...Ch. 14. An overview of Corporate Finance. 14.1 Cash for investments is generated mostly (USA: 80%) internally as depreciation and retained earnings. Still, companies have a gap between cash they need and cash they generate internally. This gap is financial deficit. So companies have to either sell new equity or borrow.This causes two different kinds of problems: 1) The plow back ratio? => Dividend policy 2) The proportions of debt and issue of equity? => Debt policy. • Net stock issue is negative = Company repurchases more stocks than issues them. Reasons for internally generated funds: a) avoid cost of issuing securities b) investors don’t get the message from lower future profits and higher risk. Recent years firms have issued more debt than equity. Still, there are many ways to calculate the Debt ratio of company: 1) Debt / total assets = ( Short + long term debt ) / Total assets, or 2) Proportion of debt in long term financing) = Long term liabilities Long term liabilities + stockholders’ equity The Debt Ratios has risen since 1950 because of the book value of the corporate assets falls as behind the actual value of those assets. This is caused the inflation. And the new tools for risk management have...
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...Bachelor Thesis Department of Business Studies Århus, the 3rd of May 2010 Valuation of BMW - Financial & Strategic Analysis Authors Rasmus Ramshøj Pløen Exam no. 282821 BSc (B/IM) Mikkel Kronborg Olesen Exam no. 283755 BSc (B) Academic Advisor Nicolai Borcher Hansen ASB Aarhus School of Business TABLE OF CONTENTS 1 PREFACE ................................................................................................................................................................ 4 1.1 1.2 1.3 1.4 1.5 1.6 2 EXECUTIVE SUMMARY ................................................................................................................................................ 5 BRIEF INTRODUCTION ................................................................................................................................................. 6 PROBLEM STATEMENT ................................................................................................................................................ 8 STRUCTURE .............................................................................................................................................................. 9 DELIMITATIONS AND ASSUMPTIONS ............................................................................................................................ 10 METHODS ..........................................................................................................................................
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...Jamie Lyons Finance W2 4-1 Questions Annuity-A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years. Lump-sum payment- A one-time payment for the total or partial value of an asset. Cash flow- A revenue or expense stream that changes a cash account over a given period Uneven cash flow stream- Any series of cash flows that doesn’t conform to the definition of an annuity is considered to be an uneven cash flow stream. 4-1 problem Solve for FV 10,000 × (1.10)5 power 10,000 × 1.6105 16,105.10 4-2 At = A0 * (1+r/100m)^mt At= 5000 A0 =? r= 7%, m = 1 t = 20 Answer =$1,292.10 4-3 (FV) = 1,000,000 (PV) = 250,000 (n) = 18 years (i) = ? 1,000,000 = 250,000 (1 + i)15 power = .801% 4-4 i = 6.5% n =? PV = 1000 FV =2000 1000 = 2000 / (1+0.065)n power (1.065)n power=2 I put 11 in for n 11.01 4-6 S = R(((1 + i)n - 1) / i) *(1 + i) $300(((1 + .07)n - 1)/.07) S = $1725.22 * 1.07 S = $1845.99 Each year – $1,725.22 Due- $1,845.99 4-8 Financial calculator used N = 60 I = 1 PV = -20000, FV = 0 PMT = $444.89 EAR formula = (1.01)12 – 1.0 = 12.68%. NOM% = 12 P/YR =12 EFF% = 12.6825% PMT= $444.89 EAR= 12.6825% ...
