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University of Palestine

University of Palestine. Business Finance FINA201. Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007. Overview of Corporate finance. Chapter 1- Introduction to corporate finance

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University of Palestine

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  1. University of Palestine Business FinanceFINA201 Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007

  2. Overview of Corporate finance Chapter 1- Introduction to corporate finance Describes the role of the financial manager and the goal of financial management. It also discusses some key aspects of the financial management environment. Concept questions 1- What is the capital budgeting decision? 2- What do you call the specific mixture of long-term debt and equity that a firm chooses to use? 3-Into what category of financial management does cash management fall? 4- What is the goal of financial management? 5- what are some shortcomings of the goal maximization? 6-Can you give definition of corporate finance? 7- What is an agency relationship? 8-What are agency problems and how do they come about? What are agency costs? 9- what role do financial institutions play in the raising of capital?

  3. Chapter2:Finncial statements, taxes and Cash flow • Objectives • - the difference between accounting value and market value • -The difference between accounting income and cash flow • -The difference between average and marginal tax rates • - How to determine a firm’s cash flow its financial statements

  4. Main questions • What is the balance sheet identity? • What is liquidity? Why is it important? • What do we mean by financial leverage? • Explain the difference between accounting value and market value. Which is more important to the financial manager? Why?

  5. Key equations • The balance sheet identity or equation • 1-Assets= Liabilities + Owners’ equity • 2- The income statement equation • 3-Revenue-Expenses= Profit • 4-The cash flow identity: • Cash flow from assets = Cash flow to lenders + Cash flow to shareholders • Where • a- Cash flow from assets = operating cash flow (OCF) – Net capital spending – Addition to net working capital (NWC): • 1- Operating cash flow = Profit before interest and taxes (PbIT) + Depreciation – taxes • 2- Net capital spending = Ending net non- current assets – Beginning non-current assets + depreciation • 3- Additions to net working capital = Ending NWC – Beginning NWC • b-Cash flow to lender= Interest paid – net new borrowing • C- Cash flow to shareholders = Dividends paid – Net new equity raised.

  6. Other Questions • -What is the income statement equation? • - What are the three things to keep in mind when looking at an income statement? • -Why is accounting profit not the same as cash flow? Give two reasons? • What is the difference between a marginal and an average tax rate?

  7. Main Equations • What is the cash flow identity? Explain what it says? • What are the components of operating cash flow? • Why is interest paid not a component of operating cash flow?

  8. Financial ratiosKey equations • 1-the current ratio: • Current ratio=Current assets/ Current liabilities • 2- the quick or acid-test ratio: • Quick ratio = (Current assets - Inventory)/ Current liabilities • 3- The cash ratio: • Cash ratio = Cash / Current liabilities

  9. Ratios-- • 4- the ratio of net working capital to total assets: • Net working capital to total assets = Net working capital / total assets • 5- The interval measure: • Interval measure = current assets / Average daily operating costs • 6-The total debt ratio: • Total debt ratio = (Total assets – total equity) / Total assets • The debt/ equity ratio: • Debt / equity ratio = total debt / total equity

  10. Ratio---- • 8-The equity multiplier: • Equity multiplier = Total assets / Total equity • 9- The long-term debt ratio: • Long-term debt ratio = long-term debt / (Long-term debt + total equity) • 10- The time interest earned (TIE) ratio: • Time interest earned ratio = Profit before interest and taxes / Interest paid

  11. Ratio-- • 11- The cash coverage ratio: • Cash coverage ratio = (Profit before interest and taxes + Depreciation) / interest • 12- The inventory turnover ratio: • Inventory turnover = Cost of goods sold / inventory • 13-The average day’s sales in inventory: • Day’s sales in inventory = Inventory χ 365 days / Cost of goods sold • 14- The day’s sales in receivable: • Day’s sales in receivable = Accounts receivable χ 365 days / Credit sales • 15- The day’s purchases in payables: • Day’s purchases in payables = Accounts payable χ 365 / Credit purchases

  12. Ratio--- • 16-The net working capital (NWC) turnover ratio: • Net working capital turnover = Sales / Net working capital • 17- The non-current asset turnover = Sales / Net non-current assets • 18- The total asset turnover ratio: • Total asset turnover ratio: • Total asset turnover = Sales / total assets

  13. Ratio---- • 19-Profit margin: • Profit margin = Net profit after tax / sales • 20- Return on assets = Net profit after tax / Total assets • 21- return on equity: • Return on equity= Net profits after tax / Total equity • 22- The price/ earnings (P/E) ratio: • P/E ratio = Price per share / earning per share

  14. Ratio--- • 23- The market- to book ratio: • = Market value per share / Book value per share • 24- The Du Pont identity • ROE = NPAT/ S χ S/TA χ TA/E • ROE PBIT/S χ S/TA χ PBT/PBIT (1-T%) χ • (TL/E +1)

  15. Chapter 4Long- Term Financial Planning and growth • What is financial planning? • Growth as a financial management goal • Dimensions of financial planning • - Planning horizon • -Aggregation • -What can planning accomplish? • -Examining interactions • -Exploring options • -Avoiding surprises • -Ensuring feasibility and internal consistency

  16. Continue- • A financial planning model: The ingredients • - Sales forecast • -Pro forma statements • Summarize the different events projected for the future • -Asset requirements • -Financial requirements • - The plug is the designated source or sources of external financing needed to deal with any shortfall in financing and thereby bring balance sheet into balance. • -Economic assumptions

  17. Key equations: chapter 4 related to financial planning • 1-The dividend payout ratio: • Dividend payout ratio = Cash dividend / Net profit after tax • 2-The internal growth rate: • Internal growth rate = [ROA χ b] / [1-(ROA χ b)] • 3- The sustainable growth rate: • sustainable growth rate = [ROE χ b] / [1-(ROE χ b)] • sustainable growth rate = [ROE0χ b]

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