university of palestine assistant professor dr. gaber h. abugamea 3rd semester 2006-2007 business...

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University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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Page 1: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

University of Palestine

Assistant Professor

Dr. Gaber H. Abugamea

3rd semester 2006-2007

Business FinanceFINA201

Page 2: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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?

Page 3: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 4: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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?

Page 5: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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.

Page 6: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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?

Page 7: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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?

Page 8: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 9: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 10: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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•

Page 11: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 12: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 13: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 14: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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)

Page 15: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 16: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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

Page 17: University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester 2006-2007 Business Finance FINA201

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]