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Exam 1 Review

Exam 1 Review. 09/23/2008. Goal of the Firm. Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price. Legal Forms of Business. 1) Sole Proprietorship 2) Partnership -- General Partnership -- Limited Partnership

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Exam 1 Review

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  1. Exam 1 Review 09/23/2008

  2. Goal of the Firm Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price

  3. Legal Forms of Business 1) Sole Proprietorship 2) Partnership -- General Partnership -- Limited Partnership -- Limited Liability Company (LLC) 3) Corporation

  4. The Corporation and Financial Markets • Primary Market • Secondary Market • Initial Public Offering (IPO) • Seasoned New Issue

  5. Financial Management Axioms 1) Risk - return trade-off. 2) Time value of money. 3) Cash - not profits - is king. 4) Incremental cash flows count. 5) The curse of competitive markets.

  6. Financial Management Axioms 6) Efficient capital markets. 7) The agency problem. 8) Taxes bias business decisions. 9) All risk is not equal. 10) Ethical dilemmas are everywhere in finance.

  7. Income Statement SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

  8. Balance Sheet Assets Liabilities (Debt) & Equity Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents

  9. Free Cash Flows = Cash Flows from Financing Cash Flows from Assets Cash flows generated through the firm’s assets Cash flows paid to - or received from - the firm’s investors (creditors & stockholders) =

  10. Taxes Marginal tax rate: the tax rate that would be applied to the next dollar of taxable income Average tax rate: taxes owned by a firm divided by the firm’s taxable income Always marginal

  11. We will want to answer questions about the firm’s • Liquidity • Efficient use of Assets • Leverage (financing) • Profitability

  12. Future and Present Value FV = PV (1 + i)n FV = PV (FVIF i, n) FV = PV (e i*n) -- continuous compounding PV = FV (PVIF i, n)

  13. Annuity and Annuity Due FV = PMT (FVIFA i, n) FV = PMT{ [ (1 + i)n – 1] / i } PV = PMT (PVIFA i, n) PV = PMT { [1 - 1 / (1 + i)n ] / i } Perpetuity: PV = PMT / i

  14. APY = ( 1 + ) m - 1 quoted rate m Annual Percentage Yield (APY)

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