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Exam 1 Review. 09/23/2008. Goal of the Firm. Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price. Legal Forms of Business. 1) Sole Proprietorship 2) Partnership -- General Partnership -- Limited Partnership - PowerPoint PPT Presentation
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Exam 1 ReviewExam 1 Review
09/23/200809/23/2008
Goal of the FirmGoal of the Firm
Shareholder Wealth Shareholder Wealth Maximization?Maximization?
this is the same as:this is the same as:
a) Maximizing Firm Valuea) Maximizing Firm Value
b) Maximizing Stock Priceb) Maximizing Stock Price
Legal Forms of BusinessLegal Forms of Business
1) Sole Proprietorship1) Sole Proprietorship
2) Partnership2) Partnership
-- General Partnership -- General Partnership
-- Limited Partnership-- Limited Partnership
-- Limited Liability Company (LLC)-- Limited Liability Company (LLC)
3) Corporation 3) Corporation
Primary MarketPrimary Market
Secondary MarketSecondary Market
Initial Public Offering (IPO)Initial Public Offering (IPO)
Seasoned New IssueSeasoned New Issue
The Corporation and The Corporation and Financial MarketsFinancial Markets
Financial Management AxiomsFinancial Management Axioms
1) Risk - return trade-off.1) Risk - return trade-off.
2) Time value of money.2) Time value of money.
3) Cash - not profits - is king.3) Cash - not profits - is king.
4) Incremental cash flows count.4) Incremental cash flows count.
5) The curse of competitive markets.5) The curse of competitive markets.
Financial Management AxiomsFinancial Management Axioms
6) Efficient capital markets. 6) Efficient capital markets.
7) The agency problem.7) The agency problem.
8) Taxes bias business decisions.8) Taxes bias business decisions.
9) All risk is not equal.9) All risk is not equal.
10) Ethical dilemmas are everywhere in 10) Ethical dilemmas are everywhere in
finance.finance.
SALESSALES
- - Cost of Goods SoldCost of Goods Sold
GROSS PROFITGROSS PROFIT
- - Operating ExpensesOperating Expenses
OPERATING INCOME (EBIT)OPERATING INCOME (EBIT)
- - Interest ExpenseInterest Expense
EARNINGS BEFORE TAXES (EBT)EARNINGS BEFORE TAXES (EBT)
- - Income TaxesIncome Taxes
EARNINGS AFTER TAXES (EAT)EARNINGS AFTER TAXES (EAT)
- - Preferred Stock DividendsPreferred Stock Dividends
- - NET INCOME AVAILABLENET INCOME AVAILABLE
TO COMMON STOCKHOLDERSTO COMMON STOCKHOLDERS
Income StatementIncome Statement
Balance SheetBalance SheetAssets Liabilities (Debt) & Equity
Current AssetsCurrent Assets CashCash
Marketable SecuritiesMarketable Securities
Accounts ReceivableAccounts Receivable
InventoriesInventories
Prepaid ExpensesPrepaid Expenses
Fixed AssetsFixed Assets Machinery & EquipmentMachinery & Equipment
Buildings and LandBuildings and Land
Other AssetsOther AssetsInvestments & patentsInvestments & patents
Current LiabilitiesCurrent Liabilities Accounts PayableAccounts Payable Accrued ExpensesAccrued Expenses Short-term notesShort-term notesLong-Term LiabilitiesLong-Term Liabilities Long-term notes Long-term notes MortgagesMortgagesEquityEquity Preferred Stock Preferred Stock Common Stock (Par Common Stock (Par value)value) Paid in CapitalPaid in Capital Retained EarningsRetained Earnings
Free Cash FlowsFree Cash Flows
Cash Flows from Cash Flows from AssetsAssets = Cash Flows from
Financing
Cash flows generated through the firm’s
assets=
Cash flows paid to - or received from - the
firm’s investors (creditors & stockholders)
TaxesTaxes
Marginal tax rate: the tax rate that would Marginal tax rate: the tax rate that would
be applied to the next dollar of taxable be applied to the next dollar of taxable
incomeincome
Average tax rate: taxes owned by a firm Average tax rate: taxes owned by a firm
divided by the firm’s taxable incomedivided by the firm’s taxable income
Always marginalAlways marginal
We will want to answer We will want to answer questions about the firm’squestions about the firm’s
LiquidityLiquidity
Efficient use of AssetsEfficient use of Assets
Leverage (financing)Leverage (financing)
ProfitabilityProfitability
Future and Present ValueFuture and Present Value
FV = PV (1 + i)FV = PV (1 + i)nn
FV = PV (FVIF FV = PV (FVIF i, ni, n ))
FV = PV (e FV = PV (e i*ni*n) -- ) -- continuous continuous
compoundingcompounding
PV = FV (PVIF PV = FV (PVIF i, ni, n ))
Annuity and Annuity DueAnnuity and Annuity Due
FV = PMT (FVIFA FV = PMT (FVIFA i, ni, n ))
FV = PMT{ [ (1 + i)FV = PMT{ [ (1 + i)nn – 1] / i – 1] / i }}
PV = PMT (PVIFA PV = PMT (PVIFA i, ni, n ))
PV = PMT { [1 - 1 / (1 + i)PV = PMT { [1 - 1 / (1 + i)nn ] / i ] / i } }
Perpetuity: PV = PMT / i Perpetuity: PV = PMT / i
Annual Percentage Yield Annual Percentage Yield (APY)(APY)
APY = APY = (( 1 + 1 + ) ) m m - 1- 1quoted ratequoted ratemm