corporate finance aae 2013

7/29/2019 Corporate Finance AAE 2013

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CORPORATE FINANCEGUIDELINES FOR EXAMINATION

Ioan Alin Nistor

Faculty of Business


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Overview Requirements for thechapters to be covered

2

CHAPTERS:

Financial statements

Balance Sheet

Income Statement Statement of Retained Earnings

Statement of Cash Flows

Financial Ratios

Present value & Future Value


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3

Examination involves multiple choice questions aswell as problems following the chapter requirementsmentioned previously.

Below will be presented a brief explanation for the

requirements. Please note that any learningmaterial that covers the data mentioned iswelcomed. Please check the problems covered inclass.

Ex: Brealey& Myers - Corporate Finance Ex: Ioan Alin Nistor Finante antreprenoriale, Ed EFES, 2012


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Financial statements4

Annual report four basic financial statements

Balance Sheet

Income Statement Statement of Retained Earnings

Statement of Cash Flows


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Balance sheet

ASSETS

Cash

Marketable securities

Accounts receivable

Inventory Total current assets

Fixed assets (property, plant,equipment, intangible assets)

TOTAL ASSETS

LIABILITIES & EQUITY

Accounts payable

Notes payable

Accruals Total current liabilities

Long term bonds Total Liabilities

Stock (preferred, common)

Retained earnings

Total equity

TOTAL LIABILITIES AND EQUITY

5


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Balance sheet

ASSETS

Cash

Marketable securities

Accounts receivable

Inventory Total current assets


TOTAL ASSETS


Accounts payable

Notes payable

Accruals Total current liabilities

Long term bonds Total Liabilities

Stock (preferred, common)

Retained earnings

Total equity


6


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Balance sheet

ASSETS

Cash 15

Marketable securities 5

Accounts receivable 265

Inventory 575

Total current assets 860


1140

TOTAL ASSETS 2000


Accounts payable 45

Notes payable 125

Accruals 130 Total current liabilities 300

Long term bonds 250 Total Liabilities 550

Stock (preferred, common) 1000

Retained earnings 450 Total equity 1450


2000

7


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Income statement

Net sales Costs excluding depreciation Depreciation Total operating costs

Earnings before interest andtaxes (EBIT) Less interest Earning before taxes (EBT) Taxes Net income

3000 2650 183 2833

167

30 137 22 115

8


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Statement of Cash-flow9

OPERATING ACTIVITIES (+ or -) Operating activities

Depreciation and amortization

Changes in other accounts affecting operations: (Increase)/ decrease in accounts receivable

(Increase)/ decrease in inventories

Increase/ (decrease) in accounts payable

Net cash provided by operating activities

LONG-TERM INVESTING ACTIVITIES (+ or -) Capital expenditures

Investments in subsidiary

Proceeds from sales of investments

FINANCING ACTIVITIES (+ or -)

Increase in notes payable Payments of long-term debt

Increase in bonds


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Statement of Retained Earnings

Balance of retained earnings at Dec.31, 2010

Add: Net income, 2011

Less: Dividends to common stockholders Balance of retained earnings at Dec.

31, 2011

525

75

35 565

10


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Analysis of Financial Statements Ratios Analysis

11

Liquidity Analysis Ratios

Asset Management Ratios

Debt Management Ratios Profitability Ratios


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Ratios Analysis Liquidity Analysis Ratios

12

sliabilitieCurrent

assetsCurrentratioCurrent

sliabilitieCurrent

sInventorieassetsCurrenttestacidorQuick

,

sliabilitieCurrent

assetsCurrentratioCurrent 860/ 300 2.87

Industry

Average

Comment

sliabilitieCurrent

sInventorieassetsCurrenttestacidorQuick

,

(860 - 575)

/300 0.95

Industry

Average

Comment


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Ratios Analysis Asset Management Ratios

13

sInventorie

SalesturnoverInventory

assetsfixedNet

SalesturnoverassetsFixed

assetsTotal

SalesturnoverassetsTotal

360/

Retan

salesAnnual

ceivablesdingoutssalesDays


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Ratios Analysis Asset Management Ratios

14

sInventorie

SalesturnoverInventory

3000/575 5.21 Industry

Average

Comment

assetsfixedNet

SalesturnoverassetsFixed

3000/1140 2.63 Industry

Average

Comment

assetsTotal

SalesturnoverassetsTotal

3000/2000 1.5 Industry

Average

Comment

360/

Retan

salesAnnual

ceivablesdingoutssalesDays 265/

(3000/360)32

days

Industry

Average

Comment


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Ratios Analysis Debt Management Ratios

15

assetsTotal

debtTotalassetstotaltodebtTotal

assetsTotal

debtTotalassetstotaltodebtTotal

550/2000 27.5

%

Industry

Average

Comment


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Ratios Analysis Profitability Ratios

16

assetsTotal

incomeNetROAassetstotalonturn )(Re

equityCommon

incomeNet

ROEequityonturn )(Re

Sales

incomeNetsalesoninmofit argPr


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Ratios Analysis Profitability Ratios

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assetsTotal

incomeNetROAassetstotalonturn )(Re

115/2000 5.75

%

Industry

Average

Comment

equityCommon

incomeNetROEequityonturn )(Re

115/1450 7.9% Industry

Average

Comment

Sales

incomeNetsalesoninmofit argPr

115/3000 3.83

%

Industry

Average

Comment


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Future Value and Preset Value18

Simple interest

Compound interest

Future value Present value


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19

Simple interest is determined by multiplying the interest rateby the principal by the number of periods.

Simple interest = P x I x N

Where:P is the amountI is the interest rateN is the duration, using number of periods (years)

Simple interest is called simple because it ignores the effects

of compounding. The interest charge is always based on theoriginal principal, so interest on interest is not included.


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Compound interest. Future value20

Compound interest = Interest that accrues on the initialprincipal and the accumulated interest of a principaldeposit, loan or debt. Compounding of interest allows aprincipal amount to grow at a faster rate than simple

interest, which is calculated as a percentage of only theprincipal amount.

FV future value

PV = present value

I = interest rate n nr of periods (years)

n

iPVFV )1(


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Net Present Value21

Cfw cash-f low

c - average cost of capital

I - Investment

NPV shows the expected increase in value of an investment ifadopted

If NPV > 0 - value increases => investment recommended If NPV < 0 - value decreases => investment not recommended

Ic

CfwNPV

n

ii

i

1 )1(


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22

Example of a NPV Problem : A firm would like to make an investment worth of10.000 Euro. The managers estimated that the Cash-flow brought by this investmentfor a period of 4 years is: Cash-f low for the first year 1.400 Euro, Cash-f low yeartwo = 1.500 Euro, Cash-flow year three = 1.300 and Cash-flow year four 1.200.Knowing that the average cost of capital is 10%, using the NPV method, make arecommendation whether the investment should be carried out or not.

Example of a FV problem: Using the compound interest, calculate the interest of100.000 USD after a period of 5 years at an interest rate of 7%.

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