Week 1 Flashcards
1
Q
3 interrelated elements in finance
A
time, money, risk
2
Q
6 principles of finance
A
- money has a time value
- higher returns are expected for taking on more risk
- diversification of investments can reduce risk
- financial markets are efficient in pricing securities
- manager and stockholder objectives may differ
- reputation matters
3
Q
money has a ___
A
money has a time value
4
Q
what is expected if you take on more risk in finance
A
higher returns are expected for taking on more risk
5
Q
when do you generally earn more returns
A
higher returns are expected for taking on more risk
6
Q
3 areas of finance
A
institutions/markets,
investments,
financial management
7
Q
what do you need to start or expand a business venture
A
money
ideas
understand: monetary system, financial institutions, , financial market interactions
8
Q
what does modern business depend on
A
business is increasingly global in nature so the success of a business depends on the domestic economic environment we live in and in the developments abroad
9
Q
what aspects of globalization is finance involved in
A
globalization encompasses the socio-economic reform process of eliminating barriers to trade, investment, cultural, information technology, and political issue across countries
10
Q
how are financial markets catagorized
A
money and capital markets
11
Q
money markets
A
debt securities that are issued and traded with maturities of one year or less
12
Q
debt securities that are issued and traded with maturities of one year or less
A
money market
13
Q
capital markets
A
debt instruments or securities are issued and traded with maturities longer than one year
14
Q
debt instruments or securities issued and traded with maturities longer than one year
A
capital markets
15
Q
primary markets
A
provide for the initial offering/origination of debt and equity securities
16
Q
secondary markets
A
locations to trade debt securities like bonds/mortgages and equity securties/stock
17
Q
definition of money
A
anything accepted as a means of paying for goods/services and paying off debt
18
Q
2 basic functions of money
A
serves as a medium of exchange
AND
can be held & stored as a value/purchasing power that can be drawn upon at awill
19
Q
what do economists believe about money and economic activity
A
economists generally believe that money supply “matters” when trying to “manage” economic activity
20
Q
GDP
A
gross domestic product
economic activity
21
Q
what is GDP comprised of
A
personal consumption expenditures (PCE)
government purchases (GP)
gross private deomestic investment
net exports
22
Q
equation of GDP
A
GDP = PCE + GP + GPDI + NE
gross domestic product
personal consumption expenditures
government purchases
gross private domestic investment
net exports
23
Q
PCE
A
personal consumption expenditures
expenditures by individuals for goods and survices
24
Q
GPDI
A
gross private domestic investment
fixed investment in residential/non residential structures, producers durable equipment, changes in business inventories
25
NE
net export
exports minus imports
26
calculate net exports
exports - importas
27
velocity of money
divide GDP by the money supply = the number of times our money supply "turns over" to produce GDP
*measures the rate of circulation of the money supply
28
measures the rate of circulation of the money supply
velocity of money = number of times the money supply turns over to produce GDP
29
what happens when money supply exceeds the amount of money demanded
the public will spend more rapidly causing real economic activity/prices rise
30
what happens when the rate of growth of the money supply is too rapid
a too rapid rate of grouth in the money supply will ultimately result in rising prices or inflation because excess moeny will be used to bind up the prices of existing goods
31
what do Keynesians believe about the money supply
Keynesians beleive a change in the money supply first causes a change in interest rate levels which, in turn, alters the demand for goods and services
-decreases in money supply will likely cause interest rates to rise
THUS GDP will grow more slowly/even decline depending on how highter interest rates affect consumption and spending decisions
32
what is a country's economic system tied to
a country's economic system is necessarily tied to the international exchange of goods/services
-a well-developed international monetary system is necessariy for a successful global economy
33
what has the international monetary system historically been tied to
gold standard
1944: many of the world's economic powers met and agreed to an international monetary system that was tied to US dollar/gold via fixed (pegged) exchange rates
34
when did major international currencies float against eacher
1973, major currencies were allowed to "float" against each other resulting in a flexible or floating exchange rate syewm
-today the current international monetary system is a "managed" floating echaange rate system (because sometimes central monetary authoriteis intervene)
35
AIS
Accounting Information System
36
objective of the AIS
Accounting Information System
-to provide all the financial information internally needed by management for business decision-making (management accounting) and to provide financial information to various external users concerned with the financial activities of hte organization (financial accounting)
37
use of bar codes in warehouses
keep track of inventory
38
what is the component of AIS that supplies information to external users
Financial accounting is a component of Accounting Information System that supplies information to external users. organizations that require/expect information to be reported and organizations that receive information on an as needed basis
39
why is the study of financial statements important
the competitivene3ss of hte global marketplace is continuing to expand at a fast pace and firms need to be positioned to leverage assets/credit, decrease debts, continuous improve
SO
must review financial statemnts/applicable ratios at prescheduled intervals
40
leadership/manager reviewing a firm's finances
. The competitiveness of the global marketplace is continuing to expand at a fast pace and firms need to be positioned to leverage assets and credits, decrease debts, and continuously improve. As a resource in this regard, firms are able to review their financial statements and applicable ratios at prescheduled intervals. These reviews must be conducted in a manner that provides the managers of a firm with the ability to take proactive and/or corrective steps as needed. We can move to an important part of a company’s existence by becoming familiar with the fundamentals of financial analysis – the review of financial statements, as well as how to interpret those statements through ratio analysis.
