BML 321Financial Management

Peter Speidel, CFA

Course Description

• Exploration of financial tools and understanding of the utilization and application to business strategy.

Underlying Course Perspective

• Proverbs 24:27 (NIV)

• “Finish your outdoor work and get your fields ready; after that, build your house.”

Learning Outcomes Identify and explain core finance fundamentals, techniques, and

concepts, including risk, return, interest rates, time value of money, and capital budgeting.

Describe the basic structure of financial markets and characteristics of securities.

Interpret financial statements.

Perform financial analysis and valuation.

Apply techniques to make financial management decisions, including budgeting, financing, and cash management.

Financial Statements

• Balance Sheet• Point in Time• Assets – Liabilities = Owners Equity

• Income Statement• Period of Time

Ratio Analysis• Liquidity Ratios (Ability to pay off debt)

• Current ratio (Curr Assets / Curr Liab) BS• Quick ratio (Curr Assets – Inventory / Curr Liab) BS

• Asset Management Ratios (Efficient use of Assets)• Inventory Turnover % (Sales / Inventory) IS/BS• Days Sales O/S (Receivables / Avg Sales per Day) BS/IS• Fixed Assets Turnover % (Sales / Net Fixed Assets) IS/BS• Total Assets Turnover % (Sales / Total Assets) IS/BS

• Debt Management Ratios (How Co is Financed, Ability to pay LT Debt)• Debt Ratio (Total Debt / Total Assets) BS• Times Interest Earned % (EBIT / Int Charges) IS

• Profitability Ratios (Operations Efficiency & Asset Utilization)• Operating Margin (EBIT / Sales) IS• Profit Margin (Net Income / Sales) IS• Return on Total Assets (Net Income / Total Assets) IS/BS

• Market Value Ratios (Future Prospects)• Price Earnings (Price per Share / Earnings Per Share) BS/IS• Book Value (Common Equity / Shares Outstanding) BS• Market to Book (Price per Share / Book Value per Share) BS

Terms• EBIT – Operating Income

• Free Cash Flow – The amount of cash that could be withdrawn from a firm without harming its ability to operate and to produce future cash flows.

• Cash Conversion Cycle – The length of time funds are tied up in working capital or the length of time between paying for working capital and collecting cash from the sale of the working capital.

Interest Rates• Cost of Money

• Determinants of Interest Rates• Nominal• Required• Inflation Premium• Default Risk Premium• Liquidity Premium• Maturity Risk Premium

• Term Structure & Yield Curves

Time Value of Money

• Future Value• Present Value• Annuities • Rates of Return• Amortization

Risk & Return

SystemicNon-diversifiable (Market – Broad Movement)

Non-systemicDiversifiable(Business – Competition, Product Liability, Operating Leverage)

Capital Structure

Life Liability Taxation Org / Costs O/S Capital

Proprietorship Limited Unlimited Income N/A "Impossible"

Partnership Limited Unlimited Income Low Limited / "Possible"

Limited Partner Limited Limited & General Income Low Limited / "Possible"

LLC / LLP Unlimited Limited Pass Thru Med Medium

S Corp Unlimited Limited Pass Thru Med Medium

C Corp Unlimited Limited Double High Easy

Cost of Capital• Sources

• Component Costs• WACC• Adjustments (Flotation & Risk)

New Common Stock

Long-Term Debt Preferred Stock Common Stock

Long-Term Capital

Retained Earnings

Stocks• Ownership• Total Return = Dividends + Capital Gains

• Common• Optional Dividends• Residual Claim

• Preferred• Par Value • Fixed Dividend• Higher Claim

Bonds

Features

• Par Value• Coupon Rate• Issue Date• Maturity Date

Types

• Convertible• Callable• Putable• Sinking Fund• Fixed vs. Variable• Secured vs. Unsecured• Junk• Inflation Protection