Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Chapter 1

The Corporation

Chapter Outline

1.1 The Four Types of Firms

1.2 Ownership Versus Control of Corporations

1.3 The Stock Market

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1.1 The Four Types of Firms

• Sole Proprietorships • Partnerships • Interview with David Viniar • Limited Liability Companies • Corporations

– Formation of a Corporation– Ownership of a Corporation

• Tax Implications for Corporate Entities

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Figure 1.1 Types of U.S. Firms

Source: www.bizstats.com

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1.2 Ownership Versus Control of Corporations

• The Corporate Management Team• Ownership and Control of Corporations

– Principal-Agent Problem– Corporate Bankruptcy

• Shareholder Activism and Voting Rights

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Worldwide Stock Markets Ranked by Two Common Measures

The 10 biggest stock markets in the world ranked (a) by total value of all domestic corporations listed on the exchange at year-end 2004 and (b) by total volume of shares traded on exchange in 2004.

Source: www.world-exchanges.org

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Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Chapter 2

Introduction to Financial Statement Analysis

Chapter Outline

2.1 Firms’ Disclosure of Financial Information

2.2 The Balance Sheet

2.3 Balance Sheet Analysis

2.4 The Income Statement

2.5 Income Statement Analysis

2.6 The Statement of Cash Flows

2.7 Other Financial Statement Information

2.8 Financial Reporting in Practice

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2.2 The Balance Sheet

• Assets – Curret Assets– Long-Term Assets

• Liabilities – Current Liabilities– Long-term Liabilities

• Stockholders’ Equity • Balance Sheet Analysis

– Market-to-Book Ratio– Debt-Equity Ratio– Enterprise Value– Other Balance Sheet Information

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Table 2.1 Global Conglomerate Corporation Balance Sheet for 2009 and 2008

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Equation 2.2

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Equation 2.3

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Equation 2.4

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2.5 The Income Statement

• Earnings Calculations– Gross Profit– Operating Expenses– Earnings Before Interest and Taxes– Pretax and Net Income

• Income Statement Analysis– Profitability Ratios– Working Capital Days– EBITDA– Leverage Ratios– Investment Returns– Valuation Ratios

• Common Mistake: Mismatched Ratios

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Table 2.2 Global Conglomerate Corporation Income Statement Sheet for 2009 and 2008

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Equation 2.5

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Equation 2.8

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Equation 2.9

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Equation 2.10

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Equation 2.12

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2.6 The Statement of Cash Flows

• Operating Activity • Investment Activity • Financing Activity

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Table 2.3 Global Conglomerate Corporation Statement of Cash Flows for 2009 and 2008

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2.7 Other Financial Statement Information

• Management Discussion and Analysis • Statement of Stockholders’ Equity • Notes to the Financial Statements

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2.8 Accounting Manipulation

• Enron • WorldCom • Sarbanes-Oxley Act

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Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Chapter 3

Arbitrage and Financial Decision Making

Chapter Outline

3.1 Valuing Decisions

3.2 Interest Rates and the Time Value of Money

3.3 Present Value and the NPV Decision Rule

3.4 Arbitrage and the Law of One Price

3.5 No-Arbitrage and Security Prices

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Chapter 3, Q1 Valuing Decisions

Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose Honda’s profit margin with the rebate is $6000 per vehicle. If the change in sales is the only consequence of this decision, what are its costs and benefits? It is a good idea?

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Chapter 3, Q4: Calculating Cash Values Using Market Prices

Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for $63 per share.a.Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value.b.Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the sock bonus now? What will your decision depend on?

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Example: When Value Depends on Preferences

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Comparing Costs at Different Points in Time

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Figure 3.1 Converting Between Dollars Today and Gold, Euros, or Dollars in the Future

We can convert dollars today to different goods, currencies, or points in time by using the competitive market price, exchange rate, or interest rate.

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Example: The NPV Is Equivalent to Cash Today

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3.4 Arbitrage and the Law of One Price

• An Old Joke • Can we have a case in which Gold is traded at a

different price on NYSE and LSE?• Law of One Price – Prevails or else we would

have an arbitrage opportunity.

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Example 3.6: Computing the No-Arbitrage Price

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Three Profound Ideas

1. The NPV of trading securities2. The Separation principal3. Value additivety

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Cash Flows and Market Prices (in $) of a Risk-Free Bond and an Investment in the Market Portfolio

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Determining the Market Price of Security A (cash flows in $)

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A Negative Risk Premium

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Risk and Risk Premiums for Different Securities

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The No-Arbitrage Price Range

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