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FIN 300.docx

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Ryerson University
FIN 300
Michael Inglis

FIN 300 Blawal Aleem Chapter 1 Corporate Finance and the Financial Manager 3 Questions for Financial Manager – What long-term investments should you take on? Where will you get the long-term financing to pay for your investment? How will you manage you every day financial activities? Capital Budgeting – The process of planning and managing a firm’s investment in long-term assets Capital Structure – The mix of debt and equity maintained by a firm Working capital management – Planning and managing the firm’s current assets and liabilities Forms of Business Organization Sole Proprietorship – A business owned by a single individual Partnership – A business formed by two or more co-owners Corporation – A business created as a distinct legal entity owned by one or more individuals or entities The Goal of Finance Management FIN 300 Blawal Aleem Possible Goals  Survive in Business  Avoid financial distress and bankruptcy  Beat the competition  Maximize sales or market share  Minimize costs  Maximize profits  Maintain steady earnings growth - The Goal of financial management is to maximize the current value per share of existing stock The Agency Problem and control of the Corporation Agency Problem – The possibility of conflicts of interest between the shareholders and management of a firm Corporate Governance – Rules for corporate organization and conduct Stakeholder – Anyone who potentially has a claim on a firm Financial Markets and the Corporation Money Markets – Financial markets where short-term debt securities are bought and sold FIN 300 Blawal Aleem Capital Markets – Financial markets where long-term debt and equity securities are bought and sold Primary Markets – Refers to original sale of securities by governments and corporations (In Primary market transaction, corporation is seller and transaction raises money for corporation ex. public offerings and private placements) Secondary Markets – Where securities are bought and sold after original sale (Secondary market transaction involves one owner or creditor selling to another, secondary market provides means for transferring ownership of corporate securities ex. auction markets and dealer markets) Financial Institutions Financial Institutions – Act as intermediaries between investors (fund suppliers) and firms raising funds Trends in Financial Markets and Financial Management Financial Engineering – Creation of new securities or financial processes Derivative Securities – Options, futures, and other securities whose value derives from the price of another, underlying, asset Regulatory Dialectic – The pressures financial intuitions and regulatory bodies exert on each other Chapter 2 Balance Sheet Balance Sheet – Financial statement showing a firm’s accounting value on a particular date Generally Accepted Accounting Principles (GAAP) – The common set of standards and procedures by which audited financial statements are prepared Mark-to-market – Accounting rules using market values rather than book values of assets and liabilities FIN 300 Blawal Aleem The Income Statement Income Statement – Financial statement summarizing a firm’s performance over a period of time Non-cash items – Expenses charged against revenues that do not directly affect cash flow, such as depreciation Cash Flow Cash flow from assets – The total cash flow to bondholders and cash flow to shareholders, consisting of: operating cash flow, capital spending, and additions to net working capital Operating cash flow – Cash generated from a firm’s normal business activities Free cash flow – Another name for cash flow from assets Cash flow to creditors - A firm’s interest payments to creditors less net new borrowings Cash flow to shareholders – Dividends paid out by a firm less net new equity raised Taxes Average Tax Rate – Total taxes paid divided by total taxable income Marginal Tax Rate – Amount of tax payable on the next dollar earned Dividend Tax Credit – Tax formula that reduces the effective tax rate on dividends FIN 300 Blawal Aleem Capital Gains – The increase in value of an investment over its purchase price Realized capital gains – The increase in value of an investment, when converted to cash Loss carry-forward, carry-back – Using a year’s capital losses to offset capital gains in past or future years Capital Cost Allowance Capital Cost Allowance (CCA) – Depreciation for tax purposes, not necessarily the same as depreciation under GAAP Half-year rule – CRA’s requirement to figure CCA on only one-half of an asset’s installed csot for its first year of use Net Acquisitions – Total installed cost of capital acquisitions minus adjusted cost of any disposals within an asset pool Terminal Loss – The difference between UCC and the adjusted cost of disposal when the UCC is greater Recaptured Depreciation – The taxable difference between adjusted cost of disposal and UCC when UCC is smaller Chapter 3 Cash flow and financial statements: A closer look Sources of cash – A firm’s activities that generate cash Uses of cash – A firm’s activities in which cash is spent Statement of Cash flows – A firm’s financial statement that summarizes its sources and uses of cash over a specified period Standardized Financial Statements Common-size Statement – A standardized financial statement presenting all items in percentage terms, Balance Sheets are shown as a percentage of assets and income statements as a percentage of sales Common-base-year-statement – A standardized financial statement presenting all items relative to a certain base year amount Ratio Analysis FIN 300 Blawal Aleem Financial ratios – Relationships determined form a firms financial information and used for comparison purposes Current Ratio – Measures short-term liquidity = Current Assets/Current Liability Other ratios  Quick/Acid-Test Ratio = Current assets – Inventory / Current Liabilities  Cash Ratio = Cash + Cash Equivalents / Current Liabilities  Networking capital to total assets = Net working capital / Total assets  Interval measure = Current assets / Average daily operating costs Long-Term Solvency Measures  Total Debt Ratio = Total assets – Total equity / Total Assets  Debt/Equity Ratio = Total debt / Total equity  Equity Multiplier = Total assets / Total equity  Long-Term debt ratio = Long-Term debt/Long-term debt + Total equity  Times interest earned ratio = EBIT (Earnings before interests and taxes) / Interest  Cash Coverage ratio = EBIT + Depreciation / Inte
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