Finance: 3 areas:

a) Financial Management – what and how much asset to buy, where to get the capital, managing the firm, how to maximize its value;

b) Capital market –markets where interest rates of bonds and stocks are determined;

c) Investment – markets where stocks and bonds are determined; include the following activities:a) Security analysis – finding the proper value of individual security;b) Portfolio theory – determining the best structure for bonds and stocks;c) Market analysis – deals with the issue of whether stocks and bonds are

high or low at a given time.

Value-based management – the most important management decision is how it affect to put value on the firm.

Advantage of putting up a corporation:1.) Limited risk – raises the value;2.) Attracts capital;3.) More liquid – stock of a corporation is easier to transfer.

Shareholder wealth maximization – the primary goal for management is to maximize the long-run value of the firm’s common stock.

Determining factors of stock prices and investment returns:’

Managerial actionsEconomyTaxes andPolitical conditions

Intrinsic value – correct value;Market price- perceived value;Marginal investor – investors whose view determine the actual price;Equilibrium – intrinsic value equals market price

Four important business trends:

a) Giving accurate information by CEO and CFO;b) Globalization of business – developments of communication technology;c) Rapid growth of information technology

Business ethics - a company’s attitude towards its employees, customers, community and stockholders.

- Adherence to policy, rules and regulations relating to product safety, fair employment practice, fair marketing and selling, use of confidential information for personal gain, community involvement and illegal payments to obtain business.

Conflicts between managers, stockholders and bondholders –

-good executive compensation can motivate managers to act in their stockholders interest;

-firing bad managers--threat of hostile takeovers

Corporate raider – an individual who targets a corporation for takeover because it is undervalued;Hostile takeover – the acquisition of a company over the opposition of the management.

CHAPTER 2 – FINANCIAL STATEMENTS, CASH FLOWS AND TAXES

Three basic types of financial statements:

a) Balance sheet;b) Income statement;c) Statement of cash flows

Annual report – report that corporations give to stockholders – two sections:

1) Verbal section – letter from the chairperson – discussing the firms operations for the past period and its future operations.Provides 4 basic financial statements:

a) Balance sheets – assets of the corporation and who owns them on a particular date: snap shot of the firm’s position at a specific point in time.

b) Income statement – firms sales and cost during some past period;c) Statement of cash flow – how much cash the firm began with and how

much it ended, what did it do to increase, decrease the cash.d) Statement of stockholders equity – how much equity at the start, and how

much at the end

Balance sheet –

Left side:

a) Current Assets ( cash and cash equivalents, accounts receivable, inventory);b) Long term assets (Fixed assets )- plants and equipment, patent and trade

mark

Right side:

a) Current liabilities – accrued wages, taxes, accounts payables, notes payable to banks within a year.

b) Long term debt – bonds that mature in more than a year.c) Stockholders equity – the amount that stock holders paid to the company and

the earnings retained by the company over the years.

Fundamental balance sheet equation”

Assets – liabilities plus networth.

LIQUIDITY – the ability of an asset to be converted into cash quickly with any price discount.

Current Assets – assets to be sold or otherwise used up in a year:

a) Cash and cash equivalents – savings, checking accounts, bonds near maturity, treasury bills and other market instruments.

b) Short term investment – high quality and low risk investments;c) Accounts receivables - money owed to a company by customers for products

and services provided on credit.d) Inventory – company’s raw materials, finished products

Fixed Assets –

a) Tangible assets – assets held for business;b) Depreciation – deduction from the original value of a fixed assets;c) Intangible assets – assets that do not physically exist.

Current liabilities: liabilities that must be paid in a year: They have the following properties:

1. They are legal obligations requiring future payments of cash or services;2. They are trade related liabilities;3. They are due to be paid within a year.

Long term liabilities:

1) Long term debts and2) Long term accrued liabilities

Owner’s equity – represent a company’s net worth.

Two major parts of shareholder’s net assets:

Contributed capital – total number of stock that a shareholder invested in a company;

Retained earnings – company’s net income after distributing dividends to stockholder.

INCOME STATEMENT:

- A report summarizing the firms revenues, expenses and profits during a period of time:

- Operating income- profits/earnings before interest and taxes.

Depreciation – charge against the cost of assets used up in the production process;Amortization – charge to write off intangible assets;EBITDA – earnings before interest tax depreciation and amortization.

STATEMENT OF CASH FLOWS: A report that shows how things that affect the balance sheet and income statement affect the firm’s cash flows.

Statement of Stockholder’s equity – statement that shows by how much a firm’s equity has changed during the year and this change occurred.

Free Cash Flow – the amount of cash that can be withdrawn from the company’s without harming its ability to operate and to produce future cash flows.

NOPAT – net operating profit after taxes – the profit a company would generate if it had no debt and held only operating assets.

Interest and dividends paid by a corporation

Interest paid from bonds can be deducted from operating income for taxation purposes but dividends paid cannot. – Thus, the fact that interest is a deductible expense has a profound effect on the way businesses are financed – the corporate tax system favors debt financing over equity financing.