10 fin571 study guides weeks one thur six.doc

Study Guide

Study GuideFIN/571 Version 729

Week 1 Study Guide: Foundations of FinanceReference Parrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database.

In-Text CitationInsert the paraphrased material (Parrino, Kidwell, & Bates, 2012, p. 1). According to Parrino, Kidwell, and Bates (2012), Insert the paraphrased material (p. 1).Insert the quotation (Parrino, Kidwell, & Bates, 2012, p. 1).

Reference Investopedia.com.(2015).Retrieved from

http://www.investopedia.com/terms/l/llc.aspIn-Text Citation

Insert the paraphrased material("Investopedia.com",2015).

The "Investopedia.com"(2015) websiteInsert the paraphrased material.

According to"Investopedia.com"(2015),"Insert the quotation(Limited Liability Company - LLC).

Glossary 721

Subject Index 729Readings and Key Terms

Ch. 1 of Fundamentals of Corporate Finance p.1 Agency conflicts - "Conflicts of interest between a principal and an agent"(Parrino, Kidwell, & Bates, 2012, p.14).Agency confl icts, 1318, 14and agency relationships, 14, 19

aligning interests of management and

stockholders, 1416

for diff erent forms of business, 572, 573

manager-stockholder, 14

with ownership and control, 14

payoff functions leading to, 658661

in private equity fi rms, 494

and regulatory reforms, 1618 Agency costs - "The costs arising from conflicts of interest between a principal and an agent; for example, between a fi rms owners and its management"(Parrino, Kidwell, & Bates, 2012, p.14).Agency costs, 14, 523526

of debt, 659660

of equity, 660661

ethics confl icts involving, 19

and payoff functions, 658661

in private equity fi rms, 494

stockholder-lender, 524526

stockholder-manager, 523 Bankruptcy - "Legally declared inability of an individual or a company to pay its creditors" "(Parrino, Kidwell, & Bates, 2012, p.4).Bankruptcy, 4

of Blockbuster, 200

and debt fi nancing, 5

of Enron and WorldCom, 16, 1820

losses limited in, 659

from mismanagement of working

capital, 6

Bankruptcy costs, 520523

direct, 521

indirect, 521523 Capital markets - "Financial markets where equity and debt instruments with maturities greater than one year are traded"(Parrino, Kidwell, & Bates, 2012, p.6).Capital markets, 6, 31, 32, 689691 Capital structure - "The mix of debt and equity that is used to finance a firm"(Parrino, Kidwell, & Bates, 2012, p.6).Capital structure, 6, 504530

choosing, 526529

decisions on, 612

dividends in management of, 556

and fi nancial risk, 510

in fi nancing plan, 609

leasing, 535544

and Modigliani and Miller propositions,

506514

optimal, 505506, 520, 676

pecking order theory of, 526528

for selected industries, 527

trade-off theory of, 526528

use of debt in, 514526 Corporation - "A legal entity formed and authorized under a state charter; in a legal sense, a corporation is a person distinct from its owners" (Parrino, Kidwell, & Bates, 2012, p.7).Corporations, 78

capital for, 572573

C-corporations, 572574

characteristics of, 572

fi nancial liabilities of, 574

and fi nancial system, 3637

life of, 573

multinational, 673, 674

privately held, 8, 12

professional, 8

S-corporations, 8, 571, 572

stateless, 673

transnational, 673

Limited liability company (LLC) - According to"Investopedia.com"(2015),"A corporate structure whereby the members of thecompanycannot be held personally liable for thecompany'sdebts or liabilities" (Limited Liability Company - LLC).Limited liability companies (LLCs),

8, 571, 572

capital for, 573



life of, 573

partnership agreements in, 573

private equity funds as, 493

taxes as C-corporations, 574n.1 Limited liability partnership (LLP) - "Hybrid business organizations that combine some of the advantages of corporations and partnerships; in general, income to the partners is taxed only as personal income, but the partners have limited liability" (Parrino, Kidwell, & Bates, 2012, p.8).Limited liability partnerships (LLPs), 8

Limited partners, 7, 493

Limited partnerships, 7

capital for, 572, 573



life of, 573

private equity funds as, 493 Net working capital (NWC) - "The dollar difference between current assets and current liabilities" (Parrino, Kidwell, & Bates, 2012, p.6).Net working capital (NWC), 4, 6

cash fl ow invested in, 6869

on fi nancial statements, 5354

in working capital management, 443, 450451

Partnership - 'Two or more owners who have joined together legally to manage a business and share in its profits" (Parrino, Kidwell, & Bates, 2012, p.7).Partnerships, 7


life of, 573

limited liability, 8

maximizing stock value for, 12

taxation of, 8

Partnership agreements, 572, 573

Prviately held corporations - "Corporations whose stock is not traded in public markets" (Parrino, Kidwell, & Bates, 2012, p.8).Privately held corporations, 8, 12 Residual cash flows - "The cash remaining after a firm has paid operating expenses and what it owes creditors and in taxes; can be paid to the owners as a cash dividend or reinvested in the business" (Parrino, Kidwell, & Bates, 2012, p.3).Residual cash fl ows, 3 Sole proprietorship - "A business owned by a single individual' (Parrino, Kidwell, & Bates, 2012, p.6).Sole proprietorships, 67

capital for, 572, 573



life of, 573

taxation of, 7 Stakeholders - "Anyone other than an owner (stockholder) with a claim on the cash flows of a fi rm, including employees, suppliers, creditors, and the government" (Parrino, Kidwell, & Bates, 2012, p.2).Stakeholders, 2, 3 Wealth - "The economic value of the assets someone possesses' (Parrino, Kidwell, & Bates, 2012, p.2).Wealth, 2Ch. 2 of Fundamentals of Corporate Finance p.24 Financial and real assets - "Assets that are claims on the cash fl ows from other assets; business loans, stocks, and bonds are fi nancial assets. nonfi nancial assets such as plant and equipment; productive assets are real assets; many fi nancial assets are claims on cash fl ows from real assets"(Parrino, Kidwell, & Bates, 2012, p.723, 725).Financial assets, 25, 305, 306Real assets, 25, 305, 306 Financial intermediation - "Conversion of securities with one set of characteristics into securities with another set of characteristics"(Parrino, Kidwell, & Bates, 2012, p.723).Financial intermediation, 34, 35 Initial public offering (IPO) - "The first offering of a corporations stock to the public"(Parrino, Kidwell, & Bates, 2012, p.724).Initial public off erings (IPOs), 36, 37, 479488