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...Chapter 12 Leverage and Capital Structure Solution to Problems P12-1. LG 1: Breakeven Point–Algebraic Basic FC (P − VC) $12, 350 Q= = 1, 300 ($24.95 − $15.45) Q= P12-2. LG 1: Breakeven Comparisons–Algebraic Basic (a) Q = FC (P − VC) Q= Q= Q= $45, 000 = 4, 000 units ( $18.00 − $6.75) $30, 000 = 4, 000 units ( $21.00 − $13.50 ) $90, 000 = 5, 000 units $30.00 − $12.00 ) ( Firm F: Firm G: Firm H: (b) From least risky to most risky: F and G are of equal risk, then H. It is important to recognize that operating leverage is only one measure of risk. P12-3. LG 1: Breakeven Point–Algebraic and Graphic Intermediate (a) Q = FC ÷ (P − VC) Q = $473,000 ÷ ($129 − $86) Q = 11,000 units 302 Part 4 Long-Term Financial Decisions (b) Graphic Operating Breakeven Analysis 3000 Profits Breakeven Point Sales Revenue Total Operating Cost 2500 2000 Cost/Revenue ($000) Losses 1500 1000 500 Fixed Cost 0 0 4000 8000 12000 16000 20000 24000 Sales (Units) P12-4. LG 1: Breakeven Analysis Intermediate (a) Q = $73, 500 = 21, 000 CDs ( $13.98 − $10.48) (b) Total operating costs = FC + (Q × VC) Total operating costs = $73,500 + (21,000 × $10.48) Total operating costs = $293,580 (c) 2,000 × 12 = 24,000 CDs per year. 2,000 records per month exceeds the operating breakeven by 3,000 records per year. Barry should go into the CD business. (d) EBIT = (P × Q) − FC − (VC × Q) EBIT = ($13.98 × 24,000) − $73,500 − ($10.48 × 24,000) EBIT = $335,520 − $73,500...
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...Financial Audit Liquidity: Ben & Jerry’s seem to have low risk compared to the industry standards; they have no trouble meeting short-term obligations. The CR (B&J = 3.59; I =2.3) and QR (B&J = 2.66. I =1.1) show that they are currently at a lower risk than the overall industry. However, this difference is explained when looking at accounts receivable. It seems as though the A/R collection days are much higher than the industry (B&J =29.2, I =16.4). This may be a result of Ben & Jerry’s having friendly relationships with its local dealers and societal approach. There seems to be significant room for improvement here, if Ben & Jerry’s can start collecting A/R quicker, while still being less demanding than the industry standards. Net working capital has increased every year, with a significant jump from 1992 to 1993. Even though the rest of the industry spends vast amounts of resources on marketing and advertising, the lack of paid marketing doesn’t seem to be affecting Ben & Jerry’s. Their sales have also increased every year and they seem primed for continuing sales with their new lines of lower fat frozen yogurt items. Despite slow returns on A/R, Ben & Jerry’s liquidity seems to be acceptable at this time. Capital Structure: Ben & Jerry’s has very little capital structure risk compared to the industry; which indicates its cost of capital is relatively low. Both D/E (B&J = .659; I =.903) and D/A (B&J =.40; I =.46) are well below the industry average. There...
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...Cases in Healthcare Finance Case 16 Solution Case 16 - 1 CASE 16 SOLUTION (11/17/10) Copyright 2010 by FACHE SOUTHERN HOMECARE Cost of Capital Case Information Type This case is nondirected, in that it does not contain a specific list of questions that students must answer. Rather, the case contains general guidance or concerns expressed by various parties that students should consider when developing their solutions. If you, as the instructor, want to convert this case to a directed case, and hence provide your students with very specific guidance questions, you can make available the applicable questions for this case contained in the Case Questions section of the online material for instructors. Purpose This case focuses on the estimation of the cost of capital for a business. There is minimal quantitative analysis required, but there are a significant number of conceptual issues that are addressed in the case. Complexity The calculations are not complex, but many of the issues merit a great deal of discussion and require a sound understanding of cost of capital principles. Model Description The model takes much of the busywork out of the case, so it enables students to spend more time on interpretation and evaluation. Like most case models, the student and instructor versions differ only in regards to the input data. The instructor’s version contains the complete base case inputs, while these inputs are zeroed out in the student version of the model...
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...Lesson # 1 Financial Management: Introductory Notes and Words Concepts of Finance and Financial Management Financial Management refers to the proper management of finance functions of an enterprise or organization. In other words, financial management is concerned with the financial decision-making and other financial aspects. Thus, financial management involves financial planning, financial organization, financial coordination and control, financial reporting, financial mergers, combinations and acquisitions, insurance and tax management etc. Financial planning is concerned with the act of deciding in advance the financial activities that are essential if the enterprises are to achieve their financial goals and objectives. These financial activities mainly consist of properly estimating financial needs; selecting the proper sources of finances; procuring the requisite funds; proper utilization of the funds and custody and safekeeping of funds. Financial organization is the grouping of the finance functions into various divisions, departments, sections and sub-sections of the enterprises for their proper and efficient performance. That is, financial organization deals with the proper allocation of the finance functions amongst the various financial executives. Financial coordination and control deal with the proper adjustment of the finance function and evaluation of the same in relation to the predetermined standards. Financial reporting is the proper collection and...
