Favoured In Finance
Corporation
Board of directors is appointed by shareholders, CEO, COO, and CFO appointed by Board, limited liability, shareholders double taxation, hard to set up (face taxes as individuals and as a corporation)
Propiertiorship and Partnership
Sole Propiertiorship owned by 1 person, unlimited liablility , taxed as an individual and easy to form
Partnership is the same as a sole propertiship except with 2 or more owners.
Stock Prices and Intristic Value
Intristic value is based on future while market value is based on people’s perception (most recent stock price)
Shareholder wealth is maximized by focusing on market value
In equilibrium market price is equal intrinstic value
Future Value - Value that a lump sump or a stream of payments will grow to over time based on assumed rate of interest
Present Value - Value of a lump sum or a stream of payments received in the future discounted back to the present at a defined rate of return
Compound Interest - Interest on Interest
Discounting = Compounding for the present value
Simple Interest = Interest earned on only the original investment
Ordinary Annuity - Payment paid at the end of the period
Annuity Due - Payment paid at the beginning of the period
Uneven Cash Flow - NPV
Nominal Rate - The quoted rate that ignores the number of compounding rates. Usually seen in contracts, quoted by banks, car salesmen, etc.
Effective Annual Rate/Periodic Rate - [The nominal rate/amount of compounding periods in a year] Also known as the Effective Annual Rate (EAR = EFFR%)
Time Value of Money - A dollar today is worth more than a dollar in the future because you have time to invest that dollar and earn interest on it
Balance Sheet - a snapshot of a firm’s financial position at a point in time
Balance Sheet states assets and liabilities and stockholder equity
Income statement -Summarizes a firm’s revenues and expenses over a given period of time
Statement of cash flows - reports the impact of a firm’s activities on cash flows over a given period of time
Statement of stockholder’s equity - shows how much of the firm’s earnings were retained, rather than paid out as dividends. Shows changes in stockholder’s equity
Balance Sheet Terms
Net Working Capital = Current Assets - Current Liabilities
Net Working Capital = The ability of a company to pay its debts as they come due, (Current Assets - Current Liabilities)
Net Operating Working Capital = Operating Current Assets - Operating Current Liabilities
This is the same as (Current Assets - Excess Cash) - (Current Liabilities - Notes Payable)
Net operating working Capital.= Current Assets not including excess cash - Current Liabilities not including interest bearing payments like notes payable to banks
Total Debt = Includes short term and long term interest bearing debt
Total Liabilities = Includes Total Debt and non-interest bearing liabilities
A decrease in cash is an unfavorable result for investors who’s cash to be used in reinvesting in the company and dividends
*Notes payable bears interests
Order Items are shown = Based on when their due for liabilities and their liquidity for assets
Value of an Asset
The value of any asset is derived from the cash flow that can be derived from that asset
Operating Income (Earnings Before Taxes and Interest AKA EBIT) = Sales Revenue - Operating Costs
Depreciation - The charge used to reflect the cost of capital equipment and other tangible assets depleted in the production process (not a cash-outlay)
Amortization - The charge used to reflect the cost of non-tangible assets depleted in the production process, (such as copyrights, patents, trademarks, etc.)
EBITDA = Earnings Before Taxes, Interest, Depreciation and Amortization
Statement of Cash Flows
Operating Activities - This section includes items that occur as part of normal ongoing operations
Investing Activities - Includes the purchases of physical assets such warehouse, investments in securities, and the sale of assets and securities
Financing Activities - Includes activities involving debt, equity, and dividends
Summary - This section summarize the change in cash from the beginning of the year to the end of the year
Statement of Stockholder’s Equity
Statement of Stockholder’s Equity - Reports changes in stockholder equity and retained earnings
*Retained earnings are not considered an asset and do not represent cash
*Retained Earnings are reinvesting into the company to buy equipment, inventory, etc.