advantages of, 480

bundling options and common stock in, 654

cost of, 480, 486488, 491

disadvantages of, 480481

distribution of shares, 483

investment banking services for, 481483

origination of, 481482

proceeds from, 483484

underpricing of, 485486

underwriting for, 482483

as venture capitalists exit strategy, 478Inside directors, 17

Insider trading, 299300 Liquidity - "The ability to convert an asset into cash quickly without loss of value"(Parrino, Kidwell, & Bates, 2012, p.724).Liquidity, 30, 444

marketability vs., 30

in money markets, 31

of seasoned vs. unseasoned stocks, 481

Liquidity discounts, 585n.3

Liquidity position, 8788

Liquidity ratios, 8790 Marketability - "The ease with which a security can be sold and converted into cash"(Parrino, Kidwell, & Bates, 2012, p.724).Marketability, 30, 255, 595Marketability discount, 584585

Marketability risk premium MRP), 255 Market efficiency - "The degree to which the transaction costs of bringing buyers and sellers together are minimized / the degree to which current market prices refl ect relevant information and, therefore, the true value of the security"(Parrino, Kidwell, & Bates, 2012, p.2). Primary and secondary markets - "A financial market in which new security issues are sold by companies directly to investors / a financial market in which new security issues are sold by companies directly to investors"(Parrino, Kidwell, & Bates, 2012, p. 725,726).Primary markets, 30Secondary markets, 30, 271273

corporate bonds transactions in, 239

effi ciency of, 272273

transactions in, 271272

types of, 273 Private and public markets - " / financial markets where securities registered with the SEC are sold"(Parrino, Kidwell, & Bates, 2012, p.2).Private markets, 32

private equity fi rms, 493494

private investments in public equity, 494

private placements, 32, 492493

public markets vs., 492

raising capital in, 491494Public markets, 8, 3133. See also Initial

public off erings

private markets vs., 492

as wholesale markets, 491 Real and nominal interest - "The interest rate that would exist in the absence of inflation / the rate of interest that is unadjusted for inflation"(Parrino, Kidwell, & Bates, 2012, p.725,726).Real rate of interest, 3840, 259Nominal rate of interest, 38, 676 Ch. 3 of Fundamentals of Corporate Finance p.48 Average and marginal tax rate - "Total taxes paid divided by taxable income / the tax rate paid on the last dollar of income earned" (Parrino, Kidwell, & Bates, 2012, p.722,724).Average tax rate, 7273, 356, 357Marginal tax rate, 7273, 344, 356, 357, 364 Balance sheet - "Financial statement that shows a firms fi nancial position (assets, liabilities, and equity) at a point in time"(Parrino, Kidwell, & Bates, 2012, p.722).Balance sheet, 5260

assets on, 5255, 619

book-value vs. market-value, 5758

common-size, 8485

dividends on, 552

eff ect of decision making on, 4

equity on, 5557, 619

fi nance, 411412

in fi nancial planning models, 614, 617622

historical trends on, 617618

liabilities on, 5455, 619

pro forma, 614615, 617622

relationship of other statements and, 6667

stock repurchases on, 552

working capital accounts on, 618619

Balance sheet identity, 411412 Cash flows to investors - 'The cash fl ow that a fi rm generates for its investors in a given period, excluding cash inflows from the sale of securities to investors"(Parrino, Kidwell, & Bates, 2012, p.722).Cash fl ows to investors (CFI), 6771 Depreciation - "Allocation of the cost of an asset over its estimated life to refl ect the wear and tear on the asset as it is used to produce the fi rms goods and services"(Parrino, Kidwell, & Bates, 2012, p.722).Depreciation, 5455. See also Incremental

depreciation and amortization

accelerated, 55, 61

and cash fl ow invested in long-term assets, 70

and FCF, 349

GAAP vs. IRS rules for, 356359

on statement of cash fl ows, 64, 65

straight-line, 55, 6162, 358

Depreciation charges, 358

Depreciation expense, 6162 Generally Accepted Accounting Principles (GAAP) - "A set of rules that defines how companies are to prepare financial statements"(Parrino, Kidwell, & Bates, 2012, p.723).Generally accepted accounting principles

(GAAP), 16, 5052

fundamental accounting principles in, 5051

international, 5152

revenue recognition under, 6768

sales vs. leases, 536

for tax depreciation, 356 Income statement - "A financial statement that reports a fi rms revenues, expenses, and profi ts or losses over a period of time" (Parrino, Kidwell, & Bates, 2012, p.723).Income statement, 6063

common-size, 8586

in fi nancial planning models, 613, 616617

pro forma, 613, 616617

relationship of other statements and, 6667 Market value - "The price at which an item can be sold"(Parrino, Kidwell, & Bates, 2012, p.724).Market value (MV), 50, 57

of assets, 5758, 411412

book value vs., 5758

of common stock, 56

of liabilities, 58

of stockholders equity, 58

in WACC, 428

Market-value balance sheet, 5860

Market-value ratios, 89, 100101 Statement of cash flows - "A financial statement that shows a fi rms cash receipts and cash payments and investments for a period of time"(Parrino, Kidwell, & Bates, 2012, p.726).Statement of cash fl ows, 6367 Treasury stock - "Stock that the fi rm has repurchased from investors"(Parrino, Kidwell, & Bates, 2012, p.727).Treasury stock, 56Content OverviewKey financial decisions Key finance axioms - Axioms - a statement or idea that people accept as self-evidently true Identify and define various axioms of finance, such as agency, financial intermediation, stakeholders, IPO, liquidity, and so on.