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...Syllabus FINA 3320 Fall Semester 2012 Robert Puelz, Professor 390 Crow Building OFFICE PHONE & VOICE MAIL: 214-768-4156; FAX 214-768-4099 CLASSROOM : Georges Auditorium e-MAIL ADDRESS: mailto:rpuelz@mail.cox.smu.edu OFFICE HOURS: 1:00 p.m. to 2:00 p.m., Monday and Wednesday; and by appointment. HELP LABS: see “Lab and T.A.s schedule on our Blackboard site REQUIRED TEXTS: Ross, Westerfield and Jordan (RWJ), Fundamentals of Corporate Finance (Alternate Edition), 10/e , Note: Custom book based on RWJ edition 10/e available at SMU Bookstore only Malkiel, Burton G. (Malkiel), A Random Walk Down Wall Street, 2011, Norton Publishers. RECOMMENDED READING: Wall Street Journal and the business section of the Dallas Morning News. OTHER RESOURCES: The use of a business function or financial calculator is required. The Hewlett-Packard 10-B II and Texas Instruments BA II Plus are popular choices. The HP-12C is my personal choice mostly because it has stood the test of time. Beyond your operating manual, we will support each of these calculators if you have questions. CLASS ATTENDANCE AND WEBSITE: One of the best things about teaching and learning is the interaction between us. That can only be accomplished when you attend. I expect you to attend class and use a name tent. Also important to our class is our website. You’ll need your SMU i.d. for both your username...
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...According to the Exhibit 1, I think the fiduciary duties of directors is that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. If the company is sold for a price greater than the downround valuation and the new preferred stock gets a 400 percent return plus its share of the remaining equity while the common stock gets little or nothing, the directors may be sued personally for breach of fiduciary duty.(website: http://apps.americanbar.org/buslaw/blt/2003-05-06/blomberg.html) In this case, capitalization consist of multiple series of preferred stock while founders held the common stock, therefore it will be hard to secure financing. At first, two engineers invest $60000 to found the Alantec Company. However, within six months, they needed capital to keep their enterprise going, so 1.5 million was invested. In 1989, the reduced revenue and cash flow have created an immediate need for cash, and TA felt it is too risky to be supported any longer by a single venture investor. But at that time, no one was interesting to put their money in Alantec at $0.88 per share, so they drop it at $0.30 per share. This action, in my view, can be seen as the best interests of corporation. If not doing this, the company may suffer in bankruptcy. If Alantec bankrupt at that time, not only the founders, but also the VCs will suffer from it. So I...
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...Viability When it comes to finance and accounting they are both part of the financial form of a business. These two departments deal with finances in different ways. Accounting mainly deals with examining and preparing financial records and making sure their accurate, that their taxes are paid properly and in a timely manner, and to ensure that all financial operations are ran efficiently. Then again, finance handles primarily with making important financial decisions for the business and helps to make plans and strategies to reach their financial goals. (Financial Managers 2012). It is also essential that the finance mangers uses the financial information gathered by the accounting department to make the best decisions for the business. Nonetheless, accountants and financial managers must work together to make sure they operates effectively and efficiently to ensure the continued short and long term financial viability of any health care organization. The way they work together to determine financial viability within a health care organization is by working together in creating “a company’s budget”. Accounting concerns itself with recording the information regarding profit and loss accounts, which shows the gain and loss of the business overall. Also, the accounting department will provide a balance sheet showing the finances of the business at certain times, which will be precise and accurate numbers. As for the finance side of a budget, the finance professionals use financial...
