FIN-3403 Lecture Notes - Lecture 2: Current Liability, Income Statement, Capital Structure

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violethippopotamus705

26 Oct 2016

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Financial management of the firm - chapter 2 notes. Lenders care about cash and ability to repay. Only cash can be paid out as dividends or reinvested in the rm. A picture over a period of time of how much income the company has made. Average shows you what"s been paid to this point on average across all earnings that the company has. Marginal shows you what we pay in the future on additional earnings. Working capital management - focuses on current assets and current liabilities of rm. Dady to day operations, inventory, suf cient cash at hand, making sure bills are paid, etc. Capital budgeting - managing the xed assets of the company, looking at where the company can invest its money in productive assets. Capital structure - debt and equity nancing, how the company funds the purchases of its assets (either by debt capital or equity/ownership capital)

Related Questions

What is the return on Invested Capital (ROIC) for the financial data? (PLEASE SHOW WORK SO I CAN UNDERSTAND HOW THIS WAS DONE. Thank you)

GENERAL ELECTRIC CO (GE) CashFlowFlag BALANCE SHEET
Fiscal year ends in December. USD in millions except per share data.	2014-12	2015-12
Assets
Current assets
Cash
Cash and cash equivalents	90208	70483
Short-term investments	47907	31973
Total cash	138115	102456
Receivables	23237	27022
Inventories	17689	22515
Other current assets	233911	18834
Total current assets	412952	170827
Non-current assets
Property, plant and equipment
Gross property, plant and equipment	113321	90961
Accumulated Depreciation	-46934	-35927
Net property, plant and equipment	66387	54095
Equity and other investments	33822	12673
Goodwill	76553	65526
Intangible assets	14156	16745
Deferred income taxes	2541	3105
Other long-term assets	41938	169721
Total non-current assets	235397	321865
Total assets	648349	492692
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt	79231	50810
Accounts payable	16338	13680
Accrued liabilities	12537	15776
Other current liabilities	54990	25764
Total current liabilities	163096	106030
Non-current liabilities
Long-term debt	222910	147466
Deferred taxes liabilities
Pensions and other benefits		40487
Minority interest	8674	1864
Other long-term liabilities	125510	98571
Total non-current liabilities	357094	288388
Total liabilities	520190	394418
Stockholders' equity
Preferred stock		6
Common stock	702	702
Additional paid-in capital	32889	37613
Retained earnings	155333	140020
Treasury stock	-42593	-63539
Accumulated other comprehensive income	-18172	-16528
Total stockholders' equity	128159	98274
Total liabilities and stockholders' equity	648349	492692

GENERAL ELECTRIC CO (GE) CashFlowFlag INCOME STATEMENT
Fiscal year ends in December. USD in millions except per share data.	2014-12	2015-12
Revenue	148589	117386
Cost of revenue	81311	82693
Gross profit	67278	34693
Operating expenses
Sales, General and administrative	30572	17831
Other operating expenses	9995
Total operating expenses	40567	17831
Operating income	26711	16862
Interest Expense	9482	3463
Other income (expense)		-5213
Income before taxes	17229	8186
Provision for income taxes	1772	6486
Net income from continuing operations	15457	1700
Net income from discontinuing ops	-112	-7495
Other	-112	-331
Net income	15233	-6126
Preferred dividend		18
Net income available to common shareholders	15233	-6144
Earnings per share
Basic	1.51	-0.62
Diluted	1.5	-0.61
Weighted average shares outstanding
Basic	10045	9944
Diluted	10123	10016
EBITDA	35994	16496