The Risk-Return Trade-offThe more risk an investment has, the higher its expected return should be If you bet on a horse, you want greater odds on the long shot If you invest in a risky business Semiconductor, oil wells, junk bonds), you should demand a greater return. Every decision you make should be evaluated for riskThe Time Value of MoneyA dollar received today is worth more than a dollar received in the future If you receive a dollar today, you can invest it and earn more Because of inflation, a dollar you receive today will buy more than a dollar you receive in the future So the sooner you get the money, the better The sooner you invest your money, the better (i.e. retirement)Cash is KingYou can not spend profit or net income. These are paper figures only Cash is what is received by the firm and can be reinvested or used to pay bills. Cash flow does not equal net income; there are timing differences in accrual accounting between when you record a transaction and when you receive or pay the cashIncremental Cash FlowsIts only the increase or decrease in cash that really counts. Its the difference between cash flows if the project is done versus if the project is not done Consider all related cash flows, i.e., equip., inventory, etc.Curse of Competitive MarketsIts hard to find and maintain exceptionally profitable projects. High profits attract competitionHow to keep very profitable projects Product differentiation (Kleenex, Xerox),

Low cost (Costco, Honda), Service and quality (Mercedes, Lexus)Efficient Capital MarketsThe markets are quick and the prices are right. Information is incorporated into security prices at the speed of light! Assuming the information is correct, then the prices will reflect all publicly available information regarding the value of the firm. Example: announcing a stock splitThe Agency ProblemManagers are typically not the owners of a company. Managers may make decisions that are in their best interests and not in line with the long term best interests of the ownersExample, cutting Research and Development costs on new products to maximize current incomeTaxes Bias Business DecisionsBecause cash is king, we must consider the after-tax cash flow on an investment. The tax consequences of a business decision will impact (reduce) cash flow. Companies are given tax incentives by the government to influence their decisions. Examples : investment tax credit and environmental credits reduce taxes; purchase of PriusAll Risk is Not EqualSome risk can be diversified away and some cannot Dont put all your eggs in one basketDiversification creates offsets between good results and bad results. Example: drilling for oil wellsEthical Behavior Means Doing the Right ThingEthical Dilemmas are everywhere in finance; just read the news (back date stock options, Madoff). Unethical behavior eliminates trust, results in loss of public confidenceShareholder value suffers and it takes a long time to recoverSocial responsibility means firms have to be responsible to more than just owners, all stakeholders.http://10axioms.blogspot.com/2011/05/10-axioms-of-financial-management.html Determine difference between nominal and real interest rates.Thenominal interest rate(ormoney interest rate) is the percentage increase in money you pay the lender for the use of the money you borrowed. For instance, imagine that you borrowed $100 from your bank one year ago at 8% interest on your loan. When you repay the loan, you must repay the $100 you borrowed plus $8 in interesta total of $108.

But the nominal interest rate doesnt take inflation into account. In other words, it is unadjusted for inflation. To continue our scenario, suppose on your way to the bank a newspaper headline caught your eye stating: Inflation at 5% This Year! Inflation is a rise in the general price level. A 5% inflation rate means that an average basket of goods you purchased this year is 5% more expensive when compared to last year. This leads to the concept of thereal, or inflation-adjusted,interest rate. The real interest rate measures the percentage increase in purchasing power the lender receives when the borrower repays the loan with interest.. In our earlier example, the lender earned 8% or $8 on the $100 loan. Fortunately, the market for U.S. Treasury securities provides a way to estimate both nominal and real interest rates. You can start comparing current real and nominal interest rates by looking at rates on comparable maturity Treasury securitiespick one that is not adjusted for inflation and one that is adjusted for inflation (more about these below). Chart 1 illustrates that there is certainly a difference between the real and nominal interest rates. This difference gives us an idea of the current inflation premium.100 loan.Interest Rates in the Real World. Advertised interest rates that you may see at banks or other financial service providers are typically nominal interest rates. This means its up to you to estimate how much of the interest rate a bank may pay you on a savings deposit is really an increase in your purchasing power and how much is simply making up for yearly inflation.Now, lets look at some of the inflation-adjusted securities that provide a real interest rate. The blue line in Chart 1 plotted the inflation-adjusted interest rates paid on these securities over the past several years, In 1997, the U.S. government began offering bonds calledTreasury Inflation-Protected Securities(TIPS). Unlike other investments that pay a nominal interest rate, TIPS earn a real interest rate. The TIPS securities earn a fixed rate of interest just like many other types of government bonds. But, in addition to the fixed rate, the principal value of your TIPS bond is adjusted for inflation. So, at maturity, TIPS investors receive an inflation-adjusted principal amount. Also, for the unlikely event of deflation, there is a safeguard built into the TIPS system: the final payment of principal cannot be less than the original par value. I-bonds, issued by the U.S. Treasury, are another type of investment that earns a real rate of return. Unlike TIPS investors, who receive an adjusted principal value at the end of the investment time period, I-Bond investors receive interest payments that areadjusted for inflationtwice each year.

As with any investment or loan, its simply important to understand the interest rate that you are paying or receiving. With this knowledge, you will be able to compare it with other investments or loans and make sure you are getting a deal that is right for you and your financial situation.http://www.frbsf.org/education/publications/doctor-econ/2003/august/real-nominal-interest-rate Determine difference between private and public markets.Private Market - On the private market transactions are directly between two parties and can take any form the parties agree to. Public Market - Transactions in public markets are conducted on organized exchanges. Securities traded on public markets use standardized contracts because they involve so many parties.http://www.answers.com/Q/Private_market_vs_public_market Determine difference between financial and real assets.Businesses are evaluated according to the assessment of both financial and real assets and the ability of each to generate cash flow. Financial assets usually show continued growth and increased value, but the building and vehicle components of the real assets lose value over time. Real estate is a stable real asset that generally appreciates over time and adds value to the business portfolio.

Businesses require both financial and real assets to continue to deliver their products and meet the financial obligations that enable them to remain in operation. Financial assets generate the income to purchase real assets, and in turn, real assets are used to produce goods and services to generate revenue. A diversified portfolio with a balance of financial and real assets creates a strong company that is able to weather the ups and downs of the financial market.

http://www.ask.com/business-finance/difference-between-financial-real-assets-3ac187ab4c82c658 Understand financial intermediation.Theprocessperformed bybanksof taking infundsfrom a depositor and thenlendingthem out to aborrower. Thebankingbusinessthrives on the financial intermediationabilitiesoffinancial institutionsthat allow them to lend outmoneyat relativelyhighratesofinterestwhilereceivingmoney ondepositat relativelylowrates of interest.http://www.businessdictionary.com/definition/financial-intermediation.html Finanacial statements

Identify the components of a balance sheet.The three key sections of a balance sheet are:

Assets

Liabilities

Owners equity

Assets and liabilities are sub-divided into current (short-term) and non-current (long-term) and may have several components within each sub-division such as cash at bank, inventory, property, accounts payable, or business bank loans. The individual items will differ depending on the nature of the business and industry.

