1. Resources must equal Claims 2. Order of Listing – Highest to Lowest Liquidity 3. Valuing of Items - Generally at original cost/Historical Cost Exceptions: Marketable Securities and Inventories Book Value: Historical Costs less Acc Dep, determined by GAAP Market Value: Determined by current trading values Market Value of SH Equity = Market Capitalisation = Share price * # Outstanding Shares Enterprise Value: Value of underlying business assets and separate from the value of non-operating cash and marketable securities of firm. Basically, the cost of company if someone acquire it Enterprise Value=Market Value of Equity + Debt – Excess Cash Income Statement Statement of RE Basic Stock Concepts Profit VS Cash flow Profits subtract depreciation, ignores cash expenditures on new fixed assets, record income and expenses at time of sales instead of cash exchange, do not consider changes in working capital. Sources of cash: Decrease in Assets, Increase in Eq and liabilities Uses of cash: Increase in non-cash assets, Decrease in Eq and liabilities Statement of Cash flow : Summarises the sources and uses of cash over period. 3 major categories: Operating, Investment and Financing Activities Finance concept of cash flow How cash is generated from utilising assets and how it is paid to those that finance the purchase of the assets. Concerned with the transaction of cash, not accrual accounting Operating Working Capital OWC: Working capital stemming from our operating policies and removed from our financing decisions. Exclude non-operating working capital such as Note Payable from calculation of NOWC Interest bearing liabilities (Financing activities): ST loans, Notes payable Non-interest bearing liabilities (Operating activities): Acc Payable CFFA = OCF-NCS-Changes in NOWC CFFA + Interest Tax Shield=CF to Creditors + CF to SH OCF=EBIT*(1-Tax Rate)+Depreciation NCS=End Net FA-Beg Net FA + Depreciation Changes in NOWC=End NOWC-Beg NOWC=(End CA-CL)-(Beg CA-CL) Interest Tax Shield=Taxable Income*Tax Rate Interest Tax Shield: Reduction in amt of taxes paid due to tax deductibility of interest . Dividend payment is not tax deductible Standard Financial Statement • Common-size Balance Sheet: All acc as % of Total Assets • Common-size Income Statement: All acc as % of sales • Common-Base Year Statement: All acc as % of base year Easier to compare fin info and companies of dif sizes, in same industry Liquidity ratios (Short-Term Solvency) measure the firm’s ability to pay bills in the short run. • Current ratio = Current assets / Current liabilities • Quick Ratio = (CA – Inventory) / CL • Cash Ratio = Cash / CL • NWC to Total Assets = NWC / TA Interval Measure = CA / average daily operating cost Long-Term Solvency (Financial Leverage ) ratios show how heavily the company is in debt • Total Debt Ratio = Total Debt / Total Assets All determine stock’s Intrinsic Value
• Debt/Equity Ratio = (total assets – total equity) / total equity • Equity Multiplier = total assets/total equity = 1 + debt/equity ratio •
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- Spring '11