GENERAL ELECTRIC CO (GE) Statement of CASH FLOW
Fiscal year ends in December. USD in millions except per share data.	2014-12	2015-12
Cash Flows From Operating Activities
Net income	15345	-6126
Depreciation & amortization	9283	4847
Deferred income taxes	-1186	383
(Gain) Loss from discontinued operations	112	7495
Accounts receivable
Inventory	-872	-314
Accounts payable	305	-541
Other working capital	-2428	-1048
Other non-cash items	7151	15195
Net cash provided by operating activities	27710	19891
Cash Flows From Investing Activities
Investments in property, plant, and equipment	-13727	-7309
Property, plant, and equipment reductions	6262	3020
Acquisitions, net	311	-9744
Sales/Maturities of investments
Other investing activities	2124	73521
Net cash used for investing activities	-5030	59488
Cash Flows From Financing Activities
Debt issued	37548	13951
Debt repayment		-47038
Preferred stock issued
Common stock issued	2842
Dividend paid	-8851	-9295
Other financing activities	-48497	-33672
Net cash provided by (used for) financing activities	-16958	-76054
Effect of exchange rate changes	-3492	-3464
Net change in cash	2230	-139
Cash at beginning of period	88787	91017
Cash at end of period	91017	90878
Free Cash Flow
Operating cash flow	27710	19891
Capital expenditure	-13727	-7309
Free cash flow	13983	12582

harlequingnat889

Narratives on the following: Based on the information in the attached pictures.

at least one ratio from each category (liquidity, asset management, debt management, profitability, and market value)

a comparison of the results of the two fiscal years for the ratios chosen (i.e., increase, decrease, ideas as to why this might have occurred)

a comparison to the industry average for the ratios chosen (i.e., how the company compares to the industry and what this means for the company)

What risk is the company facing? Is this true for the entire industry? How can the company mitigate this risk? What is the industry Beta and the company's Beta?

recommendations for individuals who may be considering investing in the chosen company

Given the model of valuation is the company priced fairly? What recommendations would you make to increase the value of the company (be thorough make specific recommendations tied back to the company's stated financial goals).

Assume that you were given an early inheritance of $50,000 and on January 2, 2015, you used the money to invest in your chosen company's stock. You held the company's stock during 2015, selling all of your shares on December 31, 2015. Answer the following:

How many shares did you purchase on January 2, 2015?

What was the initial purchase price per share of stock?

Did you earn any dividends during 2015? Cash or stock? What was the value of your dividends? Would you have received a stock-split or been part of a repurchase program?

At what price per share did you sell your stock at on December 31, 2015?

Did you make any money on your investment? If so, how much? If not, how much did you lose?

Answer based on this info:

	All Figures in 000's
Particulars	2014	2015	2016
Current Asset		2764538	3133214
Current Liability		1049014	1187659
Cash & Cash Equivalents		441850	600646
Investment others		268720	310072
Investments fixed maturity		1304962	1510538
Receivables		189869	175210
Total Assets	5998978	6872175	8150175
Shareholders Equity	1527368	1884359	2251406
Total debt		2190869	2688758
Sales		3074531	3275656
Operating profit		663024	866814
Net profit		356741	489001
Price on the last day ($)		330.62	345.05
EPS ($ per share)		18.21	24.95

Particulars	Formula	2015	2016
Current Ratio	current assets/current liabilities	2.64	2.64
Quick Ratio	(cash + investments + receivables)/curretn liabilities	2.10	2.19
Operating Margin	(Operating Profit/Sales)*100	21.57%	26.46%
Net Profit Margin	(Net Profit/Sales)*100	11.60%	14.93%
Return on Total assets	(Net profit/Average assets)*100	5.54%	6.51%
Return on common equity	(Net profit/Average shareholders equity)*100	20.91%	23.65%
Return on invested capital	(Net income -dividends)/(Debt+quity)	8.27%	7.92%
Price/Earnings	Price/EPS	18.16	13.83
Market Capitalisation	Price * Bumber of shares outstanding	6475732602	6761637756
Share outstanding	NA	19586633	19596110
Dividend per share ($)	NA	1	5
Dividend Yield	(Dividend/Price)*100	0.30%	1.45%

fuchsiamule181

1. Which of the following is true of the change in the weighted average cost of capital of a firm? a. A decrease in the weighted average cost of the capital increases the value of the firm. b. An increase in the weighted average cost of the capital increases the value of the firm. c. A decrease in the weighted average cost of the capital decreases the value of the firm. d. A decrease in the weighted average cost of the capital increases the cash flow generated by the investments. e. Any change in the weighted average cost of capital results in no change in the value of the firm.

2. The cost of debt to the firm is adjusted for _____. a. marginal revenue generated b. taxes c. interest rate d. internal rate of return e. return to investors

3. The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock. a. True b. False

4. The target capital structure of a firm is the capital structure that: a. minimizes the operating risk of the firm's assets. b. maximizes the tax shield created by debt. c. minimizes the default risk of long-term debt. d. maximizes the price of the firm's stock. e. minimizes the risk premium paid on long-term debt.