41
GAAP
General Accepted Accounting Practices
42
3 most important financial statements
income statement
balance sheet
statement of cash flow
43
aka income statement
profits & losses statement
44
aka profits & losses statement
income statement
45
what is the income statement directly linked to
the income statement (profits & losses) is directly linked tot he balance sheet and statement of cash flow
46
what does the income statement report
income statement reports the revenues generated & expenses incurred by a company over an accounting period (quarter/year)
47
reports revenue generated & expenses incurred by a company over a period of time (quarter/year...)
income statement
48
aka balance sheet
Statement of Financial Position
49
Statement of Financial Position
aka balance sheet
50
what shows the snapshot of hte financial situation of the company
balance sheet
51
what provides an insight into the financial inner-workings of hte company
balance sheet (Statement of Financial Position)
52
how to use the balance sheet
aka Statement of Financial Position
Assets = Liabilities + equity
balance stateement must blance
53
Assets =
Assets = Liabilities + equity
MUST BALANCE
this is the balance sheet/Statement of Financial Position statement
54
Liabilities + Equity =
L + E = Assets
Balance sheet MUST BALANCE
55
what must a company have for every asset
for every asset, the company will have some combination fo debt or equity financing for it
56
how is the statement of cash flow useful
statement of cash flow is a useful tool in determining a company's ability to generate cash flows
-summarizes the cash recepits/cash payments during the period from a company's operating, investing, and financing activities
57
3 business activities covered by the statement of cash flow
operating activities
financing activities
investing activities
58
operating activities of a business
(1/3 of the statement of cash flow)
expenses of the company required to maintain its business operations
59
expenses of a company needed to maintain business operations
operating activities
60
investing activities of a company
all investing activities the company has purchased or sold duirng that accounting period
61
financing activities of a company
changes in teh company's debt, loands, or dividends account
62
what can be confusing about statement of cash flow
is a change in the account a source or use
-ask Q "does the transaction lead to an increase or decrease in cash?"
63
important question to ask about the different components on the statement of cash flow
Does the transaction lead to an increase or decrease in cash?
64
why is the study of financial statements important?
The study of financial statements is an important one. The competitiveness of the global marketplace is continuing to expand at a fast pace and firms need to be positioned to leverage assets and credits, decrease debts, and continuously improve. As a resource in this regard, firms are able to review their financial statements and applicable ratios at prescheduled intervals. These reviews must be conducted in a manner that provides the managers of a firm with the ability to take proactive and/or corrective steps as needed. We can move to an important part of a company’s existence by becoming familiar with the fundamentals of financial analysis – the review of financial statements, as well as how to interpret those statements through ratio analysis.
65
forms of business organizations in the US
sole proprietorshiop, partnership, corporation
66
aka single business ownership
sole proprietorship
67
what is a corporation
business organized under the laws of a particualar state
68
Finance Equations and Calculations
Asset Ratios
Inventory turnover = Sales or cost of goods sold/ Inventory
Days’ sales in inventory=(Ending Inventory × 365 days)/ Cost of goods sold
Accounts receivable turnover = Credit sales /Accounts receivable
Average collection period (ACP)=(Accounts receivable × 365 days /Credit sales)=365 days /Accounts receivable turnover
Accounts payable turnover = Cost of goods sold /Accounts payable
Average payment period (APP)=Accounts payable × 365 days /Cost of goods sold=365 days/ Accounts payable turnover
Fixed asset turnover = Sales/ Net fixed assets
Sales to working capital = Sales/ Working capital
Total asset turnover = Sales/ Total assets
Liquidity Ratios
Current ratio = Current assets/ Current liabilities
Quick ratio (acid-test ratio) = Current assets – Inventory/ Current liabilities
Cash ratio = Cash and marketable securities /Current liabilities
Current ratio using Inventory: Current ratio – Quick ratio=Inventory. Add inventory result to current assets and to current liabilities and then divide to calculate a new current ratio.
Debt Management Ratios
Debt ratio = Total debt/ Total assets
Debt-to-equity = Total debt/ Total equity
Equity multiplier = Total assets/ Total equity or Total assets/ Common stockholders’ equity
Times interest earned = EBIT/ Interest
Profitability Ratios
Gross profit margin = Sales − Cost of goods sold/ Sales
Operating profit margin = EBIT/ Sales
Profit margin=Net income available to common stockholders /Sales
Basic earnings power (BEP) = EBIT/ Total assets
Return on assets (ROA)=Net income available to common stockholders /Total assets
Return on equity (ROE)=Net income available to common stockholders/ Common stockholders’ equity
Dividend payout=Common stock dividends /Net income available to common stockholders
Market Value Ratios
Market-to-book ratio = Market price per share /Book value per share
Price-earnings (PE) ratio = Market price per share/ Earnings per share
Other
Assets = Liabilities + Equity
Percentage formula: to find X if P of it is Y. Use the formula Y/(1-0.30)=X
Net working capital = Current assets − Current liabilities
Earnings per share (EPS) = Net income available to common stockholders /Total shares of common stock outstanding
Dividends per share (DPS) =Common stock dividends paid /Number of shares of common stock outstanding
Book value per share (BVPS) =Common stock + Paid-in surplus + Retained earnings /Number of shares of common stock outstanding
Market value per share (MVPS) =Market price of the firm’s common stock
GDP = PCE + GP + GPDI + NE.
Treasury securities are 0 DRP.
Approximate return - Rule of 72 is the approximate number of years to double an investment. It calculated by dividing 72 by the annual rate of return.
FCF===[EBIT (1 − Tax rate) + Depreciation] − [ΔGross fixed assets + ΔNet operating working capital][NOPAT + Depreciation] − Investment in operating capital Operating cash flow − Investment in operating capital
ROA: Net income available to common stockholders +Profit margin + Total asset turnover
ROE: ROA×Equity multiplier or Total assets/Common stockholders’ equity
Retention ratio (RR)=Addition to retained earnings/Net income available to common stockholders
Retention ratio (RR)=Addition to retained earnings Net income available to common stockholders. For the Retention ratio: (1 – payout ratio).