It is called a balance sheet because assets minus liabilities (net assets) must equal the owners equity (they must balance). A balance sheet is based on the formula:

Owners equity = Assets Liabilities

https://www.smallbusiness.wa.gov.au/business-topics/money-tax-and-legal/money-matters/understand-your-accounts/understanding-balance-sheets/components-of-a-balance-sheet/ Explain the balance sheet identity and why it must balance.The balance sheet reflects a companys health. It lists the assets and liabilities for a specified period, such as the most recent quarter or a fiscal year. Potential investors or loan officers examine the balance sheet when a business applies for a commercial mortgage or other loan. One of the calculations they make is balance sheet identity.http://smallbusiness.chron.com/balance-sheet-identity-37248.htmlA balance sheetshould always balance. The name "balance sheet" is based on the fact thatassetswill equalliabilitiesand equity every time.

The assets on the balance sheet consist of things of value that the company owns or will receive in the future and which are measurable. Liabilities are what the company owes, such as taxes, payables, salaries and debt. The equity sections displays the company'sretained earningsand the capital that has been contributed by shareholders.

The balance between assets, liability and equity makes sense when applied to a simpler example, such as buying a car for $10,000. In this case, you might use a $5,000 loan (debt), and $5,000 cash (equity) to purchase it. Your assets are worth $10,000 total, while your debt is $5,000 and equity is $5,000. In this simple example, assets equal debt plus equity.

http://www.investopedia.com/ask/answers/09/does-balance-sheet-always-balance.asp

Describe how market values differ from book values.Book valueis the price paid for a particular asset. This price never changes so long as you own the asset. On the other hand,market valueis the current price at which you can sell an asset.

For example, if you bought a house 10 years ago for $300,000, its book value for your entire period of ownership will remain $300,000. If you can sell the house today for $500,000, this would be the market value.

Book values are useful to help track profits and losses. If you have owned an investment for a long period of time, the difference between book and market values indicates the profit (or loss) incurred.

The need for book value also arises when it comes togenerally accepted accounting principles. According to these rules, hard assets (like buildings and equipment) listed on a company'sbalance sheetcan only be stated according to book value. This sometimes creates problems for companies with assets that have greatly appreciated - these assets cannot be re-priced and added to the overall value of the company. http://www.investopedia.com/ask/answers/183.asp Identify the components of an income statement.Theincome statementconsists of revenues and expenses along with the resultingnet incomeor loss over aperiodof time due to earning activities. The income statement showsinvestorsand management if the firm made money during the period reported.

The operating section of an income statement includes revenue and expenses. Revenue consists ofcash inflowsor other enhancements ofassetsof an entity, and expenses consist ofcash outflowsor other using-up of assets or incurring ofliabilities.

Thenon-operatingsection includes revenues and gains from non-primary business activities, items that are either unusual or infrequent,financecosts likeinterestexpense, and income tax expense.

The "bottom line" of an income statement is the net income that is calculated after subtracting the expenses from revenue. It is important to investors - also on a per share basis (asearnings per share, EPS) - as it represents the profit for the accounting period attributable to theshareholders.

https://www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-statements-taxes-and-cash-flow-2/the-income-statement-32/elements-of-the-income-statement-179-8370/ Identify the basic income statement equation and the information it provides.Theincome statementis one of the three primaryfinancial statementsused to assess a companys performance and financialposition(the two others being thebalance sheetand thecash flow statement). The income statement summarizes therevenuesand expenses generated by the company over the entire reporting period.

How it works/Example:

Theincome statementis also known as aprofitand loss (P&L) statement, statement ofearnings,statement of operationsorstatement of income.

The basic equation on which an income statement is based is:

Revenues Expenses =Net IncomeAll companies need to generaterevenueto stay in business.Revenuesare used to pay expenses,interest paymentsondebtandtaxesowed to the government. After the costs of doing business are paid, theamountleft over is callednet income. Net income is theoretically available to shareholders, though instead of paying out dividends, the firm's management often chooses to retain earnings for futureinvestmentin the business.

Income statements are all organized the same way, regardless of industry. The basic outline is shown in the following example:

Income Statement for Company XYZ, Inc.for theyearended December 31, 2008TotalRevenue $100,000Cost of Goods Sold($ 20,000)Gross Profit $ 80,000Operating ExpensesSalaries $10,000Rent $10,000Utilities $ 5,000Depreciation$ 5,000Total Operating Expenses($ 30,000)Operating Profit (EBIT)$ 50,000Interest Expense($ 10,000)Earnings before tax(EBT)$ 40,000Taxes($ 10,000)Net Income $ 30,000Number ofShares Outstanding 30,000

Earnings Per Share (EPS)$1.00Anyone interested inactive investing, pickingstocksor investigating thefinancial healthof acompany must know how to readfinancial statements, including the income statement. The importance of the information contained in the income statement cannot be overemphasized.

A firm's ability or inability to generateearningsover the longtermis the key driver ofstockandbondprices.Operating profit(EBIT) is the source ofdebtrepayment, and if a company can't generate enough EBIT to pay its debt obligations, itwillhave to enterbankruptcyor sell itself.Net incomeis the source of compensation to shareholders (owners of the company), and if a company cannot generate enoughprofitto compensate owners for the risks they've taken, the value of the owners'shares willplummet. Conversely, if a company is healthy and growing, higherstockandbondpriceswillreflect the increased availability ofprofits.

Pleasenotethat earnings/net income/profitsare not the same ascashorcash flow. It is possible for a firm to be profitable on the income statement, but not be generatingcash flow, and vice versa. To see a company'scash flow, youwillneed to examine its statement ofcashflowshttp://www.investinganswers.com/financial-dictionary/financial-statement-analysis/income-statement-1104 Understand the calcualtion of cash flows from operating, investing, and financing activities required in the statement of cash flows.UnderU.S.and ISA GAAP, the statement of cash flow can be presented by means of two ways:

The indirectmethod

The direct method

The Indirect MethodThe indirect method is preferred by most firms because is shows a reconciliation from reported net income to cash provided by operations.Calculating Cash flow from OperationsHere are the steps for calculating the cash flow from operations using the indirect method:

Start with net income.

Add back non-cash expenses.

(Such as depreciation and amortization)

Adjust for gains and losses on sales on assets.

Add back losses

Subtract out gains

Account for changes in all non-cash current assets.

Account for changes in all currentassets and liabilitiesexcept notes payable and dividends payable.