5. The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital. a. True b. False

6. The component costs of capital are market-determined variables in as much as they are based on investors' required returns. a. True b. False

7. The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by: a. the marginal revenue generated by investment in the new projects. b. the investors who purchase the firm's stocks and bonds. c. the internal rate of return of the firm. d. the cash flow generated by the investment in the additional projects. e. the dividend payout ratio fixed by the firm.

8. The marginal cost of capital _____ as more capital is raised during a given period. a. remains the same b. decreases c. increases d. changes in an unpredictable way e. approaches zero 10. The firm's cost of capital represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm increases. a. True b. False

12. Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because: a. the dividend yield is extremely difficult to estimate. b. the proper growth rate is difficult to establish. c. the market price of the common equity is very volatile. d. the firm grows at a constant rate in perpetuity. e. the firm's historical data of dividend yield is unavailable.

13. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. a. True b. False

14. Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company would incur a flotation cost of 20 percent if it sold new common stock. Which of the following is the cost of issuing new common stock? (Round off the answer to two decimal places.) a. 11.96 percent b. 12.25 percent c. 12.63 percent d. 10.24 percent e. 11.42 percent

15. Which of the following is a capital component for the purpose of calculating the weighted average cost of capital in capital budgeting? a. The after-tax cost of long-term debt b. The after-tax cost of common stock c. The after-tax cost of preferred stock d. The after-tax cost of retained earnings e. The after-tax cost of new equity

16. Which of the following statements is true of the impact of tax on the cost of capital of a firm? a. All else being equal, an increase in the corporate tax rate results in a decrease in the weighted average cost of capital. b. The before-tax cost of debt is the cheapest component of the cost of capital since the tax paid is a deductible expense. c. The before-tax cost of debt is always less than the after-tax cost of debt of a firm. d. The tax paid on dividends of preferred stock reduces the amount of funds that the firm can use for financing capital budgeting projects. e. All else being equal, an increase in the equity capital that a firm raises by retaining earnings results in in the increase in the tax rate applicable to the firm.

18. A firm's weighted average cost of capital (WACC) is: a. set by the board of directors of the firm because it is the benchmark they use to evaluate upper management. b. regulated by the Internal Revenue Service (IRS) because tax-deductible debt is included in the computation. c. determined by the financial markets because investors provide the funds used by firms and these funds have costs, which are the returns demanded by investors. d. the same as the firm's internal rate of return (IRR). e. the total net present value (NPV) of all the capital budgeting projects in which the firm invests in any year.

19. Everything else equal, an asset's value is directly related to: a. the cost of raising additional capital. b. the rate of return investors require to invest in that asset. c. the risk associated with the investment in that asset. d. the cash flow the asset is expected to generate. e. the rate of return that the firm must earn to satisfy investors' demands.

24. If a project's _____ exceeds the firm's cost of capital, its NPV will be positive. a. marginal cost of capital b. cash flow c. rate of return expected by investors d. internal rate of return (IRR) e. discount rate

25. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors. a. True b. False

26. The before-tax cost of debt, rd, is the same as the: a. average yield to maturity (YTM) associated with the firm's bonds. b. dividend yield associated with the firm's common stock. c. average coupon rate of the firm's bonds. d. return on equity if the firm has no preferred stock. e. the firm's marginal tax rate.

29. As per the Bond-Yield-Plus-Risk-Premium Approach, analysts estimate the cost of common equity by adding a risk premium of 3 to 5 percentage points to: a. the cost of preferred stock of the firm. b. the risk free rate of the common equity of the firm. c. the interest rate on the long term debt of the firm. d. the return on the firm's investment in municipal bonds. e. the growth rate of the firm.

30. The marginal cost of capital (MCC) is the cost of the last dollar of new capital that the firm raises, and the marginal cost declines as more and more of a specific type of capital is raised during a given period. a. True b. False

31. Which of the following statements is true of flotation costs? a. Flotation costs decrease the cost of preferred stock to the issuing firm. b. Flotation costs are added to the issue price of preferred stock to compute the cost of preferred stock. c. Floatation costs are added to the cost of debt to compute the weighted average cost of capital of a firm. d. Floatation costs result in higher funds available from the issue of preferred stock to the firm. e. Floatation costs increase the rate the issuing firm must earn to pay the preferred dividend.

34. Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because: a. as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will not decrease. b. returns below the cost of capital will cover all the fixed costs associated with the capital and provide excess returns to the firm's stockholders. c. it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets. d. it is an indication of the return the firm is expecting to earn in future from all of its expansion plans. e. the weighted average cost of capital remains unchanged if the components costs of capital changes.

36. The cost of issuing preferred stock by a corporation must be adjusted to an after-tax figure because of the 70 percent dividend exclusion provision for corporations holding other corporations' preferred stock. a. True b. False

38. The after-tax cost of debt is used to calculate the weighted average cost of capital since we are concerned with the after-tax cash flows of the firm. a. True b. False

39. Beige Inc. plans to issue preferred stock that pays an $11.50 dividend per share and sells for $120 per share in the market. It will cost 4 percent, or $4.80 per share, to issue the new preferred stock, so Beige will net $115.20 per share. Which of the following is Beige's cost of preferred stock? (Round off the answer to two decimal places.) a. 8.89 percent b. 12.25 percent c. 11.50 percent d. 15.20 percent e. 9.98 percent

40. The Jackson Company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10 percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate is 10 percent; and the expected return on the market is 14 percent. Which of the following is the required rate of return as per the capital asset pricing model (CAPM) approach? a. 9 percent b. 12 percent c. 7 percent d. 16 percent e. 18 percent

41. J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Ross' common stock currently sells for $40 per share. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. Which of the following is the firm's cost of retained earnings? (Round off the answer to two decimal places.) a. 16.34 percent b. 10.42 percent c. 15.50 percent d. 12.20 percent e. 13.25 percent

42. Omega Inc.'s net income is expected to be $600,000 and the firm's payout ratio is 60 percent. The firm's common stock ratio is 30 percent and it has no preferred stock outstanding. Which of the following is the retained earnings break point for Omega Inc.? a. $400,000 b. $250,000 c. $375,000 d. $100,000 e. $800,000

43. Marigold Inc.'s common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. Which of the following is the cost of newly issued common stock? (Round off the answer to two decimal places.) a. 12.24 percent b. 13.56 percent c. 14.12 percent d. 16.47 percent e. 17.53 percent

44. Super Solutions Inc. is a constant growth firm, which just paid a dividend of $3.00, sells for $33.00 per share, and has a growth rate of 6 percent. Which of the following is the cost of retained earnings using the discounted cash flow (DCF) approach? (Round off the answer to two decimal places.) a. 12.55 percent b. 15.64 percent c. 16.25 percent d. 13.35 percent e. 12.40 percent

45. The _____ is equal to the average rate of return that investors require to provide funds to the firm in the form of debt. a. Coupon rate b. Yield to maturity (YTM) c. Maturity value d. Discount rate e. Internal rate of return

46. Oval Inc. has just paid a dividend of $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year, indefinitely. The firm plans to issue common stock at $16. The firm's investment bankers believe that new issues of common stock would have a flotation cost equal to 4 percent of the current market price. Which of the following is the cost of newly issued common stock? (Round off the answer to two decimal places.) a. 14.16 percent b. 10.15 percent c. 15.36 percent d. 13.80 percent e. 16.92 percent

47. Diggin Tools just issued new preferred stock, which sold for $85 in the stock markets. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. Which of the following is the component cost of preferred stock, rps? (Round off the answer to two decimal places.) a. 10.75 percent b. 10.52 percent c. 12.25 percent d. 11.70 percent e. 11.05 percent

48. Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. Which of the following is Rollins' component cost of debt? (Round off the answer to one decimal place.) a. 8.4 percent b. 7.2 percent c. 6.8 percent d. 5.3 percent e. 9.5 percent

50. Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. What is the firm's cost of newly issued preferred stock? (Round off the answer to two decimal places.) a. 11.15 percent b. 12.50 percent c. 16.45 percent d. 10.52 percent e. 13.46 percent

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FIN-3403 Lecture Notes - Lecture 2: Current Liability, Income Statement, Capital Structure

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