If you know the retention ratio and net income and want the dividend payout:
ratio is (1 - the retention ratio) * net income
Internal growth rate= ROA × RR1 − (ROA × RR)
Sustainable growth rate= ROE × RR1 − (ROE × RR)
Future value in 1 year = FV1 =PV × (1 + i )
Future value in N years = FVN = PV × (1 + i)N
Future value in N periods =FVN =PV × (1 + i period 1 ) × (1 + i period 2 ) × (1 + i period 3 ) × …× (1 + i period N )
Present value of next period’s cash flow = PV = FV1 /(1 + i )
Present value of cash flow made in N years: PV = FV / (1 + i)N
Present value with different discount rates: =PV = FVN(1+iperiod 1) × (1 + i period 2) × (1 + iperiod 3) × ...×(1 + iperiod N)
NOTE: If you use Excel for FV or PV, make sure to add negative sign for the amount.
Bond price =PV of annuity (PMT, i, N) + PV (FV, i, N)
NOTE: Bond price will be $1000.00 for all questions/problems in this course.
Constant growth model: P0=D0(1 + g)/i − g= D1/i – g
Constant Growth Assumption: Annual Dividend*(1+ Expected Growth%)/(Required return%- Expected Growth%)
Expected return: i=Dividend yield + Capital gain or D1P0+ g
P/E=Current stock price/Per-share earnings for last 12 months
Dollar return: Capital gain or loss + Income; (Ending value – Beginning value) + Income
Percentage return:(Ending value – Beginning value + Income Beginning value)* 100%
Total risk = Firm−specific risk + Market risk
Rate of return will be calculated as: (Expected Price + Dividend - Current Price) / Current Price
Required return = Risk-free rate + Risk premium
Expected return=Rf+β(RM−Rf)
Free Cash Flow: Operating cash flow−Investment in operating capital=[EBIT(1−Tax rate)+Depreciation]−[ΔGross fixed assets + ΔNet operating working capital]
Depreciation: (Depreciable basis−Ending book value)/Life of asset
Payback Decision Rule: Accept project if calculated payback ≤ Maximum allowable payback; Reject project if calculated payback > Maximum allowable payback
NPV Decision Rule: Accept the project if the NPV is positive and reject the project if the NPV is NPV is negative. If a conflict in ranking occurs, the decision rule is to accept the project with the highest positive NPV instead of the project with the highest IRR that is greater than the hurdle rate.
IRR Decision Rule: Accept project if IRR ≥ Cost of capital; Reject project if IRR < Cost of capital
Operating cycle: Days’ sales in inventory + Average collection period; (Inventory × 365/Cost of goods sold) + (Accounts receivable × 365/Credit sales)
Cash cycle: Operating cycle − Average payment period; Operating cycle – (Accounts payable × 365)/Cost of goods sold
Average payment period (APP): Operating cycle−Cash cycle
Payables turnover = 365/APP
Dividends = Net income − Retained earnings necessary to fund positive NPV projects
Simple dividend payout ratio: dividends/net income
Current Yield when only % and price are known: %/price
Value of the stock: $Dividend/Required return%
Stock price: P/E * earnings per share
Market capitalization: Shares * Stock price
% Equity + % Debt will always equal 100%
Estimated Yield to Maturity Formula: (Annual Interest Payment) + (Face Value - Current Price)/(Years to Maturity)/(Face Value + Current Price)/2
WACC = WdKd + WpKp + WeKe
Weight of Debt*Cost of Debt+Weight of Equity*Return on Equity
Sample input in Excel: =0.4*(0.06)+0.6*(0.17)
69
what is finance the study of?
finance is the study of value and how it is determined
70
what must you know about risk in terms of finance
assessing risk and ascertaining the appropriate return for hte preceived level of risk
71
how are the three fundamental principles of finance meant to be used
not meant to be directly related to each other -each stands on its own- but they work together in shaping financial theory
72
first fundamental principle of finance
The value of any asset = the preset value of the cash flow the asset is expected to produce over its economic life
73
basis for all methods used for determining the value of virtually anything
The First Fundamental Principle of Finance: the value of any asset is = the preset value of the cash flows the asset is expected to produce over its economic life
74
value of a dollar
a dollar today is NOT = dollar tomorrow
- you can invest it so it is worth more in a year. so it is worth more later
75
what is the basis of value for an asset
the basis of value for an asset stems from the cash flows the asset is expecte dto rduce
76
what determines the cash flow of an asset
the nature of hte asset determines the nature and timing of the cash flows produced by the asset
77
why might multiple financial specialists make different judgements for the expected cash flow from an asset?
each may make a different assumption
78
what type of financial analysts are the most talented/successful
there is a lot of judgement in finance so the analysts who develop good judgment get paid well. not expected to have good judgment starting out but will grow over time. managers whose judgment proves effective climbs the corporate ladder successfully
79
eeconomic life of assets
different assets have different lives.
