StuDocu is not sponsored or endorsed by any college or universityMGF301 Exam 1 Notes - Professor UnknownCorporation Finance (University at Buffalo)StuDocu is not sponsored or endorsed by any college or universityMGF301 Exam 1 Notes - Professor UnknownCorporation Finance (University at Buffalo)Downloaded by Louis Guillemain ([email protected])lOMoARcPSD|12662205Forms of Business Organizations:Sole Proprietorship:a. Easy to setup but difficult to transfer ownershipb. 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 liability3. Partnership agreementLimited Partnership1. At least one general partner meaning participate day-to-day operation(signing contracts)2. At least one limited(silent) partner meaning only responsible for moneyinvested or only liability in agreementCorporation:a. Bylaws: tell the gov how business will operateb. Borrow money from bankc. Limited liability(legal entities separate from owners)d. Double taxation (drawback) taxed at corporate level and personal incomeLimited Liability Company(LLC):a. Hybrid between partnership and corporationb. Limited liabilityc. Tax as partnershipFinancial Manager’s Decision in a Corporation1. Firm(shareholders) and managers are seperated2. 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)2. Identify investment projects that will add value to the companyb. Financing Decision (Capital Structure)(get money)1. Left hand side of balance sheet2. Determine the right mixture of long-term debt and equity financingc. Payout Decision1. What should be done with profits? DividendD. Working capital management1. Manage current assets/ liabilities of day-to-day businessDownloaded by Louis Guillemain ([email protected])lOMoARcPSD|126622052/3/2020 MondayPrincipal-Agent RelationshipShareholders(principal)=Owners of a corporationManagers(agent)=Decision makersProxy Statement: informations to vote on decision, salaries of managersAgency Problem:Manager maximize their own interestPossible ways to fix it:Internal governance mechanism:Managerial CompensationBoard of DirectorsExternal governance mechanism:Activist shareholders:Proxy Fight:Market takeoverRegulation:Information transparencyPrimary market (Issuance Market): Markets where corporations raise capital by issuing newsecuritiesPublic offerings: sells securities to general publicPrivate placement: negotiates a sale with specific buyersInitial public offering (IPO): first equity issue made available to public by a privatecompany(private to public)Seasoned equity offering (SEO): new equity issue by a public companySecondary markets (Trading market):Organized securities exchanges:Auction market: NYSE(New York Stock Exchange) A market wherebuyers(sellers) indicate highest (lowest) price they willing to pay (accept)Over-the-counter:Transact through dealers: ex NASDAQ.Downloaded by Louis Guillemain ([email protected])lOMoARcPSD|126622052/5/2020 WednesdayBalance sheet: statement of firm’s assets and liabilities at a given point in timeIncome statement: firm’s revenues, expenses, and profits over a period of timeCurrent assets-current liabilities=net working capital2/10/2020Operation cash flow= cash from businessNet capital expenditure= cash used to invest in permanent assetsNet working capital=short term assest investmentOperating Cash Flow= EBIT(earning before taxes)-Tax+Depreciation expenseNet Capital Spending=Ending net FA-Beginning net FA+Depreciation expenseChange in NWC=Ending NW-Beginning NWC2/12/2020LiquityCurrent ratio=current assets/current liabilitiesDownloaded by Louis Guillemain ([email protected])lOMoARcPSD|12662205Quick(Acid test) ratio=(current assets-inventories)/current liabilitiesCash ratio=cash/current liabilitiesAsset management ratioReceivable turnover=sales/account receivableDays Sales Outstanding=365/Receivable turnoverInventory turnover=COGS/InventoryDays in inventory=365/inventory turnoverAsset turnover=sales/total assetsFinancial Leverage ratioTotal debt ratio=total debt(total assets-total equity)/total assetsDebt-equity ratio=total debt/total equityEquity multiplier(leverage ratio)=total asset/total equityCoverage RatioTimes interest earned(TIE)=EBIT/interest expenseCash coverage ratio=EBIT+Depreciation/interest expenseProfitability ratiosProfit margin=net income/salesReturn on assets(ROA)=net income/total assetReturn on equity(ROE)=net income/total equity2/17/2020Dupont systemThree rules of time travelFuture Value= CFx(1+r)^nSimple interest(based on original investment)=CF+[CF*r*x]Downloaded by Louis Guillemain ([email protected])lOMoARcPSD|126622052/19/20203/2/2020Types of BondPremium ---Bond price > Par value--- Coupon rate > Discount ratePar ---Bond price = Par value--- Coupon rate = Discount rateDiscount ---Bond price < Par value--- Coupon rate < Discount rate3/4/2020Zero-coupon bonds issued at prices below par valueLong term bond more sensitive to change in interest ratePrice of low coupon bond is more sensitive to change in interest rateDownloaded by Louis Guillemain ([email protected])lOMoARcPSD|126622053/11/2020Bond Market→ Over the counter market→ Dealers handle the transactionsGordon ModelDownloaded by Louis Guillemain