[FINE 2000] - Midterm Exam Guide - Ultimate 69 pages long Study Guide!

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6 Feb 2017

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Capital budgeting decisions or investment decision (which real assets to invest in) Financing decisions (how to raises money/finances and pay/invest in these assets) The financial manager also need to place a future value on these assets. Risks and uncertainties associated with the future benefits of these assets. The financial manager can raise money for investment by: Finance structure the choice between debt and equity fining. Real assets assets used to produce goods and services. Financial assets (cid:272)lai(cid:373)s to the fir(cid:373)"s i(cid:374)(cid:272)o(cid:373)e ge(cid:374)erated (cid:271)(cid:455) real assets. E. g. a share of stock is a financial asset, a bank loan is a financial asset (since the bank has rights to get the money back) Security a traded financial asset (e. g. stock) Separate legal entity in which shareholders have limited liability. Shareholders are owners but the ceo controls the corporation. If the manager quits/or is fired, the corporation still survives. Toda(cid:455)"s shareholders (cid:272)a(cid:374) all sell their shares a(cid:374)d it (cid:449)o(cid:374)"t affe(cid:272)t the (cid:272)orporatio(cid:374)s operatio(cid:374)s.

Related Questions

Take a look at and read this article that discusses the cost of capital. What are your thoughts? Elaborate and Explain

Capital for a small business is simply money. It is the financing for the small business or the money used to operate and buy assets. Cost of capital is the cost of obtaining that money or financing for the small business. The cost of capital is also called the hurdle rate.

Should very small businesses even worry about their cost of capital? The answer to that is absolutely yes! Even very small businesses need money to operate and that money is going to cost something. Companies want that cost to be as low as possible.

What is Capital?

Capital is the money businesses use for financing their operations. The cost of capital is simply the rent, or interest rate, it costs the business to obtain financing. In order to understand cost of capital, you must first understand the concept of capital. Capital for very small businesses may just be the supplier credit they rely on. For larger businesses, capital may be the supplier credit and longer term debt or liabilities, which are the firm's liabilities.

If a company is public or takes on investors, then capital will also include equity capital or common stock. Other equity accounts will be retained earnings, paid-in capital, perhaps preferred stock.

Why is Capital Important?

In order to build new plants, buy new equipment, develop new products, and upgrade informationtechnology, businesses have to have money or capital. For every decision like this, a business owner or Chief Financial Officer (CFO) has to decide if the return on the investment is greater than the cost of capital or the cost of the money it takes to invest in the project.

Business owners do not usually invest in new projects unless the return on the capital they invest in these projects is greater than or at least equal to the cost of the capital they have to use to finance these projects. Cost of capital is the key to all business decisions.

What is the Cost of Capital?

A company's cost of capital is simply the cost of money the company uses for financing. If a company only uses current liabilities and long-term debt to finance its operations, then it uses debt and the cost of capital is usually the interest rate on that debt.

If a company is public and has investors, then cost of capital gets more complicated. If the company only uses funds provided by investors, then the cost of capital is the cost of equity. Usually, this type of company has debt but it also finances with equity financing or money that investors supply. In this case, the cost of capital is the cost of debt and the cost of equity.

The combination of debt and equity financing for a company is the company's capital structure.

What is Return on Capital?

Return on capital is the amount of profit you earn out of a business or project as compared to the amount of capital you invested. The key to cost of capital for a company is that a company's return on capital must always equal or exceed the cost of capital for any project in which the firm wants to invest. In other words, the company's investment rate of return (return on capital) must equal or exceed their financing rate of return (cost of capital) in order for the firm to be profitable.

What Composes the Cost of Capital

One component of the cost of capital is the cost of debt financing. For larger businesses, debt usually means large loans or bonds. For very small companies, the debt can mean trade credit. For either, the cost of debt is the interest rate the company pays on debt.

Another component of the cost of capital is the cost of equity financing if your company is a public company; in other words, if you have investors in your company who provide money in exchange for an ownership stake in the company.

There are several components of the cost of equity capital. First, there is the cost of retained earnings or the money that the company invests back into the company, instead of paying outdividends. Next, there is the cost of new common stock or stock that the company issues to raise money. Last, the company may even issue preferred stock to raise money.

For very small firms, the cost of capital may be much simpler. There are advantages and disadvantages to both debt and equity financing, including cost, that any business owner must consider before adding them to the capital structure of the company. Very small firms may just useshort term debt, in which case we have to establish a cost for this capital component.

The Company's Weighted Average Cost of Capital

Once the business owner understands the concepts of capital and cost of capital, the next step is to understand weighted average cost of capital. Each capital component is a certain percentage of the company's capital structure. In order to arrive at the true cost of capital for a business firm, the owner must multiply the percentage of the company's capital structure for each component by the cost of that component and sum them.

Summary of Cost of Capital

Before a company can engage in buying assets or obtaining financing for its operations, it must make some determination of its cost of capital -- what it really costs the firm for the money it has to have to for all its financing. That cost of financing must never exceed its return on capital. Here is a cost of capital video series that you may find helpful. It helps put the return on capital and cost of capital in real world terms for you.

