True/False Questions: Circle the correct response.
1.
T
F
The New York Stock Exchange is an example of a secondary
market.
2.
T
F
The balance sheet represents a snapshot of a firms financial
position at a given point in time.
3.
T
F
If new bonds are sold
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
Without investment research analysts, markets would be less efficient.
2.
T
F
A portfolio consisting of a single stock is unlikely to lie on the efficient
frontier.
3.
T
F
The price
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
Earnings that are paid out as dividends show up on the balance sheet as a
reduction in shareholders' equity.
2.
T
F
The government is an example of a firm stakeholder.
3.
T
F
The Na
True/False Questions: Circle the correct response. (2 points each)
1.
T
2.
3.
4.
T
TF
TF
5.
TF
6.
TF
7.
TF
8.
TF
9.
TF
10.
TF
11.
T
12.
T
13.
T
14.
T
15.
T
16.
T
17.
T
F
An example of a bond covenant is that the firm must seek approval from
bondholders be
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
One of the benefits of organizing as a sole proprietorship is that the
interest paid on debt is tax deductible.
2.
T
F
An increase in fixed assets is a source of cash.
3.
T
F
If a f
1.
T
F
Subordinated debt will generally have a higher yield to maturity than
senior debt.
2.
T
F
You have a choice between annuity payment of $50,000 at the end of
each of the next 10 years, or a perpetuity that pays you $25,000
indefinitely. You are indi
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
If markets are efficient, stock prices should rise and fall with expected seasonal variation
in earnings.
2.
T
F
Unlike the NYSE and Nasdaq, ECN's have no dealers or market makers.
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
As a common shareholder in a firm, you generally have the right to vote
on important firm decisions like mergers and acquisitions.
2.
T
F
Adding more stocks to a portfolio generally
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
If you own 51% of the voting common shares in a corporation, you
would prefer shareholders to have cumulative voting over straight
voting.
2.
T
F
Unlike the NYSE, the Nasdaq has sev
True/False Questions: Circle the correct response. (2 points each)
1. T F
Dividends paid during the fiscal year are deducted from Operating income in
order to determine the Earnings before tax.
2.
T
F
Sole proprietorships have potentially infinite lives.
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
2.
T
F
3.
4.
T
T
F
F
5.
6.
T
T
F
F
7.
8.
T
T
F
F
9.
T
F
10.
T
F
11.
T
F
12.
T
F
13.
T
F
14.
T
F
15.
T
F
16.
T
F
17.
T
F
18.
T
F
The private placement of a new issue of corporate bon
True/False Questions: Circle the correct response. (2 points each)
1.
T
2.
3.
T
TF
4.
TF
5.
TF
6.
TF
7.
TF
8.
9.
TF
TF
10.
11.
TF
T
12.
T
13.
T
14.
T
15.
16.
T
T
17.
T
18.
T
F
A bond with a face value of $1,000 has annual coupon payments of $100
and was i
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
In order to compare two different investment opportunities (each with
the same risk) that have interest rates reported in different manners, you
should convert each interest rate to
Bonds
40
Bond: a loan made by investors to the issuer.
In return for his/her money, the investor receives a legaI claim on future
cash flows of the borrower.
The issuer promises to:
Make regular coupon payments every period until the bond matures
Pay
Pro Forma Financial Statements
Scenarios, not just one version
Forecast sales
How will this influence expenses and asset needs
How should we pay for new assets
The plug
TA = TL + TE
21
Another Example
Income Statement
(projected growth = 30%)
This year
Pr
Ratio Analysis
Facilitates interpreting different pieces of financial
information
Use to describe firm performance along a series of
dimensions
Ratio categories
Short term solvency, or liquidity ratios
Long term solvency, or financial leverage ratios
Asse
Review
Financial decision making
Basics of financial statements
Types of financial decisions
Decision making in context
Types of business organizations
Ways of raising money
How financial markets operate
How to get to cash flows
Financial Ratios to hel
Test: Most problems are too easy
Valuing Stocks
Preferred Stocks
Pay constant dividend indefinitely
Use perpetuity formula
What if you sell it to someone else?
What about common stocks?
61
Decomposing Returns
The return from holding common stock consists
Perpetuities
Pays a fixed amount evenly over time forever.
