Презентация на тему Introduction to finance

(6) questions
Each question has a weighting of 25 marks.

marks)
Question 2
 
(a) Calculation                 (13 marks)
(b) Theory : Discuss        (12 marks)
                                     (25 marks)

Discuss      (25 marks)

  
                               

Evaluate and analyze and discuss    

firm is to create value for the firm’s legal

should the firm undertake? (Capital budgeting decision)

How should the

to assets and profits

Unlimited liability

Termination occurs on owner’s death

Partnership: All partners are fully responsible for liabilities incurred

can sue, be sued, purchase, sell, and own property
Owners

taxation like corporations)

Limitations
Owners must be people so cannot be

a partnership

Limitations
Qualifications vary from state to state
Cannot appear

firms are looking to international expansion to discover profits.

expenses (land, labor, capital, raw material, taxes)

To lower governmental

regulations, unstable government, economic changes in foreign country)

Currency risk

describe how easy it is to convert assets to

one that can be converted quickly and routinely into

with current liabilities using:

Current Ratio
Acid Test or Quick Ratio

to its current liabilities.
Equation:

Home Depot = $13,479M ÷ $10,122M

and current assets (minus inventory) that can be converted

accounts receivable and inventory into cash:

Average Collection Period

Inventory Turnover

is usually a penalty for converting them to cash

cash or cash equivalents because they can be converted

and other collectibles. If you were to sell to

a company can sell lots of widgets and have

will usually have a current ratio of more than

called the acid test ratio. This uses current assets

usually defined as total liabilities divided by stockholders' equity. While

from the Company’s Assets?
The focus is on the profitability

firm finance its assets by debt or equity or

operating income available to service interest payments.
Equation: Times Interest

on the Capital Provided by the Company’s Shareholders?

or 17.7%
Owners of Home Depot are receiving a higher

to identify industry categories or comparable peers.
The published peer

preferred stock.
Identify the basic characteristics of common stock.
Value common

a hybrid security because it has many characteristics of

stock’s claim on assets and income
Cumulative dividends
Protective provisions
Convertibility
Retirement provisions

more than one series of preferred stock, and each

stock has priority over common stock with regard to

all past, unpaid preferred stock dividends be paid before

in the event of nonpayment of dividends, or they

the holder, be converted into a predetermined number of

associated with it, issuing firms generally provide for some

stock is equal to the present value of all

V=3.75(1+0.03)/(0.06-0.03)=128.75

ownership in a corporation. When you buy a share,

residual income after bondholders and preferred stockholders have been

on assets in the case of liquidation.
Residual claim

the amount of their investment.
The limited liability helps

security holders with a vote.
Majority of shareholders generally

maintain a proportionate share of ownership in the firm.
Thus,

value of common stock is equal to the present

not fixed.

Dividend pattern varies among firms, but dividends

capital by borrowing or issuing new common stock.
Through

g = the growth rate of future earnings and

of future dividends
Vcs = D1/(rcs– g)
Vcs = Common stock

expected rate of return on a security is the

r=(D1/P)+g

concerned with the value of a stock. Rather, investor

or long-term promissory note, issued by a borrower, promising

debentures provide the benefit of not tying up property

case of insolvency.
The claims of subordinated debentures are honored

on real property.
Typically, the value of the real property

the one in whose currency the bond is denominated.

Income

Seniority in claims
In the case of insolvency, claims

the face value of the bond, returned to the

of the par value of the bond that will

bonds have zero or very low coupon rate. Instead

to the length of time until the bond issuer

it exists on a bond) gives a corporation the

legal agreement between the firm issuing the bond and

the future risk potential of the bonds.
Three prominent bond

Effect on Bond Rating

A greater reliance on equity as

high-risk bonds with ratings of BB or below by

firm's assets and operations. Capital constitutes all items on

also referred to as the firm’s Opportunity cost of

Return – the minimum rate of return necessary to

sources of financing and the particular mix in which

of return on a 8% 20-year bond trading for

incurred, preferred stockholder’s required rate of return will be

more challenging to estimate than the cost of debt

common stockholder’s required rate of return are:

The Dividend Growth

(For Retained Earnings):


D1 = Dividends expected one year hence
Pcs

this year to be $1.10, based upon the fact

is 1.25, risk-free rate is 1.5% and expected return

to apply. Also, the estimates for model variables are

together: WACC
To estimate WACC, we need to know the

of cost of capital may be more complex:

If firms

often have unique risks and different costs of capital

in the systematic risk of the projects evaluated by

cost of capital can be estimated by identifying “pure

the divisional WACC for the refining and retail (convenience

may not be a good match for the firm

of capital can serve as the discount rate in

respect to investments in fixed assets—that is, should a

Rate of Return

recover the initial cash outlay related to an investment.
Decision

rather than accounting profits
Easy to compute and understand
Useful for

to the traditional payback period except that it uses

traditional payback and discounted payback methods.
With undiscounted free cash

present value of all future free cash flows less

of $60,000 with following free cash flows for 5

of money
Drawbacks
Requires detailed long-term forecast of cash flows
NPV is

(PI) is the ratio of the present value of

rate of return is considering investing in a new

$7,513 + $8,196 + $8,693 + $9,032)

project’s free cash inflows are greater than the initial

≥ Required Rate of Return, accept
If IRR < Required

be greater than the required rate of return
If NPV

$1,000, Yr. 2 = $2,000, Yr. 3 = $3,000

must first set guidelines by which we measure the

than Accounting Profits
Think Incrementally
Beware of Cash Flows Diverted From

free cash flows:
The initial outlay,
The annual free cash flows

risk
Systematic risk

ignoring the fact that much of the risk will

the project contributes to the firm as a whole.

of a well-diversified shareholder.

This measure takes into account that

shareholders is systematic risk.
Since the project’s contribution-to-firm risk affects

for more risky projects.
As the risk of a project

income streams. Such variability may arise due to:
Choice of

firm’s expected earnings attributable to the industry in which

firm’s operating earnings that results from firm’s cost structure

as a result of firm’s financing mix or proportion

financial leverage on the overall cost of capital to

value remains the same, despite the differences in financing

financial managers is that one capital structure is just

position considers how the capital structure decision is affected

tax deductible.
Because interest is deductible, the use of debt

debt is tax deductible, the higher the interest expense,

a firm will be unable to meet its debt

important for the manager.

The decision to maximize the market

the shareholders.
Firms are not obligated to pay dividends

Payout ratio
Indicates amount of dividend paid relative to the

basic views with regard to the impact of dividend

wealth is not affected by dividend policy (whether the

based on “bird-in-the-hand theory,” which argues that investors may

the tax rates on capital gains and dividends were

Effect
Agency Costs
The Expectations Theory

amount of equity needed for financing
First, use retained earnings

preferences towards dividends.
For example, some investors may prefer a

in dividends can have a significant impact on the

tool to minimize agency costs.
Dividend payment may require managers

reaction does not only reflect response to the firms

the relevance of dividend policy:
As a firm’s investment opportunities

prevent a company from paying dividends.
Debt and preferred stock

Policies
Constant dividend payout ratio
The percentage of earnings paid

Policies
A small regular dividend plus a year-end extra
The company

quarterly basis. The final approval of a dividend payment

dividend is formally declared by the board of directors (for

additional shares of stock in lieu of cash payment.
While

less in the case of “reverse” split) shares of

a firm repurchases its own stock. This results in

internal investment opportunity
An approach for modifying the firm’s capital

Decision
When a firm repurchases stock when it has excess

firm’s purchases. Often, the credit terms offered with trade

2/10 net 30
The equivalent APR of this discount is: APR

credit in two forms:

Lines of credit

Transaction loans (notes payable)

a bank about the maximum amount of credit the

line of credit form of financing.
A legal obligation is

specific purpose. This is the type of loan that

companies are able to use commercial paper—a short-term promise

rates on bank loans
Compensating-balance requirement
No minimum balance requirements are

the firm pledged as collateral. If there is a

for a loan obtained from either a commercial bank

higher than the bank’s prime rate. In addition, handling

sale of a firm’s accounts to a financial institution

inventories.

The amount of the loan that can be obtained

borrower gives the lender a lien against all its

in current assets.
Net working capital - The difference between

concerned with managing the firm’s liquidity. This entails managing

question is addressed by hedging principle of working-capital management

involves interrelated decisions regarding investments in current assets and

cash-flow-generating characteristics of an asset with the maturity of

firm expects to hold for a period longer than

financing consist of current liabilities such as short-term secured

working capital by speeding up collection on sales, increasing

90 days. At maturity, the company will repay the

interest. To account for the influence of compounding, we

360/90 = 4
Rate = 12%

APY = (1 +