Corporate Finance chapter 3

quiz 2/4/26

balance sheet

a financial statement that shows the value of the firm’s assets and liabilities at a particular time

assets

owned by shareholders or have claim by debtholders

current assets

cash and securities, receivables, inventories

marketable securities

generate a ROR and are liquid—able to convert assets to cash at or near its value

cash

does not generate returns

receivables

money people owe, less liquid, firms can buy at a discount

inventories

raw materials, unfinished goods, finished goods

raw materials

most liquid current asset

unfinished goods

least liquid current asset

fixed assets

tangible and intangible

productive capacity

real assets have…

types of intangible assets

patent, trademark, copyright, goodwill

patent

good or process—you have value to the idea—need to give permission

trademark

symbol of your brand carries value and information of quality

copyright

any original written word

goodwill

difference between what you pay for it and what its book value is; has productive capacity; you’re buying reputations from customers

payables

what you owe to someone for goods you’ve received on credit

long term liability

BONDS

shareholder’s equity

book value—according to the accountants

common size balance sheet

all items in the balance sheet are expressed as a percentage of total assets—-every item in balance sheet/balance sheet total on one side

book values

the value of assets or liabilities according to the balance sheet and generally accepted accounting principles

market values

the value of assets or liabilities if resold in a market

market values

the value of a company right now as if it never changes; what we think the value of future ideas are

private company

only if it’s sold—can only estimate

GAAP

procedures for preparing financial statements

because of goodwill

why are market values higher than book values

market values

are market values or book values higher?

past to determine present

book value looks to the…

future to determine present

market value looks to the…

income statement

financial statement that shows the revenues, expenses, and net income of a firm over a period

net income

bottom line; one of the most important metrics

revenue recognition

revenue is recognized when sale happens not when cash is collected

when revenue is recognized

when are expenses recognized?

price x quantity

revenue equation

COGS

how much it costs you to build/assemble(NEGATIVE)

SG and A

marketing, ads, sales, not actually building

depreciation

don’t actually write the check; spreads and smooths income; value we paid/7 years; value of assets goes down

EBIT

operating income

interest expense

cost of borrowed money(bonds)—-interest on long term loans and bonds

pay dividends or reinvest

only two things you can do with net income

NO

is net income the cash you receive at the end of the year?

inventory may not be sold

why does net income not take care of all cash?

subtract

what do you do with depreciation on an income statement

ignore

profits ….cash expenditures on new capital

DO NOT

profits …consider changes in working capital

statement of cash flows

financial statement that shows the firm’s cash receipts and cash payments over a period of time

profits

what does statement of cash flows start with?

ADD

what do you do with depreciation in statement of cash flow

down

receivables go up cash flow goes

up

receivables go down cash flows go

down

inventory goes up cash flow goes

up

inventory goes down cash flow goes

up

payables go up cash flow goes

down

payables go down cash flows go

up

liabilities go up cash flow goes

down

liabilities go down cash flow goes

working capital

current assets-current liabilities

parts of cash flows

operations, investments, financing

negative

dividends are always…on cash flows

repurchases on shares

buy back its own shares; so they don’t have to pay out dividends every year

not on cash flows

interest on debt

change in cash balance

sum of operations, financing, investments

right now

when is period 0

free cash flow

cash available for distribution to investors after firm pays for new investments or additions to working capital

free cash flow equation

interest payments to debt investors + shareholders’ operating cash flow - capital expenditures

stockholders

net income goes to…

bondholders

net income + interest goes to..

progressive

way more than fair share; you pay higher percentage of taxes the more money that you make

taxes

have a major impact on financial decisions

marginal tax rate

tax paid on each extra dollar of income—tax rate on the last dollar you pay

average tax rate

total tax bill/total income