Review_Mid-Term - 11 Corporate Finance: Capital Budgeting,...

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11 n Corporate Finance : Capital Budgeting, Capital Structure, Working Capital Management Goal of Financial Manager : Increase the market value of equity. Business Organizations : Proprietorship, Partnership, Corporation Agency Problem : Stock option, Take-over Financial Market : Primary market refers to the original sale of securities by governments and corporations. ( public offerings and private placements ) Secondary markets are those in which these securities are bought and sold after the original sale. ( auction markets and dealer markets)
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22 n Balance Sheets give the status of the company’s book value, but the book values are most likely different from the market values . - GAAP, Historical costs Income Statements describe how the incomes are generated over a certain period, but the net income is different from the cash flow . - GAAP (matching principle), Non-cash item (depreciation) n Marginal and average tax rates differ, and it is the marginal tax rate that is relevant for in- vestment decisions. n Cash flow from assets = Operating Cash Flow – Net Capital Spending – Change in NWC Operating Cash Flow = EBIT + Depreciation – Tax Capital Spending = End. Net Fixed Asset – Beg. Net Fixed Asset + Dep. Change in NWC = Ending NWC – Be- ginning NWC Cash flow from assets = Cash Fl. to Creditors + Cash Fl. to Shareholders Cash Flow to Creditors = Interest Paid – Net New Borrowing Cash Flow to Shareholders = Dividends Paid – Net New Equity Raised
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33 Operating Cash Flow: EBIT($694)+Depreciation(65): Taxes (212) = $547 Capital Spending: End. net fixed assets($1,709): Beg. net fixed assets(1,644)+Dep.(65) = $130 Change in Net Working Capital: Ending NWC($1,014): Beginning NWC(684) = $330 Cash Flow from Assets: Operat. Cash flow($547): Net capital spend.(130): Change in NWC(330)= $ 87
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44 Cash Flow to Creditors: Interest paid($ 70) : Net new borrowing(46) = $ 24 Cash Flow to Stockholders: Dividends paid($103): Net new equity raised(40) = $ 63 Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
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55 n Statement of cash flows: Sources and Uses of cash An increase in the LHS (asset) account or a decrease in the RHS (liability or equity) account is a use of cash . Likewise, a decrease in an asset account or an increase in a liability (or equity) account is a source of cash . n Standardizing Financial Statements Common-size statements express balance sheet items as a percentage of total assets and income statement items as a percentage of sales. Common-base year statements express all items relative to a certain base- year amount. This is specially useful for a trend analysis . Combined common-size and common-base year analysis in order to get rid of the problems arising from size and time.
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66 n Financial Ratios are traditionally grouped into the following categories : 1. Short-term solvency , or liquidity , ratios 2. Long-term solvency , or financial leverage , ratios 3. Asset management , or turnover , ratios 4. Profitability
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Review_Mid-Term - 11 Corporate Finance: Capital Budgeting,...

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