UGBA 10 Study Guide - Midterm Guide: Profit Margin, Contribution Margin, Variable Cost

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Tuesday, September 10, 2019
UGBA10 Lecture 1
Finance:
Sales/revenue: income generated from sale of goods or services
Revenue=unit price*#of Units sold
Total cost (TC) Cost incurred to produce goods or services
-Fixed Cost: Salaries, Rent, Purchase of new manufacturing, Insurance
-Variable Cost: Cost changes with every goods you sell, Shipping cost of online sales
Unite Contribution margin (UCM)- represents incremental profit earned for each unit sold
UCM=Unit revenue-unit variable cost
Profit is revenue minus cost
Profit= UCM* # of Units-fixed cost
Break-even point (BEP): total sales amount the company has to achieve in order to cover its
total cost
Break-even Units: number of units a company has to sell in order to achieve BEP
BEP: profit=0
0=UCM* #Unit-Fixed Cost
# Units at Break even
BEP=FC/UCM
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Tuesday, September 10, 2019
UGBA10 Lecture 2
Stock & Equity
Stock or equity prices are a function of
– Expected future earnings and cash flows
– Traders’ perception of risks in the market
Firms & Companies have assets (e.g. buildings, computers and equipment) that enables them
to do the business
Firms finance their assets by issuing stockholders’ equity and debts
A=L+SE (equity)
Current assets+fixed assets+intangible assets=assets
Stockholders’ equity (SE) funding is the issuance of common stock
Q: Extra stockholders equity financing can also be generated from profits the business
makes
Financial Seniority
The order in which claims on the company’s assets are paid if the company is liquidated
Claims are comprised of liabilities (debts) and stockholders’ equity (SE)
Liquidation is the sale of all assets for cash and the payment of the cash to the investors
who hold claims
Rules of Financial Seniority
Liabilities (debt) are paid first
If there is any cash remaining after the debt is paid, that residual amount is paid to
stockholders
Debt or borrowing is repaid by paying back the amount borrowed
i.e. Debt is a fixed claim
Equity gets the remaining value which could be huge
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Tuesday, September 10, 2019
It is this upside potential that
makes equity attractive as a
long term investment
Q: Why equity is so attractive
for investment? Equities can
compound in value in a way
that investments in other asset
classes, such as bonds and real
estate, cannot. The reason for
this is quite simple: companies
retain a portion of the profits
they generate to reinvest in the
business.
Q: Why equity has high cost of capital?
Secured loan (asset-backed loan)
Loan to finance an asset, backed by the borrower pledging the asset as collateral to the lender
Collateral
Asset pledged for the fulfillment of repaying a loan
Examples of collateral
Land
Equipment such as dump trucks
Accounts receivable (financial asset)
Mortgage backed securities (MBS)
Unsecured Loan
loan for which collateral is not required
Loan Principal
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