-e.g. when a firm purchaaes a new machine for production, it assigns its economic life base dont he nature of the asset for purposes of depreciation
- bonds have a limited expected life (maturity date) while stocks last forever
80
what must we determine when we attempt to value an asset
-determine the discount rate
-size/timing of the cash flows the asset is expected to produce
-when its economic life ends/asset expected to be sold or taken out of ervice
81
discount rate
the cost that is appropriate for the perceived level of risk for the given asset
-determined by the level oif risk associated w/the asset anin question
82
assets & discount rate
different types of assets will use different discount rates to determine the present value of cash flow
83
MACRS
modified accelerated cost recovery system
84
how is MACRS used
modified accelerated cost recovery system
depreciation system used for tax purposes
-allows the capitalized cost of an asset to be recovered over a specified period via annual deductions
-puts fixed assets into classes that have set depreciation periods
85
what does MACRS do to assets
modified accelerated cost recovery system
- puts fixed assets into classes that have set depreciation periods
86
why must you know the expected economic life of the asset
the expected economic life of the asset must be established in order to be able to determine the time span over which cash flows can be expected
87
2nd Fundamental Principle of Finance
there is a direct relationship between risk and return
88
relationship between risk and return
as perceived risk increases, required return will also increase
89
how is risk understood
the chance of a bad outcome
90
what is risk in finance
probability of not earning the return you expect from your investment over a given period of time
91
standard deviation of a data set
measures the average deviation from the mean
92
2 rules of rational investing
if 2 investments have the same expected return but different levels of risk, choose the investment with less risk
if two investments have the same level of risk but different expected returns, choose the investment with the higher expected return
93
which should you choose if you have 2 investments with the same expected return but different levels of risk
choose the one with the less risk
94
which should you choose if 2 investments have the same level of risk but different expected returns
choose the one with higher expected returns
95
what will rational investors do
either maximize their expected return for a given level of risk or minimize the risk for a given level of expected return
= will want a higher rate of return for a higher risk
96
yield =
yield is another word for return. specificially the % return
97
3rd fundamental principlal
there is an inverse relationship between price and yield
-if an assets price increases, it return will decrease
-
98
relationship between price and yield
yield = return
if an assets price increases, its return will decrease
99
what happens as the denominatior of a fraction increases (constant numerator like 1)
number gets smaller
100
precept
general rule intended to regulate behavior or thought
101
relationship between the present value of a cash flow/asset & discount rate
present value of a cash flow (asset) is INVERSELY RELATED to its discount rate
-increasing the discount rate decreases the present value
102
how is the discount rate used
the discount rate is used to calculate the present value of a cash flow determined by the nature of hte cash flow as well as the relative riskiness of hte cash flow
103
what does the discount rate used affect
different types of assets will require different discount rates SO discount rate used will affect the value determined for hte asset
104
what happens when we discount cash flows to determine their present value
we are removing value to account for return to investors over time
105
why does the timing of cash flow from an asset matter
the timing of cash flows of an asset is importatn
-sooner is better (later cash flows are more heavily discounted reducing their preset value)
106
what happens to a cash flow at the end of the first time period
a cash flow that occurs at the end of hte first time period is discounted for one period toi obtain its present value WHILE a cash flow that occurs at the end of hte second time period isdiscounted for two periods to obtain its present value
107
what happens over time due to the discounting process
the further out the cash flows occurs, the more value gets removed in the discounting process and consequently the lower th peresent value
-SO an asset with larger cash flows comes earlier in its economic life will have a higher presentr value that a similar one in which the larger cash flows come later since the earlier large cash flows will not be discounted as much
108
what is discount rate used to reflect
discount rate is used as a reflection of the riskiness of the cash flow
109
what is present value of a cash flow affected by
presenty value of a cash flow is affected by the size of hte cash flow, timing of it, and discount rate used to determine its present value
110
relationship between present value of a cash flow or asset & perceived risk
higher the risk, higher the discount rate, and lower the present value
111
what kind of relationship between risk and return
positive relationship
112
what kind of relationship between return and value
negative
113
cash flows subjected to less discountign
less value returned
114
APR
annual percentage rate
- charged for the use of credit
- the number APR quoteds you is not the rate you will actually pay
115
role of finance in a business
determine how money is to be raised, spent, and invested
116
what is important to remember about funds raised from different sources
funds raised from different csources have different costs and different associated risks
117
what does the chief financial officer decide about bonds offered by their company
whether to issue a bond,
for what maturity,
and paying what interest rate
OR to issue equity (preferred or common)
and whidividends to pay shareholders
118
what aspect about finance directly impacts other decisions the firm will make
ability to raise money quickly and at a reasonable cost impacts decisions like...
- what products to make, how to make them, (based on production processes and the cash flows realized from the products)
- CFO also determines how much cash to make available for operatiosn and wehre to invest leftover cash
119
short-term decisions a firm must make about finances
how much cash to keep on hand
how much inventory to keep on shelves
how much credit to extend and to whom
whether to pay the bills quickly to get a discount or pay them leter at full price
120
long-term financial decisions
which production assets to purchase,
whether to use manual or anutomated process,
whether to build a production facility or rent one,
purchase own fleet of trucks or contract out,...
