FIN 350 Lecture Notes - Lecture 1: Operating Cash Flow, Mergers And Acquisitions, Accounting Liquidity
1. capital budgeting
-what do you need to start the business?
-fixed assets
2. financing
-how are you going to pay for it?
-liabilities
3. working capital
-comparison of current assets to current liabilities
cash flows
operating
financing
investing (shareholders)
what is the correct goal of financial management?
-maximize profit?
-minimize costs?
-maximize market share?
-maximize shareholder wealth?
agency relationship
-principal hires an agent to represent his/her interest
-stockholders (principal) hire managers (agents) to run the company
agency problem
conflict of interest between principal and agent
agency cost
cost of conflict of interest
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management goals
-may be different from shareholder goals
-increased growth and size
what can be done with excess cash?
-pay dividends
-reinvest in the business
-mergers & acquisitions
-stock repurchases
financial statements
-balance sheet
-statement of changes in owners' equity
-income statement
-statement of comprehensive income
-cash flows statement
the 2 basic financial questions
-how much did we earn last year?
-what resources did we use to earn that?
balance sheet identity
assets = liabilities + stockholders' equity
three concerns of the balance sheet
-accounting liquidity = working capital
-debt versus equity
-value versus cost
accounting liquidity
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-refers to the ease and quickness with which asset can be converted to cash without a significant loss in
value
-the more liquid a firm's assets, the less likely the firm is to experience problems meeting short-term
obligations
-liquid assets often have lower rates of return than fixed assets
debt versus equity
-creditors generally receive the first claim on the firm's cash flow
-debt and equity have different costs (equity is more expensive)
-the relationship between them has an impact on the firm's profitability
value versus cost
-under GAAP, financial statements of firms in the U.S. carry assets at historical cost
-market value is the price at which the assets, liabilities, and equity could actually be bought or sold
accounting definition of income
revenue - expenses = income
income statement analysis
GAAP
noncash items
time and costs
GAAP
-matching principle
-income and expenses are reported when earned or incurred
noncash items
-depreciation
-net income DOES NOT EQUAL cash flow
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Document Summary
Principal hires an agent to represent his/her interest. Stockholders (principal) hire managers (agents) to run the company agency problem conflict of interest between principal and agent agency cost cost of conflict of interest management goals. Cash flows statement the 2 basic financial questions. What resources did we use to earn that? balance sheet identity assets = liabilities + stockholders" equity three concerns of the balance sheet. Refers to the ease and quickness with which asset can be converted to cash without a significant loss in value. The more liquid a firm"s assets, the less likely the firm is to experience problems meeting short-term obligations. Liquid assets often have lower rates of return than fixed assets debt versus equity. Creditors generally receive the first claim on the firm"s cash flow. Debt and equity have different costs (equity is more expensive) The relationship between them has an impact on the firm"s profitability value versus cost.