In general, candidates should utilize the following rules:

(Such as depreciation and amortization)

The following example illustrates a typical net cash flow from operating activities:

Cash Flow from Investment ActivitiesCash Flow from investing activities includes purchasing and selling long-term assets and marketable securities (other than cash equivalents), as well as making and collecting on loans.Here's the calculation of the cash flows from investing using the indirect method:

Cash Flow from Financing ActivitiesCash Flow from financing activities includes issuing and buying back capital stock, as well as borrowing and repaying loans on a short- or long-term basis (issuing bonds and notes). Dividends paid are also included in this category, but the repayment of accounts payable or accrued liabilities is not.Here's thecalculation of the cash flows from financing using the indirect method:

http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/cash-flow-indirect.asp Understand the difference between marginal and average tax rates.The difference between marginal and average tax rates is a fairly important concept for all tax payers to better understand the way the government gets paid. Youve probably heard both terms, but maybe never knew what they were. Well, lets fix that.Marginal Tax RateYour marginal tax rate is the highest rate that you are taxed. For many people, a portion of their income is taxed at one rate, and the rest is taxed at another rate. For instance, if you make right around $40,000 a year, you may pay 15% on the first $20,000 or so and 28% on anything over $20,000. So, lets break that down:15% of $20,000 is $3,00028% of $20,000 is $5,600Total tax liability is $8,600In this case, your marginal tax rate would be 28%, the highest rate at which your income is taxed.Average Tax RateThe average tax rate is the actual percentage of income going to pay taxes. In the example above we can calculate average tax rate as follows:$8,600 / $40,000 = .215 * 100 = 21.5%So, in this example, your average tax rate is 21.5%, a bit lower than your 28% marginal rate. Its good to know this because this represents your actual tax liability.Why the Two Tax Rates?In the United States, we have something called a progressive tax system, meaning, the more money you make, the higher your tax rate. If the person in the example above only made $20,000, hed wouldnt have had to pay the 28%instead only the 15% would apply. Our progressive tax system taxes you at a lower rate for the first so many dollars you make, everything over that amount gets taxed at a higher rate, and so on until you reach the cap, which, for 2008, was 35%.So, it all boils down to this, your marginal tax rate is the highest rate at which youre taxed, but it does not represent the percentage of your income that goes toward paying taxes. That number is the average tax rate.

https://answers.yahoo.com/question/index?qid=20101010231157AANR6E0 Understand how each of the financial statements articulates with the other."Financial statementarticulation" describes how different financial statements link together. For example, the same net income figure appears on a year's income statement, statement of stockholders' equity, and statement of cash flows. "Articulation" is based on the mathematical properties of accounting records; failure to articulate in the following ways indicates that the financial statements are in error.

Net income reconciles to statement of retained earningsNet income at the bottom of the income statement should equal Net income on the statement of retained earnings, presented as part of the statement of stockholders' equity. Note that this link works for "net income attributable to shareholders," also known as "net income attributable to the parent company." It does not always work for "consolidated net income."

Net income reconciles to cash flows statementNet income at the bottom of the income statement should equal net income on the cash flows statement, as presented at the beginning of operating cash flows, under the indirect method. This works for "consolidated net income" only.

Current assets and liabilities reconcile to cash flows statementUnder the indirect method, operating cash flows present a series of changes in currentassets and liabilities. These changes should equal changes in all current assets and liabilities presented in the balance sheet.

Stockholders' equity on the balance sheet reconciles to the stockholders' equity statementAll stockholders' equity items listed on the balance sheet should equal individual stockholder equity balances listed in the statement of stockholders' equity. Most statements of stockholders' equity are presented in the columnar format. The numbers in the last row should equal the year-end balances on the balance sheet.

Cash on the balance sheet reconciles to the cash flows statementCash, usually presented as "cash and cash equivalents" on the balance sheet, should equal cash presented on the statement of cash flows.

Reconciliation to notesNotes to the financial statements provide more detail explaining values in the financial statements themselves. Values in the notes sometimes, but not always, reconcile to the financial statements themselves.

Financial statement "articulation" describes how financial statements should link together. Ultimately, the income statement, the statement of cash flows, and the statement of stockholders' equity explain how balances in the balance sheet change from one period to the next.

http://accounting.answers.com/financial-statements/6-ways-that-financial-statements-articulate Fundamental decisions in financial management

There are two fundamental types of financial decisions that thefinanceteam needs to make in a business: investment and financing. The two decisions boil down to how to spend money and how to borrow money. Recall that the overall goal of financial decisions is to maximize shareholder value, so every decision must be put in that context.

InvestmentAn investment decision revolves around spending capital onassetsthat willyieldthe highestreturnfor the company over a desired timeperiod. In other words, the decision is about what to buy so that the company will gain the most value.

To do so, the company needs to find a balance between its short-term and long-term goals. In the very short-term, a company needs money to pay its bills, but keeping all of its cash means that it isn't investing in things that will help it grow in the future. On the other end of the spectrum is a purely long-term view. A company that invests all of its money will maximize its long-term growth prospects, but if it doesn't hold enough cash, it can't pay its bills and will go out of business soon. Companies thus need to find the right mix between long-term and short-term investment.

The investment decision also concerns what specific investments to make. Since there is no guarantee of a return for most investments, the finance department must determine anexpected return.This return is not guaranteed, but is the average return on an investment if it were to be made many times.

The investments must meet three main criteria:

It must maximize the value of the firm, after considering the amount ofriskthe company is comfortable with (risk aversion).

It must be financed appropriately (we will talk more about this shortly).

If there is no investment opportunity that fills (1) and (2), the cash must be returned to shareholder in order to maximize shareholder value.

FinancingAll functions of a company need to be paid for one way or another. It is up to the finance department to figure out how to pay for them through the process of financing.

There are two ways to finance an investment: using a company's own money or by raising money from external funders. Each has its advantages and disadvantages.

There are two ways to raise money from external funders: by taking ondebtor selling equity. Taking on debt is the same as taking on a loan. The loan has to be paid back withinterest, which is the cost of borrowing. Selling equity is essentially selling part of your company . When a company goes public, for example, they decide to sell their company to the public instead of toprivateinvestors. Going public entails sellingstockswhich represent owning a small part of the company. The company is selling itself to the public in return for money.

https://www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-field-and-goals-of-financial-management-1/introducing-finance-22/types-of-financial-decisions-investment-and-financing-145-3871/

Understand the concerns of capital budgeting, financing, and working capital decisions and how they affect the balance sheet.