121
what is important ot remember about any major decision a firm makes
any major decision a firm makes commits the firm to a long-term plan
122
what type of discipline is finance
a strategic discipline
123
how does CEO, CFO, and other top managers choose which option to invest in
based on firm's strategic plan and value of each option
124
what is it every manager's responsibility to do
maximize the intrinsic value of a firm
- some focus on maximizing shareholder wealth (generally translates to maximize the firm's common stock price
SHORT SIGHTED: stock prices can be manipulated and generally doesn't add long-term value
thus, promote maximizing the intrinscic value of a firm ((intrinsic common stock price)
125
stakeholders for a business
- customers (depend on good/service)
- suppliers (live/die based on the success/fail of the businesses they supply
- employees (take pride in work and devote a better part of hteir week to the firm's success)
- investors supply the firm with the funds they need to continue in business
- community is invested in teh firm's success
126
what is important to remember about your employees
they devote the better part of their week to your firm's success
127
Coco Cola flop
1985: New Coke. to compete w/ Pepsi
1. changed a program that didn't need to be changed
2. tgook original product off the market
original product "Coke Class" brought back 3 months later and Coke II d/c 7yrs later
128
what was one of the reasons Obama bailed out GM
many reason but also was because of the impact on the local community. numerous local businesses made virtually all of its revenue from supplying the local GM plant
129
controversary at Amazon the same year he became the richest man in theworld
Jeff Bezos became richest man in the world in 2017 but more than 10% of 6K employees in Ohio were on food stamps
130
CEO of Amazon
Jeff Bezos
131
Stop BEZOS Act
2018: Bernie Sanders act to require large employers like Amazon/Walmart pay the government for various forms of public assistance like food stamps/medicaoid/public housing received by their employees
- zero chance of passing but did begin a national conversation about corporate subsidies paid for with taxpayers funds
132
what does Walmart say about its low wages
Walmart Claims its strategy is low prices but hte low rwages are why so many WalMart are on public assistence
133
Walmart family in 2012
6 people in the Walton family had combined wealth of $90M which is more than the bottom 30% of US earners
134
what does the local community receive from businesses
ongoing source of labor,
restaurants for meals/outings,
local businesses as customers/suppliers,
retail stores for employee convenience
**efforts made/money spent on supporting the local community often pays dividends for hte firm in term s of good public relations and support from the lcoal vogernment
135
socially responsible investing
give back to community
136
green funds
mutual funds that limit investimets to firms that limit their carbon footprint and contribute to environmental protection, firms developing alternative energy sources, ethical corport governance
137
purpose of socially responsible investiong & green firms
to tell corporate executives that how they choose to operate their businesses matters to investors
138
what is Enron
energy firm in 1985 Houston that was a merger of two smaller ones
in 1990s, used fradulent accounting practices to transfer liabilityies off its balance sheet making the firm appear less risky and thus keeping its stock pricesartificially elevated while also making the firm seem more profitable than it was
- marketing analysits found out in August 2001
- problematic b/c management had insisted that the employees invest their pensions heavily in Enron stock so when the firm filed for bankruptcy, the employees lost their jobs and life saving
139
SEC
Securities and Exchange
140
EPS
earnings per share
141
stock buyback hx
1982, SEC passed rule 10b-18 which makes stock buyback esier
- repurchasing shares reduces the number of shares outstanding, increases earnings per share. higher EPS cause sthe market to reprice the stock upwards
- buiyback doesn't do anything for the firm other than put upward pressure on the stock price - not real value added. but increases int ehsock price helps motivate top managers becasue lets them meet their goals and achieve huge bonuses
- so top mamagers are motivated to continue the practice since it benefits them
142
theory of corporate sustainability
corporations have an ethical obligation to run the business in a way that is sustainable for all parties involved
143
what is true sustainability
sustainability for everyone, not just the shareholders
144
how can you measure the market price of a stock
published all day long and changes constantly with traded based on new information
145
3 ways to increase the present value of hte firm's expected future cash flow
maximize the size of the expected future cash flows,
obtaint he cash flows sooner rather than later,
redce the riskiness of cash flow
146
what does MACRS schedule offer
MACRS schedule for depreciation of production assets offers higher depreciation rates earlier int he assets life, increasing the early cash flow from the asset
147
creative ways to obtain cash flows sooner rather than later
- MACRS schedule rather than straight line depreciation,
purchasing dept could propose purchasing contracts with its suppliers that reward volume purchases with lower prices or rebates for meeeting certain volume targets
**good relationships with suppliers makes it easier to implement
-
148
how do you manage purchasing expenses
manage relationships with suppliers. prices increases are inevitable but good working relathiopships wmakes them work for all parties involved
149
increases operating expenses over time
salary increaseshow
150
3 general types of financial decisions made by the CRO
capital budgeting, working capaital management, capital structure
How do we invest long-term to implement our strategic plan?
How do we manage our funds in the short term to suppoert production?
How do we obtain the funds we need
151
what do cpaital budgeting decisions involve
large initial purchases and large cash inflows form sales revenues over an extended period of time
- each decision of this time commits the fiirm to utilizingthe assets for years
152
working capital
current assets & liabilities
(the short-term balance sheet accounts used to support day to day operations
**must manage to prevent costly interruptions to production
153
how do you prevent costly interruptions to production
manage working capital
154
short-term accounts used to support day to day operations
working capital
155
examples of typical working capital questions
How much cash to have available for production? (cash does not earn interest)
how much credit should be extended to customers and at what interest rate,
how much inventory should be kept in stock,
should we pay cash for operationg purchases or use trade credit?
how much short=-term debt should be used to support operations?
