throw off perpetual cash flows sholarships Look at checking technique for multiple cash Flows Deferred Annuity when annuity starts after timel Annuity Shortcut on notes EAR laprml
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