Prepare a report on disclosure issues related to the segment and noncontrolling interest information for HP. I am not allowed to attach a website per this website my last post was flagged but any website containg this infomration is fine!! I am just having an issue talking about and understand their non controlling interests.

I'm not really sutre what infomrtaion is needed

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

			October 31

			2011			2010
			In millions, except par value
ASSETS
Current assets:
	Cash and cash equivalents		$	8,043		$	10,929
	Accounts receivable			18,224			18,481
	Financing receivables			3,162			2,986
	Inventory			7,490			6,466
	Other current assets			14,102			15,322

		Total current assets		51,021			54,184

Property, plant and equipment				12,292			11,763
Long-term financing receivables and other assets				10,755			12,225
Goodwill				44,551			38,483
Purchased intangible assets				10,898			7,848

Total assets			$	129,517		$	124,503

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Notes payable and short-term borrowings		$	8,083		$	7,046
	Accounts payable			14,750			14,365
	Employee compensation and benefits			3,999			4,256
	Taxes on earnings			1,048			802
	Deferred revenue			7,449			6,727
	Accrued restructuring			654			911
	Other accrued liabilities			14,459			15,296

		Total current liabilities		50,442			49,403

Long-term debt				22,551			15,258
Other liabilities				17,520			19,061
Commitments and contingencies
Stockholders' equity:
HP stockholders' equity
	Preferred stock, $0.01 par value (300 shares authorized; none issued)			â			â
	Common stock, $0.01 par value (9,600 shares authorized; 1,991 and 2,204 shares issued and outstanding, respectively)			20			22
	Additional paid-in capital			6,837			11,569
	Retained earnings			35,266			32,695
	Accumulated other comprehensive loss			(3,498	)		(3,837	)

		Total HP stockholders' equity		38,625			40,449
Non-controlling interests				379			332

Total stockholders' equity				39,004			40,781

Total liabilities and stockholders' equity			$	129,517		$	124,503

The accompanying notes are an integral part of these Consolidated Financial Statements.

Table of Contents

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

					For the fiscal years ended October 31

					2011			2010			2009
					In millions
Cash flows from operating activities:
	Net earnings				$	7,074		$	8,761		$	7,660
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization				4,984			4,820			4,780
		Impairment of goodwill and purchased intangible assets				885			â			â
		Stock-based compensation expense				685			668			635
		Provision for doubtful accountsâaccounts and financing receivables				81			156			345
		Provision for inventory				217			189			221
		Restructuring charges				645			1,144			640
		Deferred taxes on earnings				166			197			379
		Excess tax benefit from stock-based compensation				(163	)		(294	)		(162	)
		Other, net				(46	)		169			22
		Changes in assets and liabilities:
			Accounts and financing receivables			(227	)		(2,398	)		(549	)
			Inventory			(1,252	)		(270	)		1,532
			Accounts payable			275			(698	)		(153	)
			Taxes on earnings			610			723			733
			Restructuring			(1,002	)		(1,334	)		(1,237	)
			Other assets and liabilities			(293	)		89			(1,467	)

				Net cash provided by operating activities		12,639			11,922			13,379

Cash flows from investing activities:
	Investment in property, plant and equipment					(4,539	)		(4,133	)		(3,695	)
	Proceeds from sale of property, plant and equipment					999			602			495
	Purchases of available-for-sale securities and other investments					(96	)		(51	)		(160	)
	Maturities and sales of available-for-sale securities and other investments					68			200			171
	Payments in connection with business acquisitions, net of cash acquired					(10,480	)		(8,102	)		(391	)
	Proceeds from business divestiture, net					89			125			â

				Net cash used in investing activities		(13,959	)		(11,359	)		(3,580	)

Cash flows from financing activities:
	(Payments) issuance of commercial paper and notes payable, net					(1,270	)		4,156			(6,856	)
	Issuance of debt					11,942			3,156			6,800
	Payment of debt					(2,336	)		(1,323	)		(2,710	)
	Issuance of common stock under employee stock plans					896			2,617			1,837
	Repurchase of common stock					(10,117	)		(11,042	)		(5,140	)
	Excess tax benefit from stock-based compensation					163			294			162
	Cash dividends paid					(844	)		(771	)		(766	)

				Net cash used in financing activities		(1,566	)		(2,913	)		(6,673	)

(Decrease) increase in cash and cash equivalents						(2,886	)		(2,350	)		3,126
Cash and cash equivalents at beginning of period						10,929			13,279			10,153

Cash and cash equivalents at end of period					$	8,043		$	10,929		$	13,279

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Question 8

Which of the following is NOT one of the steps taken in the financial planning process?
Answer Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.
Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
Determine the amount of capital that will be needed to support the plan.
Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
.2 points
Question 9

Which of the following statements is CORRECT?
Answer Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
.2 points
Question 10

Spontaneous funds are generally defined as follows:
Answer Assets required per dollar of sales.
A forecasting approach in which the forecasted percentage of sales for each item is held constant.
Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm

[FINE 2000] - Midterm Exam Guide - Ultimate 69 pages long Study Guide!

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