university of palestine assistant professor dr. gaber h. abugamea 3rd semester 2006-2007 business...
TRANSCRIPT
University of Palestine
Assistant Professor
Dr. Gaber H. Abugamea
3rd semester 2006-2007
Business FinanceFINA201
Overview of Corporate finance
Chapter 1- Introduction to corporate finance
Describes the role of the financial manager and the goal of financial management. It also discusses some key aspects of the financial management environment.
Concept questions
1- What is the capital budgeting decision?
2- What do you call the specific mixture of long-term debt and equity that a firm chooses to use?
3-Into what category of financial management does cash management fall?
4- What is the goal of financial management?
5- what are some shortcomings of the goal maximization?
6-Can you give definition of corporate finance?
7- What is an agency relationship?
8-What are agency problems and how do they come about? What are agency costs?
9- what role do financial institutions play in the raising of capital?
Chapter2:Finncial statements, taxes and Cash flow
• Objectives
• - the difference between accounting value and market value
• -The difference between accounting income and cash flow
• -The difference between average and marginal tax rates
• - How to determine a firm’s cash flow its financial statements
Main questions
• What is the balance sheet identity?
• What is liquidity? Why is it important?
• What do we mean by financial leverage?
• Explain the difference between accounting value and market value. Which is more important to the financial manager? Why?
Key equations
• The balance sheet identity or equation• 1-Assets= Liabilities + Owners’ equity• 2- The income statement equation• 3-Revenue-Expenses= Profit• 4-The cash flow identity:• Cash flow from assets = Cash flow to lenders + Cash flow to shareholders• Where• a- Cash flow from assets = operating cash flow (OCF) – Net capital
spending – Addition to net working capital (NWC):• 1- Operating cash flow = Profit before interest and taxes (PbIT) +
Depreciation – taxes• 2- Net capital spending = Ending net non- current assets – Beginning non-
current assets + depreciation• 3- Additions to net working capital = Ending NWC – Beginning NWC• b-Cash flow to lender= Interest paid – net new borrowing• C- Cash flow to shareholders = Dividends paid – Net new equity raised.
Other Questions
• -What is the income statement equation?
• - What are the three things to keep in mind when looking at an income statement?
• -Why is accounting profit not the same as cash flow? Give two reasons?
• What is the difference between a marginal and an average tax rate?
Main Equations
• What is the cash flow identity? Explain what it says?
• What are the components of operating cash flow?
• Why is interest paid not a component of operating cash flow?
Financial ratiosKey equations
• 1-the current ratio:
• Current ratio=Current assets/ Current liabilities
• 2- the quick or acid-test ratio:
• Quick ratio = (Current assets - Inventory)/ Current liabilities
• 3- The cash ratio:
• Cash ratio = Cash / Current liabilities
Ratios--• 4- the ratio of net working capital to total assets:• Net working capital to total assets = Net working capital /
total assets• 5- The interval measure:• Interval measure = current assets / Average daily
operating costs
• 6-The total debt ratio:
• Total debt ratio = (Total assets – total equity) / Total assets
• The debt/ equity ratio:
• Debt / equity ratio = total debt / total equity
Ratio----
• 8-The equity multiplier:• Equity multiplier = Total assets / Total equity• 9- The long-term debt ratio:• Long-term debt ratio = long-term debt / (Long-
term debt + total equity)• 10- The time interest earned (TIE) ratio:• Time interest earned ratio = Profit before interest
and taxes / Interest paid•
Ratio--
• 11- The cash coverage ratio:• Cash coverage ratio = (Profit before interest and taxes +
Depreciation) / interest• 12- The inventory turnover ratio:• Inventory turnover = Cost of goods sold / inventory• 13- The average day’s sales in inventory:• Day’s sales in inventory = Inventory χ 365 days / Cost of goods
sold• 14- The day’s sales in receivable:• Day’s sales in receivable = Accounts receivable χ 365 days / Credit
sales• 15- The day’s purchases in payables:• Day’s purchases in payables = Accounts payable χ 365 / Credit
purchases
Ratio---
• 16-The net working capital (NWC) turnover ratio:
• Net working capital turnover = Sales / Net working capital
• 17- The non-current asset turnover = Sales / Net non-current assets
• 18- The total asset turnover ratio:• Total asset turnover ratio:• Total asset turnover = Sales / total assets
Ratio----
• 19-Profit margin:• Profit margin = Net profit after tax / sales• 20- Return on assets = Net profit after tax / Total
assets• 21- return on equity:• Return on equity= Net profits after tax / Total
equity• 22- The price/ earnings (P/E) ratio:• P/E ratio = Price per share / earning per share
Ratio---
• 23- The market- to book ratio:
• = Market value per share / Book value per share
• 24- The Du Pont identity
• ROE = NPAT/ S χ S/TA χ TA/E • ROE PBIT/S χ S/TA χ PBT/PBIT (1-T%) χ
• (TL/E +1)
Chapter 4Long- Term Financial Planning and growth
• What is financial planning?• Growth as a financial management goal• Dimensions of financial planning• - Planning horizon• -Aggregation• -What can planning accomplish?• -Examining interactions• -Exploring options• -Avoiding surprises• -Ensuring feasibility and internal consistency
Continue-
• A financial planning model: The ingredients• - Sales forecast• -Pro forma statements• Summarize the different events projected for the future• - Asset requirements• -Financial requirements• - The plug is the designated source or sources of
external financing needed to deal with any shortfall in financing and thereby bring balance sheet into balance.
• -Economic assumptions
Key equations: chapter 4 related to financial planning
• 1-The dividend payout ratio:• Dividend payout ratio = Cash dividend / Net
profit after tax• 2-The internal growth rate: • Internal growth rate = [ROA χ b] / [1-(ROA χ b)]• 3- The sustainable growth rate:• sustainable growth rate = [ROE χ b] / [1-(ROE χ b)]
• sustainable growth rate = [ROE0 χ b]