财务管理英文版期末.docx
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财务管理英文版期末.docx
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财务管理英文版期末
TheReviewSheetsofCorporateFinance
KeyConceptsandQuestions
1.WhatIsCorporateFinance?
Corporatefinanceaddressesseveralimportantquestions:
1)Whatlong-terminvestmentsshouldthefirmtakeon?
(Capitalbudgeting)
2)Wherewillwegetthelong-termfinancingtopayfortheinvestment?
(Capitalstructure)
3)Howwillwemanagetheeverydayfinancialactivitiesofthefirm?
(Workingcapital)
2.Thefinancialmanagerisconcernedwiththreeprimarycategoriesoffinancialdecisions.
1)Capitalbudgeting–processofplanningandmanagingafirm’sinvestmentsinfixedassets.Thekeyconcernsarethesize,timingandriskinessoffuturecashflows.
2)Capitalstructure–mixofdebt(borrowing)andequity(ownershipinterest)usedbyafirm.Whataretheleastexpensivesourcesoffunds?
Isthereanoptimalmixofdebtandequity?
Whenandwhereshouldthefirmraisefunds?
3)Workingcapitalmanagement–managingshort-termassetsandliabilities.Howmuchinventoryshouldthefirmcarry?
Whatcreditpolicyisbest?
Wherewillwegetourshort-termloans?
3.TheBalanceSheet
assets=liabilities+owners’equity
4.NetWorkingCapital
Thedifferencebetweenafirm’scurrentassetsanditscurrentliabilities.
Assetsarelistedonabalancesheetinorderofhowlongittakestoconvertthemtocash.
Liabilityorderreflectstimetomaturity.
5.NoncashItems
Thelargestnoncashdeductionformostfirmsisdepreciation.Itreducesafirm’staxesanditsnetincome.Noncashdeductionsarepartofthereasonthatnetincomeisnotequivalenttocashflow.
6.CashFlow
FreeCashFlow(FCF)
FCF=Operatingcashflow–netcapitalspending–changesinnetworkingcapital
Operatingcashflow(OCF)=EBIT+depreciation–taxes
Netcapitalspending(NCS)=endingfixedassets–beginningfixedassets+depreciation
ChangesinNWC=endingNWC–beginningNWC
Workingcapital=currentassets-currentliabilities
7.SourcesandUsesofCash
Activitiesthatbringcashinaresources.Firmsraisecashbysellingassets,borrowingmoney,orsellingsecurities.
Activitiesthatinvolvecashoutflowsareuses.Firmsusecashtobuyassets,payoffdebt,repurchasestock,orpaydividends.
MechanicalRulesfordeterminingSourcesandUses:
Sources:
Decreaseinassetaccount
Increaseinliabilitiesorequityaccount
Uses:
Increaseinassetaccount
Decreaseinliabilitiesorequityaccount
8.TheStatementofCashFlows
Theideaistogroupcashflowsintooneofthreecategories:
operatingactivities,investmentactivities,andfinancingactivities.
AgeneralStatementofCashFlows
OperatingActivities
+NetIncome
+Depreciation
+Decreaseincurrentassetaccounts(exceptcash)
+Increaseincurrentliabilityaccounts(exceptnotespayable)
-Increaseincurrentassetaccounts(exceptcash)
-Decreaseincurrentliabilityaccounts(exceptnotespayable)
InvestmentActivities
+Endingnetfixedassets
-Beginningnetfixedassets
+Depreciation
FinancingActivities
Changeinnotespayable
Changeinlong-termdebt
Changeincommonstock
-Dividends
Puttingitalltogether:
Netcashflowfromoperatingactivities
Fixedassetacquisition
Netcashflowfromfinancingactivities
=Netincrease(decrease)incashovertheperiod
9.CategoriesofFinancialRatios:
A.Short-termSolvency,orLiquidity,Measures
CurrentRatio=currentassets/currentliabilities
QuickRatio=(currentassets–inventory)/currentliabilities
CashRatio=cash/currentliabilities
NWCtoTA=(currentassets–currentliabilities)/totalassets
IntervalMeasure=currentassets/averagedailyoperatingcosts
B.Long-TermSolvencyMeasures
Totaldebtratio=(totalassets–totalequity)/totalassets
variations:
debt/equityratio=(totalassets–totalequity)/totalequity
equitymultiplier=1+debt/equityratio
C.AssetManagement,orTurnover,Measures
Inventoryturnover=costofgoodssold/inventory
Days’salesininventory=365days/inventoryturnover
Receivablesturnover=sales/accountsreceivable
Days’salesinreceivables=365days/receivablesturnover
Thisratiomayalsobecalled“averagecollectionperiod”or“days’salesoutstanding.”
D.ProfitabilityMeasures
Thesemeasuresarebasedonbookvalues,sotheyarenotcomparablewithreturnsthatyouseeonpubliclytradedassets.
Profitmargin=netincome/sales
Returnonassets=netincome/totalassets
Returnonequity=netincome/totalequity
E.MarketValueMeasures
Earningspershare=netincome/sharesoutstanding
Price-earningsratio=pricepershare/earningspershare
Price-salesratio=pricepershare/salespershare
Market-to-bookratio=marketvaluepershare/bookvaluepershare
Tobin’sQ=marketvalueoffirm’sassets/replacementcostoffirm’sassets
EnterpriseValue=totalmarketvalueofthestock+bookvalueofallliabilities–cash
EBITDAratio=EnterpriseValue/EDITDA
Totalassetturnover=sales/totalassets
Long-termdebtratio=long-termdebt/(long-termdebt+totalequity)
10.FutureValueandCompounding
Investingforasingleperiod
Ifyouinvest$Xtodayataninterestrateofr,youwillhave$X+$X(r)=$X(1+r)inoneperiod.
