Chapter 1 Forms of Business Sole Proprietorship one owner once as personal income o Advantages easy to start owner keeps all profit least regulated taxed o Disadvantages limited to owner s lifespan capital limited to owners wealth unlimited liability difficult to sell stock Partnership two or more owners o Advantages you re able to get more capital easy to start taxed once as personal income o Disadvantages unlimited liability difficult to transfer ownership when one partner dies the business may dissolve Corporation o Advantages transfer of ownership is easy separation of management and ownership limited liability unlimited lifespan easy to raise capital o Disadvantages over taxing corporate and personal Know These Capital budgeting what long term investments a business should take on Capital structure looks at how we should pay for our assets and how we should use debt or equity The goals of financial management o Maximize profits short term or long term o Minimize costs without losing quality o Maximize the market stock share o Companies may do charity work in order to better their public image Agency Problem company Stockholders hire managers that they think represent their interests to run a Unfortunately stockholder and agents managers may have a conflict of interest Because the company is managed by managers who are not the owners of the company agency problems occur Managers goals vs agency costs Chapter 2 Financial Statements Balance Sheet a snapshot in time of assets and liabilities o Listed in order of descending liquidity whichever is most easily converted to cash is listed first o 1 Assets Liability Equity o Like this Income Statement looks at a period of time o Report revenues first and then deduct expenses o Matching principle following GAAP show revenues when the sale is made and expenses when they are incurred not when they are paid out o Like this o Net Sales COGS Depreciation 2 Earnings Before Income Tax Interest 3 Taxable Income Taxes 4 Net Income Net Working Capital Current Assets Current Liabilities o This equation will not be on your formula sheet so memorize it o This is positive when cash that will be received in the next 12 months is more than cash that will be paid out o This is positive in a health firm Liquidity o Ability to convert to cash quickly o Liquid firms don t usually experience financial hardships o Liquid assets have a lower rate of return because you re not investing 5 Earnings Per Share Net Income of shares outstanding 6 Dividends Per Share Dividends of shares outstanding Market Value vs Book Value Market value is the price at which assets liabilities or equity can be bought or Book value is the price at which assets liabilities or equity was recoded at when sole purchased sold For example the VCR player you purchased in 1995 isn t worth what you bought it for today Taxes Cash Flows Marginal Tax Rate the percentage paid on the next dollar earned Average Tax Rate calculate the total tax amount using the marginal tax rates once you have the total tax amount you divide the total tax amount by taxable income Allows you to look at how cash is generated and paid off 10 Cash Flow From Asset CFFA Operating Cash Flow Net Capital Spending Change in NWC 11 Net Capital Spending NCS Ending Net Fixed Assets Beginning Net Fixed Assets Depreciation 13 Change In Net Working Capital Ending NWC Beginning NWC Chapter 5 Formulas to find present value future value rate and time are found as 14 17 on your formula sheet but you don t need to know these if you have a financial calculator Time Value of Money be earning interest A dollar in hand today is worth more than a dollar in the future because it could Present Value PV is earlier on a timeline than Future Value FV Interest Rate I Y is the exchange rate between later and earlier money o Also called discount rate cost of capital opportunity cost of capital required return Number of periods in years unless otherwise specified N is how much time the money will be earning interest It is important to note that if your looking at something monthly or quarterly rather than annually this affects both interest rate and number of periods Future Value Let s say you have 1 000 and you put it in the bank for 1 year at an interest rate of 5 Press 1000 then PV we put it in as a negative because it is money leaving us Press 1 then N Press 5 the I Y Press CPT then FV Your calculator should give you 1 050 Simple Interest vs Compounding Interest Using the example above lets say we put the money in the bank for 2 years Press 1000 then PV we put it in as a negative because it is money leaving us Press 2 then N Press 5 the I Y Press CPT then FV Your calculator should give you 1 102 50 This shows you compounding interest Simple interest is based off of the principle amount only For example since we earned 50 of interest for the first year we assume that we only earn 50 every year in interest For two years 1 000 50 50 1 100 Compounding interest gave us 2 50 on the interest we earned in the first year Future Value Finding the future value works the same way as present value you just enter the numbers on different keys Let s say you need 10 000 in 1 year and the interest rate is 7 annually How much should you put in the bank Press 10 000 then FV positive because this money would be coming in Press 1 then N Press 7 then I Y Press CPT then PV Your calculator should give you 9 346 Remember money inflow is entered as positive money outflow is entered as negative This is important with discount rate and number of periods Discount Rate For this we re looking at what the implied interest rate is Let s say we are paid 1 200 in 5 years We know that we originally invested 1 000 N 5 FV 1 200 PV 1 000 When you CPT I Y you should get 3 714 Remember that you want a higher rate when you re investing and a lower rate when you re borrowing Finding the Number of Periods Let s say you want 20 000 The discount rate is 10 and you currently have 15 000 How long will your money have to sit in the bank for you to have 20 000 FV 20 000 I Y 10 PV 15 000 When you CPT N you should get 3 02 so your money should sit in the bank for at least 3 02 years Chapter 6 PV of and Uneven Cash Flow Must be calculated by years and then added up Year N 1 1 2 2 3 3 4 4 I Y 12 12 12 12 FV 200 400 600 800 PV 178 75 318 88 427 07 508 41 Multiple Uneven Cash Flows This …
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