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Week 1 – Introduction to Corporate Finance and Financial Statements FINA601 Corporate Finance Week 1 Tutorial – Introduction to Corporate Finance and Financial Statements Critical Thinking Questions: 1.1 Describe the cash flows between a company and its stakeholders. company’s productive assets that were purchased through their issuing debt or raising equity. These assets generate revenues through the sale of goods and services. pay wages and salaries , pay suppliers, pay taxes, and pay interest on the borrowed money(from some of the revenue) The leftover money, residual cash, is then either reinvested back in the business or is paid out to shareholders in the form of dividends.

1.2 What are the three fundamental decisions the financial management team is concerned with, and how do they affect the company’s balance sheet? capital budgeting decisions, financing decisions, and working capital management decisions. Capital budgeting addresses the question of which productive assets to buy; thus, it affects the asset side of the balance sheet. Financing decisions focus on raising the money the company needs to buy productive assets. This is typically accomplished by selling long-term debt and equity. working capital decisions involve how companies manage their current assets and liabilities. The focus here is seeing that a company has enough money to pay its bills and that any spare money is invested to earn interest 1.3 What is the difference between shareholders and stakeholders? Shareholders are the owners of the company. Stakeholders are the company’s employees, suppliers, creditors, and the government. 1.4 Explain why profit maximisation is not the best goal for a company. What is an appropriate goal?  accounting profits do not exactly equal cash flows.  profit maximisation does not account for timing and ignores risk associated with cash flows.  maximise the value of the company’s current share price.  the total value of cash inflows exceeds the total value of cash outflows. 1.5 In determining the price of a company’s shares, what are some of the external and internal factors that affect price? What is the difference between these two types of variables? External factors :

natural disasters or wars, the level of interest rates, management has no control. internal factors financial management decisions, product quality and cost

1.6 Identify the sources of agency costs. What are some ways a company can control these factors? Agency costs are the costs that result from a conflict of interest between the agent and the principal. dinners or trips, missed investment opportunities. establishing an independent board of directors. Cooperation

Questions and Problems: 1. Building a Balance Sheet Sankey, Inc., has current assets of $4,900, net fixed assets of $25,000, current liabilities of $4,100, and long-term debt of $10,300. What is the value of the shareholders’ equity account for this firm? How much is net working capital? Balance Sheet CA $ 4,900 CL $ 4,100 NFA 25,000 LTD 10,300 TA $29,900

TL & OE $29,900

equity = $29,900 –10,300 – 4,100 equity = $15,500 NWC = CA – CL NWC = $4,900 – 4,100 NWC = $800

2. Building an Income Statement Shelton, Inc., has sales of $435,000, costs of $216,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35%. What is the net income for the firm? Suppose the company paid out $30,000 in cash dividends. What is the addition to retained earnings? Income Statement Sales $435,000 Costs 216,000 Depreciation 40,000 EBIT $179,000 Interest 21,000 EBT $158,000 Taxes 55,300

Net income $102,700 One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income – Dividends Addition to retained earnings = $102,700 – 30,000 Addition to retained earnings = $72,700 7. Building a Balance Sheet The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago: Long-term debt $55,000,000 Preferred stock $3,100,000 Common stock ($1 par value) $12,000,000 Accumulated retained earnings $119,000,000 Capital surplus $56,000,000 During the past year, the company issued 5 million shares of new stock at a total price of $63 million and issued $30 million in new long-term debt. The company generated $8 million in net income and paid $1.8 million in dividends. Construct the current balance sheet reflecting the changes that occurred at the company during the year. Long-term debt $ 85,000,000 =55000000+30000000 Total long-term debt $ 85,000,000 Shareholders’ equity Preferred stock $ 3,100,000 Common stock ($1 par value) 17,000,000 =12000000+5000000 Accumulated retained earnings 125,200,000 =6.2M +199m Net income-dividends=8M-1.8M=6.2M

Capital surplus 114,000,000 Total equity $ 259,300,000 =3100000+17m+125200000+114m Total Liabilities & Equity $ 344,300,000 =85m+259300000

13. Building an Income Statement During the year, the Senbet Discount Tire Company had gross sales of $925,000. The firm’s COGS and selling expenses were $490,000 and $220,000, respectively. Senbet also had notes payables of $740,000. These notes carried an interest rate of 4 percent. Depreciation was $120,000. Senbet’s tax rate was 35 percent. a. What was Senbet’s net income? b. What was Senbet’s operating cash flow? Income Statement Sales $925,000 Cost of goods sold 490,000 Selling costs 220,000 Depreciation 120,000 EBIT $ 95,000 Interest 29,600 Taxable income $ 65,400 Taxes 22,890 Net income $ 42,510

b. And the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = $95,000 + 120,000 – 22,890 OCF = $192,110

16. Residual Claims Josipovich, Inc., is obligated to pay its creditors $11,300 very soon. a. What is the market value of the shareholders’ equity if assets have a market value of $12,400? b. What if assets equal $9,600?...