FIN2704 BEST Cheatsheet (Midterms).docx - Financial Management Overview Finance determining present value and making decisions based on that value

FIN2704 BEST Cheatsheet (Midterms).docx - Financial...

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Financial Management Overview Finance : determining present value and making decisions based on that value assessment: allocate, acquire, invest & manage resources Corporate finance asks three questions: What long-term investments should the firm take on? ( capital budgeting decision ) i.e. FA Where will we get the long-term financing to pay for the investment? ( capital structure decision ) i.e. LTD + SE How will we manage the everyday financial activities of the firm? ( working capital management decision ) i.e. CA - CL The goal of financial management is shareholder wealth maximisation (i.e., maximising value = stock price). Balance sheet/Accounting model – LHS : Investment decision = Assets RHS : Financing decisions = Liabilities & equity (Order of liquidity, historical costs) Source of funds – Debt : bank borrowing, bond issuance (contractual obligation) Equity : share issuance, retained earnings (residual claim) => debt holders collect b4 equity holders Below Chief Financial Officer (CFO): Treasurer – oversees cash management, credit management, capital expenditure, fin planning Controller – oversees taxes, cost/fin accounting, data processing Stockholders own the corporation, but do not manage it, Board of Directors does Agency costs: Direct AC – expenditures that benefit management e.g. car, big office, high pay; monitoring costs (auditors, corporate governance) Indirect AC – lost opportunities which would increase LR firm value => sol: compensation plans, monitoring by stakeholders, threat of firing Money mkt : debt securities of less than 1 yr; loosely connected dealer mkts, banks r major plyrs Capital mkt : equity & long-term debt (LTD) r traded; auction mkts e.g. SGX Primary mkt : initially issued securities by gov/corp; IPO vs pte offering (wealthy individuals) Secondary mkt : existing financial claims, dealer e.g. OTC mkt + auction mkts e.g. SGX, NYSE Financial Statement Analysis Assets = Liabilities + Equity Resources must equal claims CA + NFA = CL + LTD + CS + RE CS = common stock, NFA = net fixed assets NWC + NFA = LTD + CS + RE coz NWC = CA – CL NWC = Cash + Other CA – CL CL includes both interest & non-interest bearing CL Δ Cash = Δ retained earnings + Δ current liabilities – Δ current assets other than cash – Δ net fixed assets + Δ long-term debt + Δ common stock since ΔR etained earnings = Net income – Dividends Market value of shareholders’ equity = Market capitalisation (aka Equity ) = Share price × No. of outstanding shares Market value (Mkt cap + Debt = Asset) vs Book value (determined by IFRS/GAAP) Enterprise value = Market value of equity i.e. mkt cap + Debt – Cash Market-to-book ratio = market value of equity i.e. mkt cap/book value of equity i.e. book equity Book debt-to-equity ratio = book debt/book equity Sales – COGS – Operating expenses – Depreciation = EBIT EBIT – Interest = Taxable income Taxable income – taxes payable = net income Retained Earnings (beg) + Net income – Dividends = RE (end) Dvd payout ratio = Dividends/Net Income Sources of $: decreases in assets (other than $), increases in eq/liab Note : assets incl Inv etc Uses of $: increases in assets (other than $), decreases in eq/liab Operating activities:
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