Organizational structures and forms

Identify forms of business organization and their respective strengths and weaknesses.5 Focuses of Organizational Structure Strengths and Weaknesses1. Functional StructureStrengthsEasier to manage work within a group

Contains people who speak the same language and nurtures technical expertise, attracts and develops experts

Lower labor costs

Workload can be balanced upon demand

WeaknessesCoordination and communication between departments may be slower and less accurate

Individual department managers have limited decision making authority

Different departments have different priorities; resolving conflicts may be costly; customers interests could be overlooked

2. Product or Service-Based StructureStrengthsResponsibility for each product can be pinpointed at the division level

Focus on one product can produce higher quality state-of-the-art output

Team spirit develops around each product line

Competition among divisions can boost business

Encourages independent decision making

Quicker response to customer request

WeaknessesLess sharing of resources across divisions

More duplication of effort resulting in higher costs

Customers who want more than one product/service will have to work with more than one division

Company may be slow to recognize that a product should be changed, dropped or added

Could be stifled by one product focus

3. Customer or Geography-Based StructureStrengthsUnique needs of each type of customer are well served

Focus on customers needs and preferences

Unprofitable product lines more likely to be dropped

WeaknessesMay be less sharing of resources across division/departmental boundaries

More duplication of effort and infrastructure resulting in higher costs

Internal systems may evolve in different ways to serve different customer segments

4. Business Process Team StructureStrengthsFocus on organization is outward to customer

Reduces number of levels of management flatten organizations (reduced management cost; less need for coordination)

Time and money saved due to reduced need to pass information up and down the hierarchy and between departments

Promotes self-management by employees (greater job satisfaction because of more involvement)

Broadens individuals knowledge and skill bases

Faster decision making, reduced cycle time and improved responsiveness to customers

WeaknessesInvolves major transformation of the organization (difficult, timely and costly change; new systems required for virtually everything)

Company may need to retain functional expertise if not sufficient within each process

May require major and costly training initiative

5. Matrix (Hybrid) Structure (contains more than one focus; has two or more bosses)StrengthsEnables organization to use its resources efficiently (provides flexibility to assign staff to project requirements and reassign as needed)

Takes full advantage of the use of teams (maintaining in-depth technical expertise in critical functions)

Provides individuals an opportunity to work with different skills and expertise

Requires managers to cooperate with one another and moderates their power over subordinates

WeaknessesMultiple bosses may result in confusion

Slows down decision making

Conflicting demands from bosses leads to personal stress and reduced work quality

Power struggle between managers regarding resources

Can disrupt the work and get in the way of customer service

Subordinates may play one boss against another

https://www.mbaboost.com/5-focuses-of-organizational-structure-strengths-and-weaknesses/ Determine types of business forms needed for specific business applications.Business goals Wealth maximization Identify agency conflicts.Confl icts of interest between a principal and an agent Know the concept of wealth maximization

Wealth maximization is a modern approach tofinancial management. Maximization of profit used to be the main aim of a business and financial management till the concept of wealth maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders. Wealth maximization simply means maximization of shareholders wealth. It is combination of two words viz. wealth and maximization. Wealth of a shareholder maximize when the net worth of a company maximizes. To be even more meticulous, a shareholder holds share in the company /business and his wealth will improve if the share price in the market increases which in turn is a function of net worth. This is because wealth maximization is also known as net worth maximization.

Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders. The objective of any shareholder or investor would be good return on their capital and safety of their capital. Both these objectives are well served by wealth maximization as a decision criterion to business.

How to calculate wealth?Wealth is said to be generated by any financial decision if the present value of future cash flows relevant to that decision is greater than the costs incurred to undertake that activity. Wealth is equal to the present value of all future cash flows less the cost. In essence, it is the net present value of a financial decision.

Wealth = Present Value of cash inflows Cost.http://www.efinancemanagement.com/financial-management/wealth-maximization Understand the difference between profit and stock valuation.The relationship between a company's earnings and its stock price can be complicated. High profits don't necessarily mean a high stock price, and big losses don't always lead to a low stock price. Of course, without earnings it is hard for companies to stay in business for long. You could say that two of the major factors that influence stock price are current earnings and promise of future earnings.http://finance.zacks.com/relationship-between-earnings-stock-market-value-4890.html Identify the major factors that affect stock prices.Have you ever wondered about what factors affect a stock's price? Stock prices are determined in the marketplace, where seller supply meets buyer demand. But unfortunately, there is no clean equation that tells us exactly how a stock price will behave. That said, we do know a few things about the forces that move a stock up or down. These forces fall into three categories:fundamentalfactors,technicalfactors andmarket sentiment.

Fundamental FactorsIn an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (earnings per share(EPS), for example) and 2) a valuation multiple (aP/E ratio, for example).

An owner of acommon stockhas a claim on earnings, and earnings per share (EPS) is the owner's return on his or her investment. When you buy a stock, you are purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.

Part of these earnings may be distributed asdividends, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.

As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discountedpresent valueof the anticipated future earnings stream. (To learn about present value, seeUnderstanding the Time Value of Money.)

http://www.investopedia.com/articles/basics/04/100804.asp

Week 2 Study Guide: Financial Statement Analysis

Reference

Parrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database.

Readings and Key Terms

Ch. 4 of Fundamentals of Corporate Finance p.811. Financial statement analysisProfessor Bolder and classmates,

After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012), Financial statement analysis is defined as " the use of financial statements to evaluate a companys overall performance and assess its strengths and shortcomings" (p. 82)I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database2. Trend analysisProfessor Bolder and classmates,

After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012), Trend analysis is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database3. BenchmarkProfessor Bolder and classmates,

After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012), Benchmark is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database4. Common-size financial statementsProfessor Bolder and classmates,

After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012), Common-size financial statements is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection databaseAccording to Parrino, Kidwell, and Bates (2012), Financial ratio is defined as "According to Parrino, Kidwell, and Bates (2012), Insolvency is defined as "According to Parrino, Kidwell, and Bates (2012), Financial leverage is defined as "According to Parrino, Kidwell, and Bates (2012), Default risk is defined as "According to Parrino, Kidwell, and Bates (2012), Standard Industrial Classification (SIC) System is defined as "According to Parrino, Kidwell, and Bates (2012), North American Industry Classifcation System (NAICS) is defined as "Ch. 18 of Fundamentals of Corporate Finance p.5695. Replacement costProfessor Bolder and classmates,

