Exam 1 Review

09/23/2008

Goal of the Firm

Shareholder Wealth
Maximization?
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price

Legal Forms of Business

1) Sole Proprietorship
2) Partnership
-- General Partnership
-- Limited Partnership
-- Limited Liability Company (LLC)
3) Corporation

The Corporation and

Financial Markets
Primary Market
Secondary Market
Initial Public Offering (IPO)
Seasoned New Issue

Financial Management Axioms

1) Risk - return trade-off.
2) Time value of money.
3) Cash - not profits - is king.
4) Incremental cash flows count.
5) The curse of competitive markets.

Financial Management Axioms

6) Efficient capital markets.
7) The agency problem.
8) Taxes bias business decisions.
9) All risk is not equal.
10) Ethical dilemmas are everywhere in
finance.

SALES
- Cost of Goods Sold

Income Statement

GROSS PROFIT
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT)
- Preferred Stock Dividends
- NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS

Balance Sheet
Assets
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses

Fixed Assets
Machinery & Equipment
Buildings and Land

Other Assets
Investments & patents

Liabilities (Debt) & Equity

Current Liabilities

Accounts Payable
Accrued Expenses
Short-term notes

Long-Term Liabilities
Long-term notes
Mortgages

Equity

Preferred Stock
Common Stock (Par
value)
Paid in Capital
Retained Earnings

Free Cash Flows

Cash Flows from
Assets

Cash flows generated

through the firms
assets

Cash Flows from

Financing

Cash flows paid to - or

received from - the
firms investors
(creditors &
stockholders)

Taxes
Marginal tax rate: the tax rate that
would be applied to the next dollar of
taxable income

Average tax rate: taxes owned by a firm

divided by the firms taxable income

Always marginal

We will want to answer

questions about the firms

Liquidity
Efficient use of Assets
Leverage (financing)
Profitability

Future and Present Value

FV = PV (1 + i)n
FV = PV (FVIF i, n )
FV = PV (e i*n) -- continuous
compounding

PV = FV (PVIF i, n )

Annuity and Annuity Due

FV = PMT (FVIFA i, n )
FV = PMT{ [ (1 + i)n 1] / i }
PV = PMT (PVIFA i, n )
PV = PMT { [1 - 1 / (1 + i)n ] / i }
Perpetuity: PV = PMT / i

Annual Percentage Yield

(APY)
APY =

quoted rate
1+
m

- 1