UNISEMINAR
Finance and Accounting
Maastricht 2nd Edition Academic Year 12/13
Finance and Accounting
Introduction 003 – 012
1 Capital Markets – Risk & Return 013 – 032 2 Capital Structure 033 – 065 3 Payout Policy 066 – 093
4 Capital Budgeting and Valuation 094 – 119 5 Options 120 – 163
Table of Contents
Finance and Accounting
1 Organizations 164 – 170 2 Financial Statements 171 – 184 3 Transaction Analysis 185 – 196 4 Accrual Accounting 197 – 205 5 Short-‐Term/Trading Investments 206 – 210 6 Receivables 211 – 220 7 Inventory & Cost of Goods Sold 221 – 236 8 Plant Assets and intangibles 237 – 251 9 Current Liabilities 252 – 267 10 The Cash Flow Statement 268 – 278 11 Financial Statement Analysis 279 – 298 Notes, Feedback, Contact
Table of Contents
Finance and Accounting Finance: Chapter 1 – Risk & Return
14 / 298
Name the two different types of risk
-‐ 2 Points -‐
Uniseminar
FFiirrmm-‐-‐ssppeeccii��iicc risk (also: idiosyncratic, unsystematic, unique or diversi�iable risk)
SSyysstteemmaattiicc risk (also: undiversi�iable or market-‐risk)
Risk & Return Two types of risk
P. 1
Finance and Accounting Finance: Chapter 1 – Risk & Return
The eexxcceessss rreettuurrnn is the difference between the average return for the investment and the
average return for corporate bonds, which are generally considered to be a risk-‐free
investment.
-‐ True / False -‐
15 / 298
Uniseminar
Risk & Return De�inition Excess Return
FFaallssee.. The excess return is the difference between the average return for the investment and the average return for TTrreeaassuurryy bbiillllss, which are generally considered to be a rriisskk-‐-‐ffrreeee investment
P. 1
Finance and Accounting Finance: Chapter 1 – Risk & Return
16 / 298
What is the bbeettaa?
-‐ De�inition-‐
Uniseminar
The bbeettaa is the expected percent change in the excess return of a security for a 1% change in the excess of the market portfolio.
Risk & Return De�inition of Beta
P. 2
Finance and Accounting
What is the formula for the ccoovvaarriiaannccee?
-‐ Formula -‐
Finance: Chapter 1 – Risk & Return
24 / 298
Uniseminar
Risk & Return Formula Covariance
P. 3
Cov(Ri,Rj )historical =
11−T
(Ri,t − R∑ i) ⋅ (Rj,t − R j )
T = number of observations, R = return, R = expected return
Finance and Accounting Finance: Chapter 1 – Risk & Return
25 / 298
What is the name of the line with the question mark?
-‐ Graph-‐
Uniseminar
Risk & Return Graph
CCaappiittaall MMaarrkkeett LLiinnee:: The line from the risk-‐free investment through the market portfolio, represents the highest expected return available for any level of volatility.
P. 5
Finance and Accounting Finance: Chapter 2 -‐ Capital Structure
39 / 298
What is the formula for ccoosstt ooff ccaappiittaall ooff lleevveerreedd eeqquuiittyy (when cost of unlevered equity is
known)?
-‐ Formula -‐
Uniseminar
Formula for Cost of Capital of Levered Equity P. 11
Capital Structure
rE = rU +DE(rU − rd )
Finance and Accounting
Firm X has the following capital structure: Debt = 300, Equity = 600. Imagine that the �irm has a
levered cost of equity of 15% and its cost of debt is 6%. What is its unlevered cost of equity?
-‐ Calculation -‐
Finance: Chapter 2 -‐ Capital Structure
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Uniseminar
Capital Structure Calculation unlevered cost of equity
0.15 = x + (300/600) * (x – 0.06) 0.15 + (300/600) * 0.06 = x + (300/600) x 0.18 = 1.5x x = 0.12 The unlevered cost of equity is 12%
P. 11
rE = rU +DE(rU − rd )
Finance and Accounting
Caterpillar has the following properties: Rd = 0.06; Re = 0.10; Rwacc = 0.0797; Cash-‐�low = $4.25 million;
perpetual growth rate = 0.04; D/E ratio= 0.5; τc = 0.35
What is the value of its interest tax shield?
-‐ Calculation -‐
Finance: Chapter 2 -‐ Capital Structure
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Uniseminar
Capital Structure WACC and tax shield calculation
Caterpillar has the following pre-‐tax WACC: Value without the tax shield is: Value with the tax shield is: Value of the tax shield is: 107 – 91 = $16 million
P. 12
rWACC =E
E +DrE +
DE +D
rD ⋅ (1−τC ) =1
1+ 0.50.10+ 0.5
1+ 0.50.06 = 0.0867
VU =4.25
0.0867− 0.04= 91
V L =4.25
0.0797− 0.04=107
Finance and Accounting Finance: Chapter 2 -‐ Capital Structure
49 / 298
Fill in the blanks for A, B, C, D, E
-‐ Graph -‐
Cost of Equity (rE)
Cost of Debt (rD)
Pre-‐tax WACC(rWACC=rU=rA)
Cost of Capital
Debt-‐to-‐Value Ratio (D/(D+E))
50% 100%
Cost of Equity (rE)
Cost of Debt (rD)
Pre-‐tax WACC
Due to interest tax shield
10%
20%
30%
40%
0%
10%
20%
30%
40%
Debt-‐to-‐Value Ratio (D/(D+E))
50% 100%0%
A A
B B
C C
D
E
Uniseminar
Capital Structure Graph illustrating the change in WACC with and without taxes
A = Cost of Equity B = Pre-‐tax WACC C= Cost of Debt D = WACC with taxes E = Change in WACC due to interest tax-‐shield
P. 13
Cost of Equity (rE)
Cost of Debt (rD)
Pre-‐tax WACC(rWACC=rU=rA)
Cost of Capital
Debt-‐to-‐Value Ratio (D/(D+E))
50% 100%
Cost of Equity (rE)
Cost of Debt (rD)
Pre-‐tax WACC
Due to interest tax shield
10%
20%
30%
0%
10%
20%
30%
Debt-‐to-‐Value Ratio (D/(D+E))
50% 100%0%
Finance and Accounting
The following �igure shows the alternatives a �irm has to
ddiissttrriibbuuttee iittss ffrreeee ccaasshh ��llooww. Fill in the boxes.
