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FIN EXAM 1

Terms in this set (47)

Balance Sheet
Assets = Liabilities + Owner's Equity
Balance Sheet properties
1. assets listed in order of liquidity (the speed and ease an asset can be converted to cash without losing value)
2. debt listed in order due (Financial leverage). interest bearing debt must be serviced
3. equity is stockholder's ownership in accounting terms - not market value
Net working capital
Current assets - Current liabilities
Income Statement
Revenues - Expenses = Profits
Income Statement Parts
A) Operating Section
- EBIT
B) Non-operating sections
- other expenses, such as interest and taxes
C) Revenue recognized when earned, expenses accounted for when incurred - ignores time value of money
Accrual basis accounting
Revenue recognized when earned,
expenses accounted for when incurred
Cash basis accounting
Non cash items such as depreciation, accrued income or accrued expenses have to be adjusted for purposes of a cash flow analysis
Book Value
cost - accumulated depreciation
Financial statements are for no more than....
1 year. They are also historical
Finance deals with ________-tax cash flows
AFTER
After-tax cash flows
estimate using the marginal tax rate
Depreciation Method
timing of cash flows (NOT a cash expense)
Capital gains and losses
savage value
Importance of taxation for firm's financial manager
A) Taxes and capital investment structure
1) After tax cash flows
2) Depreciation method
3) Capital Gains and Losses

B) Taxes and capital structure
1) "Should we use debt or equity to fund capital investments?"

C) Taxes and dividend policy
1) Companies can deduct employee wages from taxes, but not dividends
Firm's tax liability
- 2018 tax reform created a flat rate of 21% for all corporate income
- Marginal tax rate: the tax rate on the next dollar of income earned
- Average tax rate = taxes paid/taxable income
-this rate will be the same as the marginal tax rate UNLESS there are multiple tax rates
Cash flow
difference between amount of cash that company received and amount paid to others
Cash flow from assets
CFa = OCF - change in NWC - change in FA
Negative cash flow from assets
paid out more money than generated
OCF (operating cash flow)
EBIT + Depreciation - Taxes
Change in Net Working Capital
Ending NWC - Beginning NWC
(Ending CA - Ending CL) - (Beg CA - Beg CL)
Change in Fixed Assets
Capital Spending
Ending FA - Beginning FA + Dep
Cash flow TO suppliers of capital
1. Cash flow to creditors
Interest paid - net new borrowing (Change in long term liabilities)
2. Cash flow to stakeholders
Dividends - new equity (Change in stock)
Positive cash flow to creditors
We paid money to creditors
Negative cash flow to creditors
We got more cash than paid out
Interest is NOT an...
Operating expense. Is a cost of capital and will appear in CF to creditors.
Time Value of Money
A dollar in your hand today is worth more than a dollar that you will receive some time in the future
Why is the Time Value of Money so?
- Inflation
- Investment
- Money represents opportunity to earn additional money through investment or to create enjoyment through ownership or experience. Giving up that opportunity in the present for later has a cost
TVM allows us to...
- compare investments (or loans) that have different rates of return, terms, and/or CFs
- find the FV of an investment made today
- find the PV of an asset that will be received some time in the future
- determine the rate of return (interest rate) being earned on an investment or the interest rate that is being paid on a loan
- determine the length of time required to pay off a loan or a time period necessary for an investment to grow to some future amount
- determine a periodic payment used to pay off a loan or a periodic deposit in order to accumulate a fixed amount of money at some time in the future
Relationship between the FV of a lump sum and the COMPOUND RATE?
Direct
Relationship between the FV of a lump sum and the NUMBER of compounding periods?
Direct
Relationship between the PV of a lump sum and the discount rate?
Inverse
Relationship between the PV of a lump sum and the NUMBER of discounting periods?
Inverse
Annuity
A series of constant, equal (even) cash inflows or outflows
Ordinary Annuity
Cash flow occurs at END of period
-salaried employee
-mortgage
Annuity Due
Cash flow occurs at BEGINNING of period
-rent
-insurance premiums
-subscription/membership
Perpetuity
Cash flow has no apparent end date or is intended to last forever
-treated as ordinary annuity/end of period
-endowment: spending only the interest, never use principal
-preferred stock: paying set dividends
PV of ordinary annuity is _________ than the annuity due.
LESS because more interest has built up
Can't calculate the FV of a ____________
Perpetuity
PV of a perpetuity
Amount of payment / interest rate
Annuity due will accrue a __________ FV than an ordinary annuity with the same payments and number of periods
HIGHER
Effective Annual Rate (EAR)
expresses the rate as though it were compounded only once per year
Stated or quoted rate (APR)
expressed in terms of the interest payment
Payments of a loan that is amortized include both
Principal AND interest. This means that the loan balance declines with each payment.
Loan payment
principal portion of payment + interest portion of payment
As principal decreases, interest __________
decreases. When interest decreases, more of your payments go toward principal
Unless otherwise noted, assume that future cash flows occur at the ____ of the period in which they accrue
END
The ______________________ is the rate that is really paid
Effective annual rate
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