156
cash & interest
cash does not earn interest
157
capital structure
mixture of debt and equipty the firm uses to purchase its assets and uspport operations
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typical capital structure issues
Should we issue bonds or stocks
what maturity should the bonds be assigned
what interest rate is appropriate for the bonds
what divident should we pay the common shareholder
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what does the value of a firm derive from
value of the firm derives from the cash flow it produces
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how does the stock market set a price for a firm's common stock
based on its expectations regarding the firm's future cash flows
- optimistic or pessimistic
- investors vote with wallet
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how does the news affect the stock market
expectations of future cash flows are shaped by the news puvblished about the firm (top management changes, lawsuits, annual reports)
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things the CRFO must determine the value of decisiosn
introducign a new product
entering a new product
utilizing a new production process
acquiritng another firm
changing the location of corporate HQW
* none of these decisions are purely financial in tature, they all have value and it is the functuion of finance to determine the appropriate value
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wealth managers
work with people to develop an investment strategy and creaqte a portfolio to meet long-term needs
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investment manager
recomend or select/purchase securities on behalf of other investors
- financially savvy sales people to get investors to invest in teh securities or funds they are offering
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broker
broker at an investment firm offers a selection of possible investments for their clients to choose from
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mutual fund manager
creates a portfolio of securities and markets it to the investing community
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seucrity analyst
must learn asm much about a firm as possible in order to make a recommendation on the firm's securities buy/hold/sell
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what type of business is a priprietorship
small business
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benefit of a proprietorship
totaol control of business operations,
business income belongs to proprietor
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disadvantage of a proprietorship
profits/losses are reflected in the proprietors tax returns and taxes are paid at individual rates (highter than corporation)
- no formal books to review so raising money is a fucntion ofthe credit worthiness of the propreitor and propretor bears all lieability for hte borrow funds
largest concern = liability
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liability & proprietorship
proprietors have unlimited liability. so sole responsibility for all obligations of the business (expenses, taxes, lawsuits, fines...)
- if they are hit with a large obligation like a lawsuit, the court can take away their business and the owner's personal assets
- insurance can reduce risk but still risk
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proprietorship owned by 2 peope
partnership
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corporations difference from proprietorship and partnership
corporations are legal entities separate from owners
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obligations of being a public corporationh
must have an annual report verified by an accounting firm
- include audited financial statemnts that reflect the results the firm experience over th past year
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main disadvantage of corporations
double taxation
- pays taxes on operationg earnings arfter interest is deducted and the balance is netincome
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S corporations
corporation doesn't pay taxes themselves but passes the profits along ot the owners where the income is taxed at individual rates
- professional services like doctors, lawyers, podiatrists, accountantsq
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secret to business
to be successful, you msut invest in projects that earn more than cost
- strategic choices need 2 essential bits fo information: what does it cost, and what earn
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estimating cash flows for projects
art & sicence
mistakes are inevitable
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primary duty of a CFO
acquire capital for the firm when needed
-most firms do not have enough to fund all of hteir capital projects on an ongoing basis. so they need to raise funds. understad the market
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why do markets exist?
to bring entities that have funds (insurance companies or pension funds) to those who need funds
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when are people motivated to invest
when they believe the return from the investment will be worth the risk
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important thing to remember about risk in finance
there are different levels of risk tolerance in the financial markets
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who issues stocks
corporations
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who issues bonds
corporations/cgovernments
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IPO
initial public offerings
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examples of flotation costs
Flotation costs include legal fees, certificate printing fees, registration fees, stock exchange listing fees, and underwriting fees.
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floatation costs
Flotation costs are incurred by a publicly-traded company when it issues new securities and incurs expenses, such as underwriting fees, legal fees, and registration fees. Companies must consider the impact these fees will have on how much capital they can raise from a new issue.
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primary market transactions
corporation is the seller of the securities and recipient of the funds (minus flotation costs
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SEO
seasoned equity offerings
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IPO
initial public offering
-a firm's common stock is sold to the public for the first time
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a firm's common stock is sold to the public for the first time
IPO: initial public offering
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difference between IPO and SEO
initial public offering versus seasoned equity offering
-IPO: firm's common stock is sold to the publif for the first time
SEO: seasoned equity offerings
-firm offers additional shares of a stock that is already publically traded
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private placement
negotiated sale to a specific buyer
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SEC
Securities & Exchange Commission
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register w/SEC
all public offerings do debt and equity must register but private placements do not
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what does the SEC do
Securities & Exchange
- federal body that regulates stocks and bond market
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federal body that regulates the stock and bond market
SEC: Securities & Exchange
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registration process w/SEC
Securities & Exchange Commission
- issuing entity must disclose a good deal of information about the corporation prior to selling any securities
- costs associated w/public offerings can be susbtantial
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private placements & SEC
priivate placemsents don't have to register w/SEC so they dont' have regulations or underwriters. so no flotation fees
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underwriters
investmetn banks that help corporations sell new issues publically
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secondary market transactions
one owner of a stock sells it to a new owner OR debtholder sells a bond to the new bdebtholder
- funds do not flow to the corporation BUT an active secondary market is crucial for success when issuing new seucrities int eh primary market
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2 types of secondary markets
either dealer or auction markets
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dealer markets
dealers buy or sell socks/bonds. generally for themselves and at their own risk
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auction markets
broekrs match up buiyers and sellers to facilitate transactions (new york stock exchange(
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money market
exists to trade securities that have maturities of less than one year
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exists to trade securities that have maturities of less than one year
money market
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how can individuals invest in money market securities
via money market mutual fund
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how do corporations and goverments (any level) raise money
in the capital market
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purpose of the capital market
for long-term debt and equity securities (securities with more than one yera to maturity)
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what do firms use capital market transactiosn to do
purchase long-term assets like building or production equipment
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efficient market hypothesis
financial markets are expected to be efficient at processing information effectively and reflecting it in current stock market
-when stories about a publically held corporation hit the news, response
*unexpected & good news: stock prices increase
*unexpected & bad: stock prices decrease
(little/no movement if expected news)
increase/decreases based on stories of high/low impact
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why might a pharmaceutical company's stock not go up the day a new drug is approved?
