CHAPTER 1

The Four Basic Areas:

1. Corporate Finance - simply implies that this topic is only relevant to corporations;
however, broader lang ang scope.
2. Investments - financial assets such as stocks and bonds
3. Financial Institutions - business that deal primarily in financial matters. Most
common example for this is banks and insurance companies.
4. International Finance - it is a specialization. Careers in international finance generally
involve international aspects of either corporate finance, investments, or financial
institutions.

Why Study Finance?

1. Marketing and Finance
2. Accounting and Finance
3. Management and Finance
4. You and Finance

What is Business Finance?

1. The Financial Manager - Chief Financial Officer (CFO) which is the top finance officer
of the firm.
2. Financial Management Decisions - Organizational chart of an organization.
a. Capital Budgeting - the process of planning and managing a firm’s long-term
investments.
b. Capital Structure - the mixture of debt and equity maintained by a firm.
c. Working Capital Management - a firm’s short-term assets, such as inventory,
and liabilities, such as money owed to suppliers.
i. Conclusion - these are the THREE AREAS of corporate financial
management

Forms of Business Organization

1. Sole Proprietorship - business owned by one person
2. Partnership - two or more persons
a. General Partnership - all the partners share in gains or losses
b. Limited Partnership - there are limited partners who do not actively participate
in the business
3. Corporation
i. One Person Corporation (OPC)
ii. 5 or more stockholders

Goal of Financial Management

1. Profit Maximization - it could be in a long-run or average profits
2. Goal of Financial Management in a Corporation
a. to maximize the current value per share of the existing stock.
b. maximize the market value of the existing owners’ equity.

The Agency Problem and Control of the Corporation

1. Agency Relationships - relationship between stockholders and management. Such a
relationship exists whenever someone (the principal) hires another (the agent) to
 represent his or her interest.
2. Management Goals - the goals they set for their business in which they could either
gain or lose an opportunity.

Do Managers Act in the Stockholders’ Interests?

1. Managerial Compensation
a. Managerial Compensation - usually tied to financial performance in general
and oftentimes to share value in particular. For example, managers are
frequently given the option to buy stock at a fixed price.
b. Related to job prospects - better performers within the firm will tend to get
promoted.
2. Control of the Firm - ultimately rests with stockholders
i. Conclusion - the stockholdes control the firm and that stockholder
wealth maximization is the relevant goal of the corporation.

● Stakeholders - someone other than a stockholder or creditor who potentially has a

claim on the cash flows of the firm.

Financial Markets and the Corporation

1. Cash Flows to and from the Firm

a. Firm issues securities to raise cash.

b. Firm invests in assets.
c. Firm’s operations generate cash flow
d. D. Cash is paid to the government as taxes. Other stakeholders may receive cash.
e. Reinvested cash flows are plowed back into the firm.
f. Cash is paid out to investors in the form of interest and dividends.
Primary versus Secondary Markets
1. Primary markets - original sale of securities by governments and corporations
2. Secondary Markets - these securities are bought and sold after the original sale.

CHAPTER 2

The Balance Sheet

1. The Left-Hand Side
a. Assets - classified as either current or fixed
i. Current - less than 12 months
ii. Fixed - more than 12 months, it could be tangible or intangible
2. The Right-Hand Side
a. Liabilities - classified as either current or long term, just like the assets
b. Equity - difference between the total assets and total liabilities
 REMEMBER:
Assets = Liabilities + Shareholders’ equity
 ● Net Working Capital - difference between a firm’s current assets and its current
liabilities.

● Liquidity - the speed and ease with which an asset can be converted to cash.
● Debt versus Equity - Shareholders’ equity = Assets - Liabilities
● Market Value versus Book Value - the distinction between book and market values is
important precisely because book values can be so different from true economic
values.

The Income Statement

● Revenues - Expenses = Income

● Earnings per Share = Net income/Total shares outstanding

● Dividends per Share = Total Dividends/Total shares outstanding
● Noncash Items - take note of the depreciation
 ● Time and Costs - time (short run and long run), costs (fixed and variable)

Taxes
● One of the largest cash outflows in a firm
● Average versus Marginal Tax Rates
○ Average Tax rate - tax billed divided by taxable income; in other words, the
percentage if your income that goes to pay taxes
○ Marginal Tax rate - the extra tax you would pay if you earned one more dollar.

Cash Flow
● Cash flow from assets = Cash flow from creditors + cash flow to stockholders
1. Cash Flow from Assets
a. Operating Cash flow

b. Capital Spending

c. Change in Net Working Capital

d. Conclusion
Cash Flow to Creditors and Stockholders
a. Cash Flow to Creditors

b. Cash Flow to Stockholders

c. Conclusion

CHAPTER 3
Standardized Financial Statements

Common-size Balance Sheet

Common-size Income Statement

Ratio Analysis
Short-Term Solvency, or Liquidity, Measures
● Current Ratio

● Quick (or Acid-Test) Ratio

● Cash Ratio

Long-Term Solvency Measures

● Total Debt Ratio

● Debt Equity Ratio

● Equity Multiplier
 ● Times Interest Earned

● Cash coverage ratio

Asset Management, or Turnover, Measures

● Inventory Turnover

● Days’ Sales in Inventory

● Receivables Turnover

● Days’ Sales in Receivables