not the firm achieved its primary objective of earning a profit. Ans: False Difficulty: Easy LO: 1 7. Expenses are costs incurred or the using up of assets from generating revenue. Ans: True Difficulty: Easy LO: 1 8. Liabilities are defined as "the residual interest in the assets of an entity that remains after deducting its equity." Ans: False Difficulty: Easy LO: 1 9. A characteristic of assets is their ability to provide current benefits to
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Chapter2 Balance sheet Assets= Liabilities + shareholders’ equity Current asset= cash+ account receivable+ inventory (total) Current assets + fixed assets= total assets Current liabilities= accounts payable+ notes payable(total) Long-term debt Owners’ equity= common stock and paid in surplus + retained earnings(total) Total liabilities and owners’ equity Income statement Net sales-cost of good sold-depreciation=EBIT-interest paid=EBT(taxable income)-taxes=net income Net income= Dividends+
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IAS 1: Presentation of Financial Statements Introduction The IASB – International Accounting Standards Board issued its framework for the Preparation and Presentation of Financial Statements in 1989. This is referred to as its conceptual framework. The framework sets out the concepts that underline preparation and presentation of financial statements for external users. The IASB framework assists the IASB: • “in the development of future International Accounting Standards and in its review
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business. It may be calculated in any of the following, apparently different but essentially equivalent, ways: EVA = NOPAT – c* x CAPITAL EVA = CAPITAL (r – c*) Where, EVA = Economic Value Added NOPAT = Net operating Profit After Tax c* = Cost of Capital CAPITAL = Economic book value of the capital employed in the firm r = Return on capital = NOPAT / CAPITAL The goal of Financial Management is to maximize the shareholders’ value. The shareholders’ wealth is measured by the returns
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to grow. The firm is currently financed completely with equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:
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4, Div =2, PBR=0,5 4. Growth rate = R on equity * PBR = 4/30 * ,5 = 6,7% 5. CAPM = rf + B (rm – rf) = 7+,5*7 = 10,5% Questions: 1. Cost of equity calculations 2. Other ways of Cost of equity calculations instead of CAPM 3. Errors in calculations Check Bob: 1. Discount rate = Hurdle rate = after-tax WACC ok 2. WACC = blend of rates of return expected by investors ? Weighted average cost of capital (WACC) is the average after-tax cost of a company’s various capital sources, including
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business risk at different debt levels. List the assumptions under which Modigliani and Miller proved that a firm’s value is unaffected by its capital structure, then explain trade-off theory, signaling theory, and the effect of taxes and bankruptcy costs on capital structure. List a number of factors or practical considerations firms generally consider when making capital structure decisions. Briefly explain the extent that capital structure varies across industries, individual firms in each industry
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manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? We can compute the levered value of the plant
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Norberto Ramos 9/7/15 Advanced Corporate Finance Professor Muhammad Chishty Case 15: Nike, Inc.: Cost of Capitol Worked with Xavier Robles As many people know, Nike is a sporting brand company with a large variety of products from clothing, shoes, to tech gear that is able to read your health when in use . But for this case at hand, on July 5th, 2001 Kimi Ford from NorthPoint Group, looked over analyst write-ups. Ford, and NorthPoint Group, invested in Fortune 500 companies with a central
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has a higher cost of equity capital? Explain. Business risk is the equity risk arising from the nature of the firm’s operating activity, and is directly related to the systematic risk of the firm’s assets. Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. As financial leverage, or the use of debt financing, increases, so does financial risk and hence the overall risk of the equity. Thus, Firm B could have a higher cost of equity if it uses greater
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