2018 FDA approved an ovarian cancer drug by AstraZeneca but the company's common stock price fell by 0.68% that day. Typically unexpected good news will make stock prices go up. but that approval was expected b/c it had been awaiting approval for years. had it not been approved, the stock prices would have significantly fallen
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"beating the market"
earning a higher return than is appropriate for the given level of risk
**if therte is a way to consistently beat the stock market, it is elusive
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who did well/not during the 2008 recession
S&P 500 lost +1/3 value but Walmart had a 20% return, Anhauser Busch earned 39%. financial & financial were on the brink of collapse but McDonalds and hasbro did fine
**not all industrices in teh stock market are affected equally by the financial crisis
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when are stock market bubbles created
corrections occur when certain stock prices are above their intrinsic value (create a "bubble"/disconnect between the stock's intrinsic value and its market value(
- combo of news storeis and traading activities can occasiohnally drive a stock market priceabove its intrinsic price creating a buble. longer bubble ramins, bigger it gets. when truth is known, negative news stories trigger selling of stock which causes stock to fall
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examples of stock market buibbles
2000- internet bubble. led to recession
2007: real estate/financial industry collapse
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arbitrageur
one who does arbitrage.
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
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the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
arbitrage
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characteristics of money market securities
highly liquid. relatively low risk. generally issued by entities w/exceptional credit
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T-Bills
treasury bills- debt securities issued by US Federal gov to finance the federal budget deficit
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safety of T-bills
Treasury bills. a money market security. safe b/c US government has never defaulted on its debt (but has come close)
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USG defaulting on debt
USG has never defaulted on its debt but has come close
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commercial paper
money market security
= IOU
short-term promissory note issued by a large corporation or financial institution w/exceptional credit
- issuer must be creditworthy b/c the note are unsecured. but the borrow is creditworthy so the commercial paper is considere4d safe and liquid. can trade
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banker's acceptance
effectively a bank's promise to pay
- used for international transactiosn so that the firm is owed is releived of the need to travel overseas to collect on the debt
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equity
stock
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aka stock
equity
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stock is sold in 2 forms
common and preferred eq
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stock that represents ownership in the issuing firm
common equity (common stock)
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common equity
represents ownership in the issuing firm,
have the right to any commmon dividends,
may vote on issues addressed by the board of directors but only to the degree to which they own shares
***they want to see stock go up in price (capital gain) so when they are ready, they can seel the stock for profit
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total return to the common shareholder =
dividend yield and the capital gains yield
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preferred equity
doesn't represent ownership but does represent preference when it comes to dividends
**common dividends only get paid after preferred deividends are paid
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who gets paid first if a firm has to stop paying dividends for a period of time b/c of a hardship
preferred dividends must be payed back before common ones
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debt
loan that has to be repaid
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payment for the use of moeney
interest
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how is the interest rate earned for investing in debt determined
determined by risks associated w/the debt
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when does the USG issue treasury notes/bonds
when it wants to borrow funds for more than one year
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maturitys of T-notes/ & bonds
T-notes: 2-10 years
T-bonds: more than 10 yeas
*(principal is repaid at maturity with the final interest with the final interest payment
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who issues municipal bonds
"munis"
bonds issued by state/local governments|
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why are interest rates on municipal bonds lower than for other bonds of similar risk and m aturity
their interest payments aren't federally taxable so interest ratess are typicall lower than other bonds of similar risk and maturity
- so popular with investor in high tax brackets
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corporate bonds
similar to T-notes/bonds but issued by a corporation. riskeier b/c corporations don't have the power to print money to cover their debt and thus,, can default
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mutual fund
money manager pools money from many investors to create a portfolio
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importance of creating a mutual fund portfolio
nature is meant to be designedned to appeal to specific clients
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derivatives
financial securities whose value derives from the value of hte underlying asset
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forward contract
agreement between 2 parties to undertake a specific transaction at a future date (farmer negotiating to sell corn for their upcoming season to a grocery at a price agreed upon today. farmer/store locks in its selling/purchase price.)
it is a legal contract: if one party defaults, the other party has legal recourse in court
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future contracts
standardized forward contracts. liquid so they can be traded. commodities liek wheat/cofrfee/currencies like euro/yen, ... used for hedging and speculating.
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hedging
managing risk
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financial options
derivative securities that give the buyer the right but not obligation to buy/sell the underlying financial asset at a fixe dprice over a specified period of time
*called options because the buyer can choose to not exercise the option -let it expiere w/o transacting-if scircumstance warrents it
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the Fed
Federal Reserve Bank
-central bank of us
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central bank of the US
Federal Reserve Bank
"the Fed"
250
role of the Fed
- regulates money supply
- oversees the nations' financial system
-0 makes loans to member banks and financial institution
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who is responsibile for controlling inflation
the Fed
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how does the Fed slow down/jumpstart the economy when needed
the fed uses open-market sales and purchases of T-bills/adjustments to the discount rate as tools
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creation of The Fed
1913 b/c of multiple banking panics
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what is the Fed System made of
12 district banks,. board of governors who oversee the 123 banks, an dFOMIC to meet regulary to set the monetary policy
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how many Federal REserve Banks throughout the coutnry are there
12 district Federal REserve Banks in teh system
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who oversees the Federal REserve System district baks
Board of Gov ernors
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FOMC
Federal Open Market Committee
* part of the Fed that meets regurarily to set monerary policy
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FRED
Federal Reserve Economic Database
*party of the Fed. conducts reserac into the economy and reguarily publishers papers/maintains data for professional/academic use in FRED
259
lender of last resort to financial institutions that can't obtain credit and whose collapse woulde be detrimental to the economy
the Fed
260
how does the Fed control the money supply
w/FOMIC. it uses open-market operations (buying or selling of Treasurey securities or foreign currencies) to make adjustmetns to the money supply
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what happens when the Fed wants to increase money supply
FOMIC instructs its traders to buy treasury securities on the open market. increasing the supply of money increases liquidity and ecreases the cost of money. both stimulates economic acitvity and speeds up the economy
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what does FOMIC do when it wants to decrease money supply
FOMIC instructs its traders to sell Treasury securities on the open market. decreasign the money supply decreases liquidity and increases the cost of money which will dampen economic activity and slow the economy down. that's how they control inflation
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how do banks make money
by charging more for money they lend than the money they pay their depositiors to use their funds (difference is the interest rate spread)
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interest rate spread
banks make money by charging more for the money they lend than the money they pay their depositors
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what do banks need to open
banks need a charter-authroization from the government to operate- before they can take deposits. b/c banks are part of the moeny supply susytem and deposits are federally insured, opening a bank is not as simple as operating a business
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required reserve ratio
commercial banks can't lend out 100% of depositors money ab/c the Fed requires a minimum amound kept on hand to manage the withdrawl requests of the depositros and fund their oeprations
267
S&L
Savings & Loans. take in and lend a percentage of the deposits out but the loans they make are priamrily mortage loans.