1
PVA = A
t
1 r
r
A
PVP =
r
1
49
Example 1
51
Find the PV of a perpetuity that pays $77.00 per year, when r =
11%?
Example 2: Condo
49
The market price of a Condominium is $60,000. The condom
Finding r
A finance company offers to loan you $1000 if you will make 24
monthly payments of $52.87. What rate is implicit in the loan?
44
Annuities and Effective Rates
Two lottery payoffs.
$122 every six months for two years
$20 every month for two years
COSTCO WHOLESALE
Income Statement
Sales
Cost of Goods Sold
General & Admin Expenses
Other Expenses
EBIT
Interest expense
Other Expenses
Earnings before taxes
Taxes
Other Income/Loss
Net income
Dividends
Addition to retained earnings
Market Value of Equity
Estimate of Beta for COSTCO WHOLESALE
0.61
-0.25%
Estimate of Beta (Slope of the Line)
Estimate of Alpha (Y Intercept)
Estimate of Beta for COSTCO WHOLESALE
Security Market Line
20.00%
25.00%
15.00%
20.00%
Expected Return
COST Excess Return
10.00%
5.00%
0
COSTCO WHOLESALE
Income Statement
Sales
Cost of Goods Sold
Selling, General, & Admin Exp
Other Expenses
EBIT
Interest expense
Other Expenses
Earnings before taxes
Taxes
Other Income/Loss
Net income
Dividends
Addition to retained earnings
COST
Recent
$105,
Bus 320 (Corporate Finance)
Tue/Thur 11:30-12:45
Tue/Thur 1:00-2:15
Tue/Thur 2:30-3:45
Spring 2016
Professor T. Clifton Green
GBS Room 503
Phone: 404-727-5167
Email: clifton.green@emory.edu
Overview of the Course
This course provides an introduction to fi
What is Finance?
Economics
How to allocate scarce resources.
Accounting
Careful and correct preparation of financial data
What is Finance?
Financial Management
Financial management concerns how to acquire and allocate a
companys resources.
Where to
Bus 320: Chordia
1. Introduction and Overview
Practice Problems: II.B
11th edition
From RWJ
Chapter 1: Questions and Problems: 2, 7, 12
II.A Financial Statements and Analysis
From RWJ
Chapter 2: Questions and Problems 9, 13, 14, 22
Chapter 3: Questions an
CORPORATE FINANCE
Financial
Statements
Taxes &
Cash Flows
Ratio
Analysis
Financial Planning
Pro-Formas
Financial Statements
Corporate reports provide important information
Balance Sheet
A snapshot of the firm
Income Statement
Measures performance ove
True/False Questions: Circle the correct response. (2 points each)
1.
T
F
A broad decline in consumer spending would be an example of
systematic risk.
2.
T
F
If markets are strong form efficient, then laws against insider trading are
unnecessary.
3.
T
F
Y
Effective vs. Nominal Rates
Effective rates take into account compounding over subperiods
t
rp = 1+rc -1
rc
rate over compounding interval
t
rp
number of periods in effective period
effective rate over t periods
Visa
Nominal annual rate = 19.8%, Monthly c
Steps for Pro Formas
1. Forecast Sales and costs and determine income statement
At least up to EBIT
2. Forecast the LHS of the balance sheet and determine TA
3. Forecast as much of the RHS of Balance Sheet as possible
If available, use constraints to fi
Steps for Pro Formas
1. Forecast Sales and costs and determine income statement
At least up to EBIT
2. Forecast the LHS of the balance sheet and determine TA
3. Forecast as much of the RHS of Balance Sheet as possible
If available, use constraints to fi
Problems with Financial Statement Analysis
No underlying theory to suggest which ratios are important and
what the relevant benchmarks should be.
Finding peer groups for large conglomerates is difficult.
Comparing domestic firms with international comp
CORPORATE FINANCE
Financial
Statements
Time Value
Of Money
Taxes &
Cash Flows
Interest Rates
Compounding Intervals
Ratio
Analysis
Present Values
Future Values
Financial Planning
Pro-Formas
Annuities
Perpetuities
Bond Valuation
Stock Valuation
Time Value o