BFIN300 chaps 1-3

role of financial manager

responsible for decision that shapes the firms values

capital budgeting

deciding which long-term investments or projects a company should take

capital structure

determining how to finance the company (mix of debt and equity)

working capital management

managing day to day financial operations (cash, inventory, receivables, payables)- in other words liquidity

sole proprietorship

owned by one person and is easy to set up- unlimited liability

partnership

owned by 2 or more people, shared profits and responsibilities- still unlimited liability unless limited partnership

corporation

separate legal entity, limited liability for owners, easier to raise capital, more regulation, can be easily transferred.

other business association

LLCs, S-corps, etc.- hybrids with features of both partnerships and corporations.

goal 1 of financial management

increase the value of the firm shareholders

goal 2 of financial management

survive

goal 3 of financial management

avoid bankruptcy and financial distress

goal 4 of financial management 

maximize sales

goal 5 of financial management

minimize costs

goal 6 of financial management

earnings growth

Sarbanes Oxley act

companies asses internal controls and ensure accurate financial reporting and must evaluate and confirm risk management and reporting reliability thorough independent auditors

acting in share-holders interests (agency relationship)

separation of ownership and control can create conflicts

control of the company (agency relationship)

managers may act in their own interests instead of shareholders

solutions for control of the company

monitor management and structure incentives to align with shareholder goals

direct agency costs

expenses are managerial and need to monitor costs

debt and equity

borrowings(bonds, loans) vs ownership (stocks)

primary market

where new securities are issued(ipo etc.)

secondary market

dealers buy and sell for their own accounts

auction markets

brokers match buyers and sellers

securities listing

where securities are officially traded and listed

balance sheet

a snapshot of a business at a point in time

balance sheet equation

assets=liabilities + stockholders equity

liabilities

something you owe and is on the right side of the balance sheet

assets

on the left side of the balance sheet

are long term assets fixed

yes

long term assets

has a life longer than a year

tangible assets

things you can touch (buildings, etc.)

working capital equation

current assets- liabilities

working capital

difference between short term assets and short-term liabilities

intangible assets

things you cannot touch(brands etc.) there is still trade value

liquidity

how quickly an asset be converted to cash, and how much value was lost

income statement

measures performance of a company over a period of time

income statement equation

revenue- expenses

cash flow statements

difference of how much money is coming in and out

what is the “most” important financial statement

cash flow statement

cash flow equation

cf from asset- cf to creditors + cf to shareholders

residual equity

what is left over to pay

non cash items

depreciation and amortization

liquidity ratio

intended to give info on firm’s liquidity

quick ratio

cash + ar / current liabilities

financial leverage ratios

intended to address a company’s ability to meet its financial obligations

turnover asset utilization ratio

intended to describe how efficiently a company uses its assets to generate sales

profitability ratios

intended to measure how efficiently a business uses cash and manages operations

market based ratios

intended to measure how much an investor is willing to pay for something

return on assets

net income/ total assets(every dollar in assets generates x in profit)

return on equity

net income/ owners’ equity(every dollar of equity generates x in profit)

the three parts of roe

operating efficiency, asset use efficiency, financial leverage