FIN4 - -The only thing that has value is cash -Time value...

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-The only thing that has value is cash -Time value of money is converting future cash flows into today’s value -Capital structure has 2 meanings: 1. How capital is raised (right side of balance sheet): debt and equity 2. How it is invested (left side): assets -Sole Proprietorship: small business run by individual >Easy to form, few regulations, no corporate income taxed >Limited life, limited liability, difficult to raise capital >Account for 80% of all businesses in US, but only 13% of all business conducted -Partnerships: two individuals or more >Account for 10% of all businesses, only 7% of business conducted -Corporation: given legal existence by state in which incorporated = unlimited life >Easy transfer of ownership (sell stock), limited liability for owners of firm (shareholders), much easier to raise capital (issue debt/equity) >Double taxation, cost of setting up and reporting >Account for 10% of all businesses in US, 80% of all business conducted -Common stockholders own the firm -Debt holders of the firm own the assets but have sold a call option (right to buy at a later time at a set price) to stockholders of the firm -Institutional investors control a lot of the stock of firms and do majority of daily trading. They own on behalf of individual investors
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Basic Finance Principles: -Perpetuity: given the same amount year after year forever -Present value x Interest Rate = Cash Flow -Present Value at time 0 = P(0) = Cash Flow/Interest -The safest investment you can make is a loan to the U.S. Government in the form of U.S. Treasury Bonds. It is considered “risk free” due to belief the government won’t fail -When someone takes on more risk they require a higher rate of return -There is an inverse relationship between required rate of return (interest rate) and valuation (price) -When you buy a share of stock you are paying for the PV of all future cash flows usually paid out in dividends from that stock or investment. -Goal of Financial Manager is to maximize shareholder’s wealth, which is to maximize price of firm’s stock -Factors that affect stock price:
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>projected cash flows to shareholders >timing of cash flow streams >riskiness of cash flows -Factors that affect cash flows: >External environment: taxes, economic trends -Decisions by Financial Managers: >Investment decisions: Which assets to invest in, how much to invest >Financing decisions: Issue debt or equity? --An unlevered firm has 0 debt. A firm becomes levered when it takes on debt --Just because a firm has debt (levered) it does not mean it is not as profitable as a firm with no debt (unlevered) >Dividend Policy decisions Goal of the Financial Manager is to maximize shareholders wealth Factors that affect Stock Price Projected cash flows to shareholders Timing of cash flow streams Riskiness of cash flows The Balance Sheet Assets = Liabilities (Debt) + Stockholders Equity Assets
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Current Assets- have higher liquidity (can be converted to cash funds quickly)
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This note was uploaded on 01/26/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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FIN4 - -The only thing that has value is cash -Time value...

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