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mortgage loans
loans that are collatoraized by reakl estate. if the borrower defaults, the lender takes the real estate and sells it to recup their funds
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credit unions
financial institutions owned by the members,. usually associated w/an industry (Alliant Credit Union is in the airline industry)
- credit uniions loan out money to memebrs at rates tyhpically lower than available elsewhere
-members own the institution so residual income from operations is paid out as divident to its memebrs
-needs a charter to open
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S&L
Savings & Loans. take in and lend a percentage of the deposits out but the loans they make are primarily mortgage loans.
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how do insurance companies operate
insurance companies assume client's risk for an ongoinging fee known as a premium. pool of premiums cover damages and invest the rest to earn interest
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how do life insurance companies assess risk for clients
acturies. use applied matehmatics to forecast likely claims. calculate the rpemiums necewssariy
273
MEPRS
medical expense and performance reporting system
274
ACHE
American College of Healthcare Executives
- says financial management primarily focuses on assets management w/an emphasis on cash flow analysis (working capital_, the capital structure composition, reis,k, and costs of various amounts of debt and equity sources, capital budgeting process, financial feasibility studies (business case analysis_
275
financial statements
balance sheet,
income statemetn
276
financial accountign
field of accounting that provides external users accounting information in prescribed formats that are generally historic in nature
includes: data entry, transaction analysis, and prepared financial statements like balance sheet and income statement
277
managerial accounting
use of internal accounting for decision-making (cost identification, cost-value profit models)
- provide info to improve the efficiency and effectiveness of the use of resources
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financial planning
helps long-range financial plans
- supports the governing board in strategic positioning, test mission/vision against move reality and establish budget guidelines
279
pricing clinical services
develop pricing strategy and support specific price negotiatives
0 to supprt maximum revenue tot he insitution and its
280
securing long-term funds
manage debt, joint ventures, stock, and equity accounts
TO
minimize cost of capital, maximize return on investment
281
what does financial accounting create
financial accounting creates financial reports to establish value of the organization and report to owners/external stockholders
282
what does an organization's budget support?
budgeting supports strategic decision-making, coordinates org-wide activities, and supports the setting of performance goals
283
purpose of audits and compliance reviews
audits and compliance reviews guard against loss and diversion of property. helps comply w/contractual requirements
284
primary purpose of financial accounting system
develop set of financial statements prepared in accordance with GAAP. also purpose =- financial information for decisoin makign
- a financial accounting system shouldbe flexible enough to provide cost informatino/past summaries presented future estimates
285
GAAP
generally accepted accounting principles
286
FASB
financial accounting standards board
287
2 basic financial statements
balance sheet,
income statement
288
balance sheet
represents the financial position of an organization at a single point in time
assets = liabilities + netw work/fund balance/equity
289
represents the financial position of an organization at a single point in time
balance sheet
290
assets =
liabilities - equity
291
assets
accounts receiveable
inventories
cash
property, plant, equipment
292
accounts receivable
money tot he org from patient and insurers for services the organization has already provided
293
accounts payable
current liability that includes money owed btu not paid to vendors for supplies already received
294
bottom line of the income statement
bottom line of the income statement is fund balance amount in the balance sheet
295
accrual basis of accounting
revenues and expenses reported include the value of services whether or not cash has been received
296
6 duties of hte Chief Financial Officer
per teh Committee on Ethics and Eligibility standards for financial executive institute
297
CEEP
capital expense equipmment program
- for equipment under $100K
- super CREEP = equipmetn 10-250K
298
TRO
Tricare Regional Office
299
IGPBS
Integrated GLobal Presence and Basing Strategy
- funds to implement the repositioning of troops from overseas bases
300
purpose of MEPRS:
provide a uniform system ofhealthcare cost managed for DOD MHS
- detaile dunoformed perfomrance indicators, common expense classification, cost, a
- designed so you can make meaningful comparision between the b at civilians
301
occupied bed day
pt occupies a bed at the census taking hour
302
submission of MEPRS reports
medical centers and hospitals must submit MEPRS reports but clinics subordinate to a parent has their results reported under parent expense and workflow data
303
2 parts to a MEPRS report
1. expense data
2. manpower utilizator
304
7 costs reportable under MEPRS
inpatient care
ambulatory care
dental care
ancillary care
support services
special programs
readiness
305
workload measures
workload measures provides basis for comparing the amount of work performed w/athe amount of resources consumed in order to make better resource allocation decisions
- raw workload measures . (admissions, dispositions, occupied bed day, length of stay, average daily pt load visits)
