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Corporate Finance, Short-term Cash Flow company needs to pay --> Net…

- - - - the difference between a firm's current assets and its current liabilities
    - - the speed and ease with which an asset can be converted into cash
        
        liquidity is important: the more liquid a business is, the less likely it is to experience financial distress
        
        assets are normally listed in order of decreasing liquidity
        
        trade-off between liquidity and profitability
        
        debt vs. equity
        
        financial leverage
        
        firms use debts in its capital structure
        
        important
        
        use debts can greatly magnify both gains and losses
        
        increase the potential reward to shareholders, but also increases the potential for financial distress and business failure
  - - - Recognition/ Realization Principle: Revenue is realized when
        
        earnings process is virtually complete
        
        value of an exchange of goods or services is known or can be reliably determined
      - matching principle: Expenses is realized when goods and services are sold
        
        determine revenues at the time goods and services are sold
        
        match those revenues with the costs associated with producing them
  - - - capital spending
        
        Net Capex = End.Net FA - (Beginning Net FA - Dep.)
      - Change in Net Working Capital (NWC)
        
        Change in NWC = Ending NWC - Beginning NWC
      - Operating Cash Flow
        
        OCF = EBIT + Depreciation - Taxes
    - - CF from Assets = CF to Creditors + CF to Stockholders
  - - - Operating Cash Flow + Change in Net Working Capital (NWC) - Capital Spending
    - - Cash Flow to Stockholders
        
        CF to Stockholders = Dividends paid - Net new equity raised
      - Cash Flow to Creditors
        
        CF to Creditors = Interest Paid - Net Borrowing
- - - - Current Assets
      - Fixed Assets
        
        Tangible
        
        Intangible
        
        Answer: "What long-term investments should engage in?"
    - - Current Liabilities
      - Long-term Debt
      - Shareholders' Equity
      - Answer: "How can firms raise money for required investments?"
  - - - Increase the size of pie
    - - how best to slice up the pie
      - matters when how to slice the pie affects the size of the pie
- - - - the mixture of Debt and Equity maintained by a firm
    - - the process of managing the firm's short-term assets and liabilities
    - - the process of planning and managing a firm's long-term investments
  - - - Corporate Governance
        
        Stockholders vs. Managers
        
        control of the firm
        
        a proxy fight, takeover
        
        managerial compensation
        
        remuneration, job prospects, clawbacks, deferred compensation
        
        Agency costs
        
        costs of the conflict of interest between stockholders and management
        
        Agency Problems
        
        conflict of interest between the stockholders and management of a firm
      - this contracting and monitoring is costly
      - managers will usually act in the shareholders' interests
        
        shareholders: monitor the managers behavior
        
        shareholders: devise contracts that align the incentives of managers with the goals of shareholders
      - one of these contracts is between shareholders and managers
      - firm can be viewed as a set of contracts
  - - - survival
      - independence
      - expensive perquisites
- - - - gross profit margin = gross profit/ sales
      - profit margin = net income / sales
      - return on assets (ROA) = net income / total assets
      - return on equity (ROE) = net income / total equity
- - - - Formation
        
        one person or household
        
        no formal requirements for formation
      - Business Life
        
        limited to one owner's life span
      - Souces of funding
        
        government help
        
        loans
      - management and control
        
        all assets with one person
      - liability
        
        full personal liability of owners
      - tax consequences
        
        all business income is taxed as personal income
        
        owner claims all incomes and losses
      - transferability of interest
        
        sign a non-compete agreement
        
        business can be sold - property, inventory, goodwill
    - - definition
        
        an association of 2 or more people to carry on as co-owners a business for profit
      - business life
        
        terminates when a general partner wishes to sell out or dies
      - sources of funding
        
        outside loans
        
        loans by partners
        
        capital contributions of Partners
      - management and control
        
        unless otherwise agreed, each has equal management authority
        
        may delegate day-to-day authority to one partner
        
        each partner is a mutual principal and agent of the others
      - transferability of Interest
        
        new partnership is required to be formed
      - tax consequences
        
        all partners share in gains and losses
        
        all business income is taxed as personal income
      - liability
        
        unlimited for all partnership debts
      - general partnership >< limited partnership (no right to control)
    - - management and control
        
        separation of ownership and management
      - transferability of Interest
        
        ownership (shares of stock) is readily to be transferred
      - sources of funding
        
        debt financing
        
        short-term financing (loans from banks), long-term financing (bond market)
        
        equity financing
        
        common stocks
        
        preferred stocks
      - business life
        
        unlimited duration
      - formation
        
        articles of incorporation (a charter): provide firm information, which must be supplied to the state in which the firm will be incorporated
        
        bylaws: a set of rules describing how the corporation regulates its existence
      - liability
        
        limited for corporation debts
      - definition
        
        a legal person that is separate and distinct from its owners
      - tax consequences
        
        business income is taxed as corporate income
      - Corporate form is superior for raising cash as compared to Sole proprietorship and Partnership