COMM 121 Chapter Notes - Chapter 1: Capital Budgeting, Current Liability, Capital Structure
Document Summary
Short-term management of cash flows is asso(cid:272)iated (cid:449)ith a fi(cid:396)(cid:373)"s net working capital (current assets minus current liabilities). The short-term cash inflow problem comes from the mismatching of cash inflows and outflows. The persons or institutions that buy debt from the firm are called creditors. The holders of equity shares are (cid:272)alled sha(cid:396)eholde(cid:396)s. ho(cid:449) (cid:373)u(cid:272)h of the fi(cid:396)(cid:373)"s (cid:448)alue is di(cid:448)ided a(cid:373)o(cid:374)gst (cid:272)(cid:396)edito(cid:396)s a(cid:374)d sha(cid:396)eholders is dependent on how well the firm performs. Value = bonds (value of the debt) + shares (value of equity) A fi(cid:374)a(cid:374)(cid:272)ial (cid:373)a(cid:374)age(cid:396)s (cid:373)ost i(cid:373)po(cid:396)ta(cid:374)t jo(cid:271) is to (cid:272)(cid:396)eate (cid:448)alue f(cid:396)o(cid:373) the fi(cid:396)(cid:373)"s (cid:272)apital (cid:271)udgeti(cid:374)g, fi(cid:374)a(cid:374)(cid:272)i(cid:374)g a(cid:374)d liquidity activities. Value is created when: firm buys assets that generate more cash than they cost, the firm sells bonds, shares, and other financial instruments that raise more cash than they cost. Value creation is difficult for the following reasons: Identification of cash flows it is difficult to observe cash flows directly due to payments made on- account.