-‐ Figure -‐
Finance: Chapter 3 – Payout Policy
67 / 298
Retain Pay Out
Invest in New Projects
Increase Cash
Reserves
Repurchase Shares
Pay Dividends
Free Cash Flow
A B
C D E F
Uniseminar
Payout Policy Uses of Free Cash Flow
P. 16
Retain Pay Out
Invest in New Projects
Increase Cash
Reserves
Repurchase Shares
Pay Dividends
Free Cash Flow
Finance and Accounting
What items does the bbaallaannccee sshheeeett report?
-‐ 3 Points -‐
Accounting: Chapter 2 – Financial Statements
175 / 298
Uniseminar
The bbaallaannccee sshheeeett shows the �inancial position of a company at a speci�ic point of time. It reports 33 iitteemmss: AAsssseettss LLiiaabbiilliittiieess ((SSttoocckkhhoollddeerrss’’)) EEqquuiittyy
Financial Statements Balance Sheet Items
P. 42
Finance and Accounting
Illustrate the rules of debit and credit by putting the arrows ( ) in the right direction and choosing between +/-‐ for the three types of
balance sheet items:
-‐ Graph -‐
Accounting: Chapter 3 – Transaction Analysis
190 / 298
AAsssseettss == LLiiaabbiilliittiieess ++ SShhaarreehhoollddeerr´́ss EEqquuiittyy
DDeebbiitt ((++//-‐-‐)) CCrreeddiitt ((++//-‐-‐)) DDeebbiitt ((++//-‐-‐)) CCrreeddiitt ((++//-‐-‐)) DDeebbiitt ((++//-‐-‐)) CCrreeddiitt ((++//-‐-‐))
Uniseminar
Transaction Analysis The Rules of Debit and Credit
The rules of debit and credit are illustrated in the following exhibit:
P. 46
AAsssseettss == LLiiaabbiilliittiieess ++ SShhaarreehhoollddeerr´́ss EEqquuiittyy
DDeebbiitt ((++)) CCrreeddiitt ((-‐-‐)) DDeebbiitt ((-‐-‐)) CCrreeddiitt ((++)) DDeebbiitt ((-‐-‐)) CCrreeddiitt ((++))
Finance and Accounting Accounting: Chapter 7 – Inventory & Cost of Goods Sold
228 / 298
The following exhibit illustrates FIFO and LIFO under increasing and decreasing costs. Fill in the blanks.
-‐ Graph -‐
Time
Cost €
FIFO
Time
Cost €
Time
Cost €
Time
Cost €
A) Increasing Cost
B) Decreasing Cost
LIFO
A. Increasing/Decreasing Costs
B. Increasing/Decreasing Costs
C. FIFO/LIFO D. FIFO/LIFO
Uniseminar
Inventory & Cost of Goods Sold Graph -‐ FIFO vs. LIFO with Increasing/Decreasing Costs
The following graph illustrates the COGS and Ending inventory under FIFO or LIFO with increasing or decreasing costs.
P. 62
Time
Cost €
FIFO
Time
Cost €
Time
Cost €
Time
Cost €
A) Increasing Cost
B) Decreasing Cost
LIFO
Finance and Accounting
Fill in the correct terminology for X (e.g. depreciation).
-‐ Table -‐
Accounting: Chapter 8 – Plant Assets and Intangibles
239 / 298
AAsssseett AAccccoouunntt ((BBaallaannccee SShheeeett)) RReellaatteedd EExxppeennssee AAccccoouunntt ((IInnccoommee ssttaatteemmeenntt))
PPllaanntt AAsssseettss
Free Hold Land X
Leasehold Land X
Buildings, Machinery, and Equipment X
Furniture and Fixtures X
Land Improvements X
Natural Resources X
IInnttaannggiibblleess with �inite useful lives X
IInnttaannggiibblleess with inde�inite useful lives X
Uniseminar
Plant Assets and Intangibles Plant Assets Terminology
The correct terminology per asset is:
P. 64
AAsssseett AAccccoouunntt ((BBaallaannccee SShheeeett)) RReellaatteedd EExxppeennssee AAccccoouunntt ((IInnccoommee ssttaatteemmeenntt))
PPllaanntt AAsssseettss
Free Hold Land None
Leasehold Land Depreciation
Buildings, Machinery, and Equipment Depreciation
Furniture and Fixtures Depreciation
Land Improvements Depreciation
Natural Resources Depletion
IInnttaannggiibblleess with �inite useful lives Amortization
IInnttaannggiibblleess with inde�inite useful lives None
Finance and Accounting
What are the formulas for hhoorriizzoonnttaall and vveerrttiiccaall aannaallyyssiiss?
-‐ 2 Formulas -‐
Accounting: Chapter 11 – Financial Statement Analysis
281 / 298
Uniseminar
Vertical analysis:
Financial Statement Analysis Formula – Horizontal and Vertical Analysis
P. 73
Horizontal analysis:
Percentage Change = Dollar amount of changeBase year amount
Vertical analysis income statement = Financial statement item (e.g. income statement item)Base value (e.g. total revenue)