Intro to finance - formulas EXAM 1

operating cash flow

EBIT + depreciation - taxes

EBIT

sales - costs - deprecation

taxes

taxable income x tax rate

net income (2)

dividends + addition to retained earnings

Savings account

deposit x percent of simple interest

simple interest

p + prt

Taxable income

EBIT - interest

Cash flow to creditors

interest paid - net new borrowing

cash flow to stockholders

dividends paid - net new equity

What are the 5 areas of finance

corporate finance, investments, financial institutions & banking, personal finance, international finance

Focuses on financial decisions within a company, including capital structure, budgeting, and investments.

Corporate finance

Involves managing assets and securities, including stocks, bonds, and alternative investments.

Investments

Deals with organizations that facilitate financial transactions, including banks, insurance firms, and credit unions.

Financial institutions & banking

Focuses on managing an individual’s or household’s financial resources.

Personal Finance

Involves financial activities and transactions across countries, including exchange rates and foreign investments.

International finance

Where securities are initially issued and sold.

• Example: A company conducting an Initial Public Offering (IPO).

• Investors buy directly from the issuing entity.

Primary market

Where existing securities are traded among investors.

• Example: Buying Apple stock on the NASDAQ.

• The issuing company does not receive funds from these trades.

secondary market

a company's shares being officially traded on a stock exchange, a company must meet financial, regulatory, and governance requirements set by the exchange.

Listing

• New York Stock Exchange (NYSE) – Home to companies like Coca-Cola and JPMorgan.

• NASDAQ – Hosts tech giants like Apple, Amazon, and Microsoft.

• London Stock Exchange (LSE) – Features British and European firms.

• Tokyo Stock Exchange (TSE) – Japan’s primary stock market.

Examples of Major Exchanges

Financial markets exist to facilitate the buying, selling, and transferring of financial assets. They help allocate resources efficiently and ensure liquidity, price discovery, and risk management.

Why financial markets exist

• They operate through organized exchanges (e.g., NYSE, NASDAQ) and over-the-counter (OTC) markets.

• They require regulatory frameworks, such as the SEC in the U.S., to ensure transparency and prevent fraud.

• Transactions occur through brokers, dealers, and automated trading systems.

How financial markets exist

1. Capital Markets – For long-term securities (stocks, bonds).

   • Example: Buying shares of Tesla on the stock market.

2. Money Markets – For short-term debt instruments (Treasury bills, commercial paper).

   • Example: A company issuing short-term debt to cover immediate expenses.

3. Foreign Exchange (Forex) Markets – Where currencies are traded.

   • Example: A U.S. company buying Japanese yen to pay a supplier.

4. Commodities Markets – Trading physical goods like oil, gold, and wheat.

   • Example: A trader buying crude oil futures.

5. Derivatives Markets – Contracts based on underlying assets (options, futures).

   • Example: An investor purchasing a stock option to hedge risk.

types of financial markets

simple interest

Principle x interest x time (Prt)