Ch10(6th)Post - Chapter F10 Analysis of Financing...

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Analysis of Analysis of Financing Financing Activities Activities Chapter Chapter F10 F10
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10 - 2 1. Define capital structure, and explain why it is important to a company. 2. Explain when it is beneficial for a company to use financial leverage. 3. Explain why cash flows are important for a company’s financing decision. 4. Use financial statements to evaluate the financing activities of different companies. Objectives Objectives
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10 - 3 5. Determine and explain the effect of financial leverage on a company’s risk and return. 6. Use cash flow and liquidity measures to evaluate financing decisions. 7. Explain why financing activities are important for determining company value. Objectives Objectives
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10 - 4 Financing Decisions Financing Decisions Capital structure is the relative amounts of debt and equity used by a company to finance its assets. A firm either can borrow money, or it can issue stock Obj - 1
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10 - 5 (in thousands) Year 1 Year 2 Year 3 (in thousands) Year 1 Year 2 Year 3 Sales $ 3,000 $3,600 $4,320 Cost of goods sold (1,800) (2,160) (2,592) Operating expenses (1,000 ) (1,000 ) (1,000) Operating income 200 440 728 Income taxes (60 ) (132 ) (218 ) Net income $ 140 $ 308 $ 510 Exhibit 1 Exhibit 1 Projected Sales and Income for Favorite Cookie Company Obj - 1
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10 - 6 (in thousands) Year 1 Year 2 Year 3 (in thousands) Year 1 Year 2 Year 3 Assets: Current assets $1,000 $1,200 $1,440 Plant assets 4,000 4,000 4,000 Total assets $5,000 $5,200 $5,440 Liabilities: Current liabilities $ 800 $ 960 $1,152 Long-term debt 0 0 0 Total liabilities 800 960 1,152 Stockholders’ equity 4,200 4,240 4,288 Total liabilities and equity $5,000 $5,200 $5,440 Exhibit 2 Exhibit 2 Projected Summary Balance Sheet for Favorite Cookie Company Obj - 1
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10 - 7 Financing Decisions Financing Decisions Return on equity (ROE) is net income divided by stockholders’ equity. It measures net income relative to the amount invested by stockholders in a company, and is used by investors and financial analyst to compare the performance of companies Obj - 1
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Financing Decisions Financing Decisions It can be used to compare one company’s performance with another (or to an industry standard), or to compare a company’s performance in one period with its performance in another period. Obj - 1
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Ch10(6th)Post - Chapter F10 Analysis of Financing...

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