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40 Cards in this Set
- Front
- Back
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What is finance about?
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Measurement.
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Finance definition
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An asset from which you will gain value and you have to finance it in order to obtain it.
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Main questions finance answers
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how should we spend the money?
How should we raise the money? |
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Capital structure And how do we decide what type of financing to use?
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Equity, liabilities, bonds. How we use these depends on the type of business. Entrepreneurs debt usually is prolly alot because the bank won't support your new idea. Instead, there is investors who expect a return.
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Financial instruments that create returns for the owner also create what for the firm?
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Capital. Investors can go off and sell their investments if they no longer want to invest with you so companies have to meet the needs of their customers in order to retain them.
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Financial Management
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Maximize the value of the existing owner equity.
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Balance sheet
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Shows the total assets, liabilities, and equity of a business at a point in time. This is like a freeze frame in time.
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Asset
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What a company owns
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Liability
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What a company owes
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Equity
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Net worth.
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Income statement
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Shows the evolution of revenues and expenses over a period of time. Analgous to balancing a check book. Start with revenue subtractexpenses and you're leftwith a surplus. Net incmoe. This is like a video recording. It's reported overa period of time.
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Cash flow statement
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This statement shows the sources and uses of cash. Where it came from and how it is used up.
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Capital
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The money a co. needs to continue operating. You need a huge amount of capital to run a business. Bank won't give you a HUGE loan so you go to capital market. You have 2 options, can sell bonds or stock to raise money,.
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Characteristics of bonds (debt)_
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Top advantage of bonds.: You retain ownership.
1. Doessn't dilute ownership 2. Cost of debt financing is cheaper than equity. 3. Interest paid to bondholders is a tax deduction. Downsides of bond financing: 1. Companies ALWAYs have to pay interest. If you default on this you HAVE to file bankruptcy. |
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Characteristics of common stock (equity financing)
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1. C.S. confers ownership rights to investors.
2. C.S. has unlimited life whereas bonds are issued for typical length of 30 years or less. 3. Dividends on C. S. can be skipped by the co. without any adverse effects. There are some companies who have never issued divdiends. |
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Priority in bankruptcy
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1. Bondholders (usually get back .30 per dollar.)
2. Preferred stock 3. Common stock |
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Analytical layout of balance sheet
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Assets:
Current Assets Fixed Assets Intangible Assets Liabilities and Equity Current Liabilities Long term liabilities Shareholder Equity TOTAL LIABILITIES AND EQUITY |
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How is preferred stock like a bond? How is it like a stock?
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Preferred dividends like bond interest payments is fixed in amounts. Preferred dividends like common stock can be skipped without bankrupting the co. This is pd in arrears.
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Why is preferred stock preferred?
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1. If a co. goes bankrupt,. preferred get paid first.
2. Dividends are paid before common dividends also pd in arrears. |
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Government doesn't buy bonds orcommon stock becaus?
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won't buy bonods because they wouldn't own the company. they didn't purchase common stock b.c it is high risk.
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NWC
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CA-CL
If this is negative there is problems |
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Debt ratio
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Total Debt / Total Assets
If this number is above 6-7% the co. is having trouble. |
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Net cash flow
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Net income + depreciation
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Dividends per share
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Common dividends / # shares outstanding
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Dividend Payout ratio
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Tells what % of n.i. is being pd out in dividends. Common dividends / net income
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Retention ratio
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ARE / NI
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Earnings per share
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Price per share / EPS
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OCF
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Sales
-COGS -ADMIN EXP -TAX =OCF SKIP DEPR b/c it is an finncing exp. Skip preferred dividends b/c it is financing. Taxes however, are an operating expense. |
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Source of cash
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ANy balance sheet item that provides cash
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Use of cash
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Any balance sheet item that expends cash.
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CF to bondholders
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Interest paid - net new long term debt
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Cashflow to equity holders
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Dividends - [net new common stock - RE]
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Cash flow to assets
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Cash flow to bondholders + cash flow to creditors
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Short term liquidity ratios
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Assess current debt management to see if the co has enough money to function for the next few months.
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Long term liquidity
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Assess long term debt
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Current ratio
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CA / CL
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Quick Ratio
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CA - Inventory / CL
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Total debt ratio
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Total debt / Total assets
Trouble when over 70% |
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Debt Equity ratio
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Total debt / Total equity
Tell us that for every 100 of debt there is ____ of total equity |
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Equity multiplier
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TA / TE
By what multiplacative factor has equity been transformed into total assets. Can also be calculated as 1 + debt / equity |
