Foundations of Finance
Who are Shareholders?
Who are Shareholders?Managers, employees, suppliers, creditors, customers, and the government
What are Current Assets?
Cash, Inventory, Accounts Receivable, Prepaid Expenses
What is working capital?
Current assets - current liabilities
resources "tied up in business operations"
What are two common methods used in practice to value companies?
Choose from: DCF, Trading Comps, LBO and Transaction Comps
What are Forms of Business Organizations?
What are Forms of Business Organizations?Sole proprietorships, Partnerships, Corporations
What are the 3 Financial Statements?
Balance Sheet, Income Statement, Cash Flow Statement
What is Liquidity?
The ability of a company to convert assets—real or financial—into cash quickly without suffering a financial loss
What is the formula for the weighted average cost of capital?
D/(D+E)*(1-t)*rd + E/(E+D)*re
What are Agency Costs?
What are Agency Costs?Costs that arise from incurring and preventing conflicts of interest between a firm’s owners and its managers
What are Generally Accepted Accounting Principles?
Accounting rules and standards that public companies must adhere to when they prepare financial statements and reports
What is the Operating Cycle?
Begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales
What is the difference between Equity Value and Enterprise Value ?
EV = Equity + Net Debt + Preferred Stock + Minority Interest - NOLs +/- WC Adjustments
--> EV for both Equity and Debt holders
--> Equity is only the residual claim once all other trances have been paid
What are Business Ethics?
Society’s standards for acceptable behavior applied to business and financial markets
What is a 10K?
Summarizes the overall performance of a firm for the most recent fiscal year and Provides information on the company, its products, its activities, and its future and Includes audited financial statements, five-year summary of financial data
What is the Cash Conversion Cycle?
Represents the length of time between the cash outflow for materials and the cash inflow from sales
When would you use divisional Betas?
When valuing conglomerates with very distinct and unrelated business divisions serving different markets
What is the Sarbanes-Oxley Act?
Legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.
What is the Statement of Cash Flows?
Shows cash inflows and outflows for operating, investing and financing activities.
What happens to Free Cash Flow if inventory levels drastically increase, while while all other current assets and liabilities remain the same?
Decrease in FCF
Which capital structure do we use when computing WACC and why?
Target Capital Structure --> Because the WACC is used to discount cash flows far out into the future + we assume the firm strives to max. shareholder value