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...Weeks 13 and 14 (4/21-5/1): Lease Financing and Course Conclusion Yikes! We are at the bittersweet time in our course together. It is almost over. We’ll miss it so much, but we might also want to do something else with the rest of our lives. In these last 1.7 weeks, we’ll cover another topic which, in addition to Financial Analysis and Planning, serves the function of integrating much of the material we have covered. That topic is Lease Financing. There is a lot of material on the structure of the lease and on the accounting treatment of leases, but the analytical focus will be on the lease-buy decision. The lease-buy decision is actually a financing decision. The analysis of the advisability of a lease typically follows a prior decision to acquire an asset (based on an investment decision analysis). In lease analyses we are comparing lease financing (which is a type of debt) to “regular” debt financing. Video 20 and Chapter 25 in BMA are the main materials. As you review the video, work through the lease example in the Excel file (financing uma 13.xlsx). Toward the end of video 20 is described the concept of adjusted present value. Pay close attention to this material as well, because it describes how in some very specific cases the results of an investment decision and a financing decision must be considered together. The deliverable for this two-week period is Exercise 4, which is an individual, i.e., not a team, exercise. We’ll also use the time to review...
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...have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm's clients is Michelle DellaTorre, a professional tennis player who has just come to the United States who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre. A. Why is corporate finance important to all managers?Corporate finance is the department that handles strategic financial issues associated with achieving goals such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with firms or other companies. b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. • A proprietorship, or sole proprietorship, is a business owned by one individual. A partnership exists when two or more persons associate to conduct a business. • While a corporation is a legal...
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...Roger Clarke Grant McQueen Revised 2001 Some Indicators of a Firm's Risk and Debt Capacity Introduction One notion of the riskiness of a firm is the extent to which the firm’s earnings can fluctuate from period to period in response to changes in total firm revenues. The variability of earnings relative to revenues is determined by two categories of risk. The first source of risk is business risk and is related to the basic industry and operating decisions of the firm. Business risk depends on a number of factors including the variability of demand for the firm’s products, the stability of sales prices and basic product input prices, and the extent to which the firm’s costs are fixed. Each of these factors is determined to some extent by the character of the firm's industry, but each of them is also controllable to some degree through the firm's strategic operating decisions. The second source of risk is financial risk. This risk is related to the firm’s financial policies, specifically the use of debt in financing operations. The use of debt obligates a firm to make interest and principal payments, regardless of profit levels. These fixed financial expenses compound fluctuations in operating income (EBIT) and introduce additional risk to stockholders. Separating business and financial risk convenient illustrates the division between firm operating and financial policies. Both are important and poor management in one area can easily undo good management...
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...(4) What are the potential risks assuming a lot of debt? Ans: Assuming a lot of debt goes against CCI’s past policies since throughout their company’s history they have always tried to avoid long term debt. Potential risks associated with issue this debt would be the fact that debt holders claim profit before equity holders. Therefore profits can be lower than initially projected and increases risk to equity may decrease stock. Debt holders claim profit before equity holders, chances that profits may be lower than expected, increases risk to equity may reduce or impede stock value. However, in extreme financial situation such as a recession period, CCI would still be able to increase its cash during a recession period with all debt capital structure. (2) Different slopes: Because the calculation of EPS is N.I divided by outstanding share, two lines for the stock plans. Bond plan have different slope. The significant differences that two variables are different on bond and stock plan if we assume two plans have same EBII a NI shows different value on two plans due to the interest expense of bond, which is $ 5m in every year till maturity. Another compounding that used to calculate eps is outstanding shares that also differ on two plans. On bond plan, outstanding share would be $ 4.5M whereas for stock plan is $ 7.5M. Recommendation: ...
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...low-cost airline and it was one of a few U.S. airlines that were profitable during the sharp downturn in airline industry affected by the September 11, 2011 attacks. With its strong capital base, the company was successful due to its impressive management team, in which, David Neelaman has rich experience with airline start-ups; COO David Barger and CFO John Ower are all experienced former senior managers from other airlines. The company’s sales rose from $104,618 to $320,414 from December 2000 to December 2001 and net profit is negative $21,330 in December 2000 and reach positive $38,537 only one year later. As we can see, the company is a high growth company with huge potential. To meet its further growth needs, it going to public to finance more money. The advantage of IPO is by raising more capital, the firm could use the capital to fund capital expenditure (buy more airplanes), pay off existing debt and also it increase public awareness and let potential customers know their products. Subsequently, this may increase its market share. And the venture capitalists may want to use IPO to cash in on JetBlue as they helped start-up. The disadvantages is that JetBlue has to disclosure more information for investors, prepare periodic financial reporting and they must also meet other rules and regulations that supervised by SEC. it is always costly of complying with regulatory requirements, such as preparing additional paper work, audit fees, investor relation management and oversight...
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