Principles of Managerial Finance
Financial Statements and Ratio Analysis
Financial Statements
Financial Ratios
Income Statement: summary of firms operating result
Balance Sheet
Statement of Cash Flow
Statement of Retained Earnings
Liquidity Ratio
Activity Ratio
Debt Ratio
Market Ratio
Profitability Ratio
Current-Ratio: Current Asset / Current Liabilities
Quick (Acid-Test) Ratio: (Current Asset - Inventory) / Current Liabilities
Inventory Turnover: COGS / Inventory
Average Collection Period: Accounts Receivable / Sales per Day
Average Payment Period: Accounts Payable / Average Purchases per Day
Total Asset Turnover: Sales / Total Asset
Debt Ratio: Total Liabilities / Total Asset
Times Interest Earned Ratio: EBIT / Tax
Fixed-Payment Coverage Ratio
Gross Profit Margin: Gross Profit / Sales
Operating Profit Margin: Operating Profit / Sales
Net Profit Margin: Net Profit / Sales
Earning per Share: Earnings Available for Common Stock Holder / Shares Outstanding
Return on Total Assets: Net Profit Margin x Total Asset Turnover
Return on Common Equity: Return on Asset x Financial Leverage Multiplier
(P/E) Ratio: Market price of common stock / EPS
(M/B) Ratio: Common Stock Equity / Number of Common Stock Outstanding
Ratio Analysis
Summary of Ratios
DuPont Systems of Analysis
Liquidity
Activity
Profitability
Market
Debt
Stock Valuation
Debt vs Equity
Debt
Voice in Management
Claim on Income and Asset
Maturity
Tax Treatment
Equity
Voice in Management
Claim on Income and Asset
Maturity
Tax Treatment
Common Stock Valuation
Common Stock
Ownership
Par Value
Preemptive Rights
Voting Rights
Dividends
Authorised, Outstanding and Issued Shares
Market Efficiency
Efficient-Market Hypothesis
Basic Common Stock Valuation Equation
Zero-Growth Model
Constant Growth Model
Variable Growth Model
Free Cash Flow Valuation Model
Other Approach to Common Stock Valuation
Book Value
Liquidation Value
(P/E) Multiples
Interest Rate and Bond Valuation
Return on Common Equity (ROE)
Return on Total Assets (ROA)
Financial Leverage Multiplier (FLM)
Total Asset Turnover
Net Profit Margin
Earnings Available for Common Stockholder
Sales
Sales
Total Assets
Total Liabilities and Stockholder Equity
Common Stock Equity
Interest Rates and Required Returns
Interest Rate Fundamentals
Factors affecting interest rate
Inflation
Liquidity preference
Risk
Real rate of interest
Cost of money when the supply and demand of funds is in equilibrium
Nominal interest rate
Actual interest rate that accounts for risk and inflation
Nominal interest rate = real IR + IP + RP
Interest rate
Required return
Term Structure of Interest Rate
The relationship between maturity and rate of return for bonds of similar risk
Yield Curve
Yield to maturity
Compund annual return earned on debt securities held to maturity
Normal yield curve
Inverted yield curve
Flat yield curve
Theories of term structure
Expectation theory
Liquidity preference theory
Market segmentation theory
Yield curve reflects future expectation of future interest rate
Normal yield curve is because is because investors prefer short-term investment (more liquid and less risky) over long-term investment and higher rates compensates for the risk
Loans is segmented based on maturity and the supply/demand of each segment determine its interest rate
Risk Premium
Risk premium reflect issue and issuer risks
Issuer and issue related components
Business risk
Financial risk
Interest rate risk
Liquidity risk
Task risk
Debt-specific risk
Default risk
Maturity risk
Contractual provision risk
Corporate Bonds
Cash Flow and Financial Planning
Analyzing the firm's cash flow
Depreciation
Methods of depreciation
A method of allocating the cost of an asset over its lifetime
Depreciable value
Depreciable life
Straight line method
Double-declining balance
Sum of the year method
Developing statement of cashflow
Cashflow categories
Operating flows
Investing flows
Financing flows
Time Value of Money
Role of time value in finance
Future value
Present value
Basic pattern of cash flow
Single amount
Annuity
Mixed stream
Single amount
Future value of a single amount
Present value of a single amount
FV = PV x (1+r)^n
PV = FV / (1+r)^n
Annuities
Types of annuities
Ordinary annuity
Annuity due
Future value of an ordinary annuity
Present value of an ordinary annuity
Future value of an annuity due
Present value of an annuity due
Mixed streams
Compounding interest more frequently than annually
General formula for compounding more frequently than annually
Continuous compunding
Nominal and effective annual interest rate
Special applications of time value
Determining deposits needed to accumulate a future sum
Loan amortization
Finding interest or growth rate
Future value of a mixed stream
present value
Present value of a perpetuity
Cash flows directly related to sale and production of goods and services
Cash flow associated with purchase and sales of fixed asset and equity investment in other firms
Cash flow that result from debt and equity financing transaction
Incurrence and repayment of debt
Sales of stock
Repurchase of stock
Cash dividends
Classifying inflows and outflows of cash
PV = CF / r
Privately Owned
Publicly Owned
Arbitrary Value of Common Established for Legal Purposes in the Firm's Corporate Charter
Rights that allow the stockholder to maintain their proportionate ownership when new shares are issued, protecting them from dilution of ownership
Each stockholder is entitled to one vote in the election of directors or other special issues
Authorized shares are shares of common stock that the firms corporate charter allow it to issue
Outstanding Shares are issued shares that is held by the investors
Treasury stock are issued shares that is held by the firm
Issued Shares are shares that have been put into circulation
Financial Market Environment
Financial Institution and Markets
Financial Institutions
Financial institution is an intermediary that channel savings into loan or investments
Major Financial Institutions
Commercial banks
Investment banks
Shadow banking system
Financial Market
A marketplace where securities including equities, bond, currencies and derivatives are traded
Money market
Capital market
A market where high liquidity and very short maturity financial instruments are traded
A market where equity and debt instruments are traded
CD, Treasury bills, municipal notes and repurchase agreement
Stocks
Bonds
Long term debt instrument used to raise large sum of money
Units of ownership or equity in a corporation
A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes business, personal and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.
Investment banks specialize in large and complex financial transactions, such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial advisor for institutional clients
Cost of Capital
Definition
Cost of capital represents the firm's cost of financing
The minimum rate of return
Overview of the Cost of Capital
Basic Concept
CoC reflects the expected average future cost of funds over the long run
Sources of Long Term Capital
Long term debt
Common stock
Preferred stock
Retained earnings
Cost of Long Term Debt
The financing cost of new funds raised through long-term borrowing
Net Proceeds
Net proceeds is the fund received by the firm from the sales of securities (corporate bonds)
Reduced by
Floatation Cost
Total cost of issuing and selling securities
Underwiting Cost
Administrative Cost
Compensation earned by investment bankers for selling the securities
Issuer expense such as legal, accounting and printing
Before-Tax Cost of Debt
Rate of return that a firm must pay for on new borrowing
Can be found through
Quotations
Calculation (YTM of the bond cash flows)
Approximation
After-Tax Cost of Debt
Interest payment to bond holders are tax-deductible
Interest expense reduce taxable income - reduce tax liability
To find the net cost of debt, we have to account for the tax savings created by debt
ri - rd x (1-T)