Corporate Finance notes PDF

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Summary

Prof. Chip Snively
Half of this class was taken online....

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Corporate Finance Three main areas of concern: 1. Capital budgeting: What long-term investments should the firm take? 2. Capital structure: Where will the firm get the long-term financing to pay for its investments? In other words, what mixture of debt and equity should the firm use to fund operations? 3. Working capital management: How should the firm manage its everyday financial activities?

Financial Statements Balance sheet When analyzing a balance sheet, we should focus on three areas: 1. Liquidity a. The ease and quickness with which the assets can be converted to cash (without losing significant value) 2. Debt versus Equity a. Assets on the balance sheet are purchased with either debt or equity b. Creditors generally receive the first claim on the firm’s cash flow c. The use of debt in a firm’s capital structure is called financial leverage 3. Value versus cost (market value vs book value) a. Audited financial statement of firms in the U.S. carry assets at cost (book value) b. Market value is the price at which the asset, liability, and equity could be bought or sold Income statement - The operating section of the income statement reports the firm’s revenues and expenses from principal operations - The non-operating section of the income statement includes all financing cost, such as interest expense. It may also include non-operational activity (revenues and costs if a part of the company was sold) - Taxes - Bottom line (retained earnings and dividends) Three primary tings to keep in mind when analyzing an income statement 1. Generally Accepted Accounting Principles a. Matching principle dictates that revenues be matches with expenses 2. Time and costs a. In the short run, certain equipment, resources, and commitments of the firm are fixed, but the firm can vary such inputs such as labor and raw materials. i. In the long run, all input of production (and hence costs) are variable b. Financial accountant do not distinguish between variable and fixed costs. Instead, accounting costs usually fit into a classification that distinguishes product costs from period costs 3. Taxes

a. The one thing we can rely on with taxes is that they are always changing, and income taxes are no exceptions b. Marginal vs average tax rates i. Average: the tax bill / taxable income. This is what we see on income statement ii. Marginal: the percentage paid on the next dollar earned. This is what we typically use in evaluating new opportunities

Extracting cash flow information Cashflow ¿ assets=cashflow ¿ credits ∧stockholders -

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Cash flow from the assets of the firm: OCF −Capex −Δ NWC o Operating Cash Flow (OCF) OCF=EBIT + Depreciation – Taxes  o Changing in Net Working Capital (NWC)  Reflection of the investment in the short-term portion of balance sheet (current assets and current liabilities)  How the business is structured to manage day to day activities  NWC=Current assets−Current liabilities o Capital spending (Capex)  Buying long term assets Capex =Δ Net ¿ Assets + Depreciation  Cash flow to investors o Cash flow to/from creditors  Cash flow ¿ creditors=Interest expense−Δ...