After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Replacement cost is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database6. Book valueProfessor Bolder and classmates,

After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Book value is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database7. Enterprise valueProfessor Bolder and classmates,

After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Enterprise value is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database8. Nonoperating assests (NOA)Professor Bolder and classmates,

After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Nonoperating assests (NOA) is defined as "I look forward to any and all responses,

Greg Fowler

[email protected]

662-996-7164

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection databaseAccording to Parrino, Kidwell, and Bates (2012), Terminal value is defined as "According to Parrino, Kidwell, and Bates (2012), Cash flow is defined as "According to Parrino, Kidwell, and Bates (2012), Free cash flows is defined as "According to Parrino, Kidwell, and Bates (2012), Break-even is defined as " According to Parrino, Kidwell, and Bates (2012), Dividend discount model (DDM) is defined as "Content Overview

Financial ratios

Understand components of financial ratios.Calculate key ratio equations

Liquidity

Current ratio

Quick ratio

Cash ratio

Efficiency

Inventory turnover

Days sales in inventory

Accounts receivable turnover

Days sales outstanding

Total asset turnover

Fixed asset turnover

Leverage

Total debt ratio

Debt-to-equity ratio

Equity multiplier

Times interest earned

Cash coverage

Profitability

Gross profit margin

Operating profit margin

Net profit margin

EBIT return on assets

Return on assets (ROA)

Return on equity (ROE)

Market value indicator

Earnings per share

Price-earnings ratio

DuPont equation

ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

ROE = (Net Income / Net Sales) x (Net Sales / Total Assets) x (Total Assets / Total Equity)

Interpret financial ratio results

Interpret financial ratio results against historical company data. Interpret financial ratio results against industry benchmarks. Business valuation

Explain why the choice of organizational form is important. Describe why cash flow and break-even are important in business.

Week 3 Study Guide: Working Capital Management


Ch. 14 of Fundamentals of Corporate Finance p.4411. Professor Bolder and classmates,

After reading chapter 14 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Trade credit is defined as "

"

I look forward to any and all responses,

Greg Fowler

[email protected]

662-568-2964

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database

2. Professor Bolder and classmates,

After reading chapter 14 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Consumer credit is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST



After reading chapter 14 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Operating cycle is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST

ReferenceParrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection databaseCarrying costs

Economic order quantity

Compensating balances

Float

Lockbox

Working capital

Maturity matching strategy

Short- and long-term financing

Credit lines

Commercial paper

Ch. 15 p.4724. Professor Bolder and classmates,

After reading chapter 15 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Bootstrapping is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST



After reading chapter 15 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Venture capitalists is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST


Angel investors

Seasonal issue

Prospectus

Underwriting

Cash offer

Shelf registration

Public placement

Private placement

Ch. 16 p.504

Optimal capital structure


After reading chapter 16 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Firm value is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST


Financial restructuring

Business and financial risk

Costs of debt

Asset substitution problemCh. 17 p.5457. Professor Bolder and classmates,

After reading chapter 17 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Payout policy is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST


Dividends

Declaration date

Ex-dividend date

Record date

Payable date

Stock repurchase

Stock dividends

Tender offer

Stock split

Ch. 19 p.6068. Professor Bolder and classmates,

After reading chapter 19 of Fundamentals Of Corporate Finance, I would like to add to the discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),Internal and sustainable growth rate is defined as "

"


Greg Fowler

[email protected]

662-568-2964

9am-9pm CST


Financial and strategic planning

Pro forma financial statements

Percent of sales method

External funding needed (EFN)

Payout and plowback ratios

Internal and sustainable growth rate

Content Overview

Working capital management

Concepts of working capital

Understand working capital terms. Know what trade and consumer credit is.

Cash conversion cycle

Identify various components of the cash conversion cycle. Know how to calculate the cash conversion cycle. Working capital management strategies

Understand carrying costs. Cash management and budgeting

Understand the terms of sale. Calculate and interpret the cost of trade credit. Calculate and interpret economic order quantity. Identify reasons for holding cash. Understand the concept of float. Identify methods of float (lockboxes, EFTs, and so on). Financing working capital

Understand differences in short- and long-term financing strategies. Identify various forms of short-. and long-term financing.Raising capital

Identify and differentiate between the various methods of raising capital. Differentiate between the advantages and disadvantages of going public. Understand the process of a company going public. Differentiate between private and public markets.Capital structure policy

Capital structure and firm value

Determine a companys optimal capital structure. Identify the relation between business, financial, and total equity risk. Benefits and costs of using debt

Identify the benefits of financing a company with debt. Identify the costs of financing a company with debt. Understand how taxes influence capital structure. Determine optimal capital structure of a company.Dividends, stock repurchases, and payout policy

Types of dividends

Identify various types of dividends. Understand the dividend payment process. Stock repurchases and dividends

Identify how stock repurchases differ from dividends. Understand concept of dividends and firm value. Understand differences between stock dividends and stock splits.Financial planning and forecasting

Finance and strategic planning

Differentiate among strategic, investment, financing, and divisional plans. Identify various financial planning models. Understand why sustainable growth is important. Create a pro forma balance sheet. Create a pro forma income statement.Week 4 Study Guide: Business Valuation


Ch. 5 of Fundamentals of Corporate Finance p.124 Time value of money

Time zero

Future value (fv)

Principal

Simple interest

Compounding

Compound interest

Discounting

Discount rate

Present value (pv)

Rule of 72

Ch. 6 p.159 Annuity

Perpetuity

Ordinary annuity

Present value of an annuity (PVA)

Amortization

Future value of an annuity (FVA)

Annuity due

Annual percentage rate (APR)

Ch. 7 p.200 Total holding period return

Expected return

Variance (2)

Standard deviation ()

Normal distribution

Portfolio

Diversification

Coefficient of variation (CV)

Covariance

Diversifiable and nondiversifiable risk

Market portfolio

Market risk

Beta ()

Capital asset pricing model (CAPM)

Security market line (SML)

Ch. 8 p.238 Coupon payments

Face value or par value

Coupon rate

Opportunity cost

Par value bonds

Discount bonds

Premium bonds

Yield to maturity

Effective annual rate (EAY)