Example:
$100at10%interestgives$100(1.1)=$110
Investingformorethanoneperiod
Reinvestingtheinterest,weearninterestoninterest,i.e.,compounding
FV=$X(1+r)(1+r)=$X(1+r)2
Ingeneral,fortperiods,FV=$X(1+r)t,where(1+r)tisthefuturevalueinterestfactor,FVIF(r,t)
11.PresentValueandDiscounting
TheSingle-PeriodCase
Givenr,whatamounttoday(PresentValueorPV)willproduceagivenfutureamount?
RememberthatFV=$X(1+r).Rearrangeandsolvefor$X,whichisthepresentvalue.Therefore,
PV=FV/(1+r).
Example:
$110in1periodwithaninterestrateof10%hasaPV=110/(1.1)=$100
Discounting–theprocessoffindingthepresentvalue.
PresentValuesforMultiplePeriods
PVoffutureamountintperiodsatris:
PV=FV[1/(1+r)t],where[1/(1+r)t]isthediscountfactor,orthepresentvalueinterestfactor,PVIF(r,t)
Example:
Ifyouhave$259.37in10periodsandtheinterestratewas10%,howmuchdidyoudepositinitially?
PV=259.37[1/(1.1)10]=259.37(.3855)=$100
DiscountedCashFlow(DCF)–theprocessofvaluationbyfindingthepresentvalue
12.PresentValueforAnnuityCashFlows
OrdinaryAnnuity–multiple,identicalcashflowsoccurringattheendofeachperiodforafixednumberofperiods.
Thepresentvalueofanannuityof$Cperperiodfortperiodsatrpercentinterest:
PV=C[1–1/(1+r)t]/r
Example:
Ifyouarewillingtomake36monthlypaymentsof$100at1.5%permonth,whatsizeloancanyouobtain?
PV=100[1–1/(1.015)36]/.015=100(27.6607)=2766.07
13.FutureValueforAnnuities
FV=C[(1+r)t–1]/r
Example:
Ifyoumake20paymentsof$1000attheendofeachperiodat10%perperiod,howmuchwillbeinyouraccountafterthelastpayment?
FV=1,000[(1.1)20–1]/.1=1,000(57.275)=$57,275
14.Perpetuities
Perpetuity–seriesoflevelcashflowsforever
PV=C/r
Preferredstockisagoodexampleofaperpetuity.
15.NetPresentValue
a.TheBasicIdea
Netpresentvalue–thedifferencebetweenthemarketvalueofaninvestmentanditscost.Estimatingcostisusuallystraightforward;however,findingthemarketvalueofassetscanbetricky.
b.EstimatingNetPresentValue
Discountedcashflow(DCF)valuation–findingthemarketvalueofassetsortheirbenefitsbytakingthepresentvalueoffuturecashflows,i.e.,byestimatingwhatthefuturecashflowswouldtradeforintoday’sdollars.
16.TheInternalRateofReturn
Internalrateofreturn(IRR)–theratethatmakesthepresentvalueofthefuturecashflowsequaltotheinitialcostorinvestment.Inotherwords,thediscountratethatgivesaprojecta$0NPV.
IRRdecisionrule–theinvestmentisacceptableifitsIRRexceedstherequiredreturn.
ProblemswiththeIRR–Ifcashflowschangesignmorethanonce,thenyouwillhavemultipleinternalratesofreturn.ThisisproblematicfortheIRRrule;however,theNPVrulestillworksfine.
17.RelevantCashFlows
Relevantcashflows–cashflowsthatoccur(ordon’toccur)becauseaprojectisundertaken.Cashflowsthatwilloccurwhetherornotweacceptaprojectaren’trelevant.
Incrementalcashflows–anyandallchangesinthefirm’sfuturecashflowsthatareadirectconsequenceoftakingtheproject
18.IncrementalCashFlows
a.Sunkcost–acashflowalreadypaidoraccrued.Thesecostsshouldnotbeincludedintheincrementalcashflowsofaproject.Fromafinancialstandpoint,itdoesnotmatterwhatinvestmenthasalreadybeenmade.Weneedtomakeourdecisionbasedonfuturecashflows,evenifitmeansabandoningaprojectthathasalreadyhadasubstantialinvestment.
Examples:
thecompensationforthepresident’sson,nomatterwhetherheishiredforthenewproject
b.OpportunityCosts
Opportunitycosts–anycashflowslostorforgonebytakingonecourseofactionratherthananother.Appliestoanyassetorresourcethathasvalueifsold,orleased,ratherthanused.
c.SideEffects
Withmulti-linefirms,projectsoftenaffectoneanother–sometimeshelping,sometimeshurting.Thepointistobeawareofsucheffectsincalculatingincrementalcashflows.
Erosion(orCannibalization)–newprojectrevenuesgainedattheexpenseofexistingproducts/services.
Examples:
Coca-colanewproducts:
coca-colazerovs.Coca-coladiet
19.NetWorkingCapital
workingcapital=currentassets-currentliabilities
Newprojectsoftenrequireincrementalinvestmentsincash,inventories,andreceivablesthatneedtobeincludedincashflowsiftheyarenotoffset
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