Finance 901 Review 1
Terms
undefined, object
copy deck
-
Working Capital Requirement
(WCR) -
WCR measures the firm's net investment in its operating cycle.
WCR is the difference btwn Operating Assets (trade receivables, inventories & prepaid expenses) and operating liabilities (trade payables & accrued expenses). - Normal Bal Sheet Assets
-
Cash
A/R*
INV*
Prepaid*
Net FA - Managerial Bal Sheet Invested Capital or Net Assets
-
Cash
WCR*
Net FA
*WCR = Operating Assets (trade receivables, inventories & prepaid expenses) minus operating liabilities (trade payables & accrued expenses). - Normal Bal Sheet Liab & OE
-
Owed to Banks
Current portion of LT debt
Acc Pay*
Accrued Expense*
LT Debt
OE - Managerial Bal Sheet Capital Employed
-
SHORT TERM DEBT
Owed to banks
Current portion of LT Debt
LONG TERM FINANCING
LT Debt
OE - Income Statement
-
Net Sales
COGS
-Mat
-Labour
=GROSS PROFIT
-SG&A
-Lic Fees
-Deprec
= Operating Profit
- Extraord Loss
= EBIT
- Net Int
= EBT
- Inc Tax Exp
= EAT (bottom line)
--> Dividends
--> Retained Earnings - Cash-to-Cash Period or Cash conversion period
- Period between the date a firm pays its suppliers and the date it collects the invoices from customers.
- NPV defined
-
- Initial Cash Outlay + PV of Future net cash benefits*
*Found using an approapriate discount rate, the cost of financing the proposal
If NPV > 0 the proposal creates value. - Weighted Average Cost of Capital (WACC)
-
(After Tax cost of debt*) x (% Debt financing) + (Cost of Equity**) x (% Equity Financing)
*Return req'd by lenders measured after tax
** Return req'd by shareholders - After Tax Cost of Debt
-
Take EBIT. Don't take out interest. Then take out the tax expense. This gives the baseline for comparison.
Then figure EAT. Subtract EAT from EBIT. Divide result by EAT = % paid to Debt and Tax.
Subtract (% paid to debt and tax) from (% paid in tax w/out interest baseline) --> Result is the After tax cost of debt.
Figure the cost without the loan (ie: paying no interest) - tax expense. Then figure cost of debt with interest and - Capital Budgeting Decision
- Should an investment project be accepted or rejected?
- Capital Structure Decision
- How much of the firm's assets should be financed with debt and how much w/ equity?
- NPV Rule
-
NPV > 0 Accept
NPV < 0 Reject - IRR Rule
-
IRR is NPV = 0
Undertake a project if IRR is higher than cost of capital. - Two ways to raise equity and debt capital
-
EXTERNAL FINANCING
Short Term: Money mkt
Long Term:
Equity Mkt
Corporate Bond mkt
INTERNAL EQUITY FINANCING
Retained Earnings - What does the Bal sheet really tell us?
-
Records assets and liab at date of bal sht.
Their difference is the book value of equity at that date - what does the income statement really tell us?
- Records revenues and expenses over a period of time. Their difference represents an increase or decrease in the book value of equity. This is the profit or loss for the period.
- Cash Flow Statement Composition
-
CF OPERATING ACTIVITIES
Sales
-Operating Expenses (including depreciation)
-Tax Expense
+Depreciation expenses
- Cash used to finance growth of WCR*
=NOCF New Operating CF (A)
CF INVESTING ACTIVITIES
- Capital Expenditures and acquisitions
= New CF from Inv Activities (B)
CF FINANCING ACTIVITIES
+ New Borrowings
- Interest Payments
- Dividend Payments
= Net CF from Financing Activities (C)
(D) TOTAL NET CASH FLOW (A+B+C)
(E) Opening Cash
(F) Closing Cash (E+D) - Net Operating Cash Flow (NOCF)
-
Cash inflow from Operations - Cash outflow from operations
= Sales - COGS - SG&A expenses - Tax expenses - change in WCR
Change in WCR 2005 = WCR 12/31/04 - WCR 12/31/03 - Accounts receivable (end)
- = AR (beginning) + Sales - Cash inflow from sales
- Cash inflow from sales
-
= Sales - [AR(end) - AR (begining)
= Sales - Change in AR -
NOCF =
Net operations CF -
Sales - COGS - SG&A - Tax Expense - Change in WCR.
= EBITDA - Tax Expense - Change in WCR -
NCF Inv
Net CF from Investment Activity - Net fixed Assets end = NFA begin + Fixed Asset Acquisitions - Deprec Exp - Fixed Asset disposals