Realized yield

Interest rate risk

Yield curve

Ch. 9 p.270 Bid price

Offer (ask) price

Dividend yield

Common stock

Preferred stock

Content Overview

Time value of money

Single sums

Calculate present value. Calculate periods. Calculate interest and discount rate. Calculate future value. Interpret and make decisions from the calculations. Understand the relationship between time, rate, and value. Annuities

Identify various forms of annuities. Calculate present value. Calculate periods. Calculate interest and discount rate. Calculate payments. Calculate future value. Interpret and make decisions from the calculations. Identify and understand perpetuities. Costs of loans

Calculate effective annual rate. Compare interest rates on different loans.Risk and return

Calculate the return of an investment. Determine expected rate of return. Measuring risk

Calculate variance and standard deviation. Interpret variance and standard deviation. Understand risk diversification. Capital asset pricing model (CAPM)

Calculate expected return using capital asset pricing model. Identify and interpret the security market line. Choose between two investments using CAPM.Bond valuation

Wealth maximization

Identify types of bonds. Calculate value of a bond. Identify difference between par, discount, and premium bonds. Calculate yield to maturity (YTM). Compare bonds uisng effective annual rate. Understand correlation between interest rate risk and bonds.Stock valuation

Markets

Differentiate between primary and secondary markets. Differentiate between common and preferred stock. Valuation

Calculate value of common stock. Calculate value of preferred stock. Calculate yield of common and preferred stock. Understand growth rates and how they affect dividend payments and stock valuation.Week 5 Study Guide: Capital Financing and Risk Analysis


Ch. 7 p.200 Total holding period return

Expected return

Variance (2)

Standard deviation ()

Normal distribution

Portfolio

Diversification

Coefficient of variation (CV)

Covariance

Diversifiable and nondiversifiable risk

Market portfolio

Market risk

Beta ()

Capital asset pricing model (CAPM)

Security market line (SML)

Ch. 10 of Fundamentals of Corporate Finance p.301 Capital budgeting

Independent versus mutually exclusive projects

Contingent projects

Opportunity cost of capital

Capital rationing

Net present value (NPV)

Payback period

Discount payback period

Accounting rate of return

Internal rate of return

Modified internal rate of return

Conventional cash flow

Ch. 11 p.341 Incremental cash flows

Marginal tax rate

Stand alone principle

Net operating profits after tax (NOPAT)

Tangible assets

Intangible assets

Current assets

Nominal dollars

Real dollars

Variable costs

Fixed costs

Equivalent annual cost (EAC)

Ch. 12 p.380 Operating leverage

Degree of operating leverage (DOL)

Break-even analysis

Pretax operating cash flow (EBITDA) break-even point

Per-unit contributions

Crossover level of unit sales (CO)

Accounting operating profit (EBIT) break-even point

Sensitivity analysis

Scenario analysis

Simulation analysis

Profitability index

Ch. 13 p.409 Finance balance sheet

Weighted average cost of capital (WACC)

Ch. 20 p.641 Financial option

Call option

Put option

Real option

Exercise

Call premium

Put premium

Arbitrage

Content Overview

Capital budgeting fundamentals

Capital budgeting process

Identify reasons to make capital expenditures. Understand capital budgeting terms. Know how to classify capital investment project. Differentiate the differences among independent, mutually exclusive, and contingent projects. Identify reasons to make capital expenditures. Understand difference between nominal and real dollars. Use adjusted rate of return from CAPM to evaluate projects NPV. Determine project profitability. Choose between two or more projects. Capital budgeting calculations

Calculate annual cash flows (ACF). Calculate terminal cash flows (TCF). Calculate marginal and average tax rates. Calculate cost of debt. Calculate cost of equity. Calculate cost of preferred stock. Calculate cost of common stock. Calculate cost of capital (WACC). Calculate net present value (NPV). Calculate payback period. Calculate discounted payback period. Calculate internal rate of return (IRR). Calculate modified internal rate of return (MIRR). Calculate profitability index (PI). Calculate capital asset pricing model (CAPM). Calculate operating leverage (DOL). Calculate accounting operating leverage (ADOL). Calculate break-even analysis cash flows (ACF).Cash flows and capital budgeting

Identify forms of business organization and their respective strengths and weaknesses. Determine types of business forms needed for specific business applications.Evaluating project economics and capital rationing

Variable and fixed costs and project risk

Identify various costs and changes in EBIT.The cost of capital

Cost of capital calculations

Calculate cost of debt. Calculate cost of equity. Calculate cost of preferred stock. Calculate cost of common stock.Working capital management

Working capital accounts

Understand operating and cash conversion cycles. Identify reasons for holding cash. Identify discretionary financing needs (both short- and long-term). Working capital calculations

Calculate operating and cash conversion cycles. Calculate cost of trade credit. Calculate economic order quantity. Calculate effective annual rate (EAR).Options and capital management

Financial options

Understand the concept of options. Identify differences between call and put options. Understand the concept of arbitrage. Identify uses of hedging.Week 6 Study Guide: Applications of Finance


Ch. 19 p.606 Financial and strategic planning

Pro forma financial statements

Percent of sales method

External funding needed (EFN)

Payout and plowback ratios

Internal and sustainable growth rate

Ch. 21 of Fundamentals of Corporate Finance p.671 Globalization

Multinational corporation

Transnational corporation

Country risk

Exchange rate

Spot rate

Forward rate

Exchange rate risk

Hedge

London Interbank Offer Rate (LIBOR)

Content Overview

International financial management

Concepts

Identify and define various axioms of international finance, such as globalization, multi-national companies, foreign exchange, spot rate, forward rate, LIBOR, and so on.

Calculate cross rates. Calculate forward premium (Discount). High-level understanding of exchange rate risk.Note: Ch. 19 content is also referred to in this week. Be sure to review the Week 3 Study Guide to reference Ch. 19 content.

Reference Page Entry

Parrino, R., Kidwell, D.S., & Bates, D.S. (2012).Fundamentals Of Corporate Finance(2nd ed.). Retrieved from The University of Phoenix eBook Collection database.

In-Text Citation

Insert the paraphrased material(Parrino, Kidwell, & Bates, 2012, ChapterChapter 1).

According to Parrino, Kidwell, and Bates(2012),Insert the paraphrased material(ChapterChapter 1).

Insert the quotation(Parrino, Kidwell, & Bates, 2012, ChapterChapter 1)

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