lOMoARcPSD 12662205 MGF301 Exam 1 Notes Professor Unknown MGF301 Exam 1 Notes Professor Unknown Corporation Finance University at Buffalo Corporation Finance University at Buffalo StuDocu is not sponsored or endorsed by any college or university StuDocu is not sponsored or endorsed by any college or university Downloaded by Louis Guillemain louis guillemain gmail com lOMoARcPSD 12662205 Forms of Business Organizations Sole Proprietorship a Easy to setup but difficult to transfer ownership b 100 profit but also 100 liability if u can cut someone you re liable for it c Limited access to capital 99 out of pocket bc bank won t lend d No business tax only income tax single taxation Partnership General Partnership 1 Legal and financial liability are shared 2 Unlimited liability 3 Partnership agreement Limited Partnership 1 At least one general partner meaning participate day to day operation signing contracts 2 At least one limited silent partner meaning only responsible for money invested or only liability in agreement Corporation a Bylaws tell the gov how business will operate b Borrow money from bank c Limited liability legal entities separate from owners d Double taxation drawback taxed at corporate level and personal income Limited Liability Company LLC a Hybrid between partnership and corporation b Limited liability c Tax as partnership Financial Manager s Decision in a Corporation 1 Firm shareholders and managers are seperated 2 Manager s Job a Investment Decision Capital Budgeting spend money 1 Decision to invest tangible or intangible long term investment project Starbucks opening a store on campus Identify investment projects that will add value to the company 2 b Financing Decision Capital Structure get money 1 Left hand side of balance sheet 2 Determine the right mixture of long term debt and equity financing c Payout Decision 1 What should be done with profits Dividend D Working capital management 1 Manage current assets liabilities of day to day business Downloaded by Louis Guillemain louis guillemain gmail com Proxy Statement informations to vote on decision salaries of managers lOMoARcPSD 12662205 2 3 2020 Monday Principal Agent Relationship Shareholders principal Owners of a corporation Managers agent Decision makers Agency Problem Manager maximize their own interest Possible ways to fix it Internal governance mechanism Managerial Compensation Board of Directors External governance mechanism Activist shareholders Proxy Fight Market takeover Regulation Information transparency Primary market Issuance Market Markets where corporations raise capital by issuing new securities Public offerings sells securities to general public Private placement negotiates a sale with specific buyers Initial public offering IPO first equity issue made available to public by a private company private to public Seasoned equity offering SEO new equity issue by a public company Secondary markets Trading market Organized securities exchanges Auction market NYSE New York Stock Exchange A market where buyers sellers indicate highest lowest price they willing to pay accept Over the counter Transact through dealers ex NASDAQ Downloaded by Louis Guillemain louis guillemain gmail com lOMoARcPSD 12662205 2 5 2020 Wednesday Balance sheet statement of firm s assets and liabilities at a given point in time Income statement firm s revenues expenses and profits over a period of time Current assets current liabilities net working capital 2 10 2020 Operation cash flow cash from business Net capital expenditure cash used to invest in permanent assets Net working capital short term assest investment Operating Cash Flow EBIT earning before taxes Tax Depreciation expense Net Capital Spending Ending net FA Beginning net FA Depreciation expense Change in NWC Ending NW Beginning NWC 2 12 2020 Liquity Current ratio current assets current liabilities Downloaded by Louis Guillemain louis guillemain gmail com lOMoARcPSD 12662205 Quick Acid test ratio current assets inventories current liabilities Cash ratio cash current liabilities Asset management ratio Receivable turnover sales account receivable Days Sales Outstanding 365 Receivable turnover Inventory turnover COGS Inventory Days in inventory 365 inventory turnover Asset turnover sales total assets Financial Leverage ratio Total debt ratio total debt total assets total equity total assets Debt equity ratio total debt total equity Equity multiplier leverage ratio total asset total equity Times interest earned TIE EBIT interest expense Cash coverage ratio EBIT Depreciation interest expense Coverage Ratio Profitability ratios Profit margin net income sales Return on assets ROA net income total asset Return on equity ROE net income total equity 2 17 2020 Dupont system Three rules of time travel Future Value CFx 1 r n Simple interest based on original investment CF CF r x Downloaded by Louis Guillemain louis guillemain gmail com lOMoARcPSD 12662205 2 19 2020 3 2 2020 Types of Bond Premium Par Discount 3 4 2020 Bond price Par value Coupon rate Discount rate Bond price Par value Coupon rate Discount rate Bond price Par value Coupon rate Discount rate Zero coupon bonds issued at prices below par value Long term bond more sensitive to change in interest rate Price of low coupon bond is more sensitive to change in interest rate Downloaded by Louis Guillemain louis guillemain gmail com lOMoARcPSD 12662205 3 11 2020 Bond Market Over the counter market Dealers handle the transactions Gordon Model Downloaded by Louis Guillemain louis guillemain gmail com