Econ 106 F Lecture 1.1Four types of Firms- General partners- Limited Partners- Limited liability Company (Cost is higher)- Corporation- legally formed, sue the corp, not the individualo Raise money in the public market by selling stock- Most are sole proprietorships in the USBankruptcy- Can reorganize company- Can liquidate companyStock Market- Primary markets(when a corporation itself issues new shares of stock and sells them to investors)- Secondary markets (Continuation to trade in a secondary market between investors)Lecture 1.2Preparation of financial statements- GAAP accounting policies for companies- Auditor reviews the financial statementsBalance Sheet- snapshot in time of the firm’s financial positions- made of Asset= liabilities + Stockholders’ Equity- Assetso Current Assets: cash or expected to be turned into cash in the next yearo a/r: and example is Dell computer turned the accounts receivable to zero by ensuring they receive the money before assembling the computero inventories things you plan to sell within 1 year. o Long term assets: Net Property, Plant and equipment Depreciation: will become less valuable over years (straight line depreciation is better considering time value of money) Book value= Acquisition cost - Accumulated depreciation  Good will and intangible assets- Liabiliteso Current Liabilities: paid within the next year Accounts payable Short-term debt/ Notes payable Current maturities of Long-Term Debt Net working capital= current assets-current liabilities (measure of how liquid the firm is and how it can address financial emergencies)o Long term liabilities Long term debt, capital leases, deferred taxes- Book value of equity= stockholder’s equity- Market value of equity (market price per share x # of shares outstanding) thiscannot be negative- Comparison ratio: MV of equity/ BV of equityo Value stocks have low M/V ratios(not much growth, pretty steady)o Growth stocks have high M/V ratios (success in the future)Income Statement- shows the flow of those revenues and expenses between two dates- Includes total sales and net income- If net income is small and sales is large, could be a loss on taxes, R&D, or loans. - EPS= Net income/ shares outstanding, this is determined by the companies- Price per earnings (P/E) ratio, how much the market is willing to pay- Stock price=EPS*P/E- Dilution: due to the growth in the # of sharesLecture 2.1Statement of Cash Flows- when accounts payable increases cash flow- increase in inventory there is a decrease in cash flow- financing activities includes changes in borrowings(taking out loans, paying off loans)- Cash flow show the difference between the ending balance sheet amounts from the current year and the previous yearFinancial statement analysis- Profitability ratios: o Gross margin= gross profit/saleso Operating marging= operating income/saleso Ebit Margin=EBIT/ saleso Net profit Margin = NI/sales- Liquidity Ratioso Measures how prepared you are to pay your debtso Current ratio= current Assets/ current liabilitieso Quick ratio= (cash + short term Investments +AR)/ current liabilitieso Cash ration = Cash/ Current Liabilities. - Working Capital Ratioso Operating Liquidity available to a business Involves a measure of time and how quickly can it create cash- Leverage Ratioso How much the firm relies on debto Debt equity ratio- Valuation ratioso P/E Ratio= Market Capitalization/ net income= Share Price/ earning per shareo Enterprise Value to EBIT= (Market value of equity +Debt-cash)/ EBITo Enterprise value to sales=(Market value of equity +Debt-cash)/ sales- Operating returnso Return on Equity- how well the firm can find investment opportunities= net income/ book value of equityo Return on assets= net income +interest expense/ total assetso Return on invested capital(ROIC)= after tax earnings generated by the business over capital raised through equity and debtLecture 2.2Financial Reporting in Practice- Enron and WorldCom accounting scams- Sarbanes- Oxley Act- tried to give rules for accounting- Dodd-Frank ActIdentify Costs and Benefits- Competitive market: market in which goods can be bought and sold at the same price- What are they worth and what do they cost- Time value of money: the difference in value between money today and money in the future is due to the tie value of money- Net present value is the difference between the present value of its benefits and the present value of its costsArbitrage: you can buy it at a lower price somewhere and sell it at a higher price. This doesn’t exist because prices would eventually equilibrate Lecture 3.1Lab informationPg 137-138 Lab 1Assumptions: base pay goes up g=3% r=?1.cost- 5000 benefit- promo goes up by 10K2.MBA cost- 25000 per year for three years; benefit promotion goes up by 20K3. do nothingLecture 4.2Inflation- effects purchase powerTerm- structure: the relationship between the investment term and the interest