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Midterm 1 cheat sheet FIN 320
Finance (FIN 320)
California State University, Fullerton
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4 financial statements and required disclosures for U public companies
Balance sheet- snapshot at a given point in time showing assets, liabilities, shareholders equity (TAssets= TLiabilities+SE)
Income statement- revenues less costs, operating expenses, interest and taxes between two points in time
Statement of cash flows- cash flows from operating, investing, financing activities. The sum of these will show the change in
cash between the two periods on the balance sheet
Statement of shareholders equity- shows the change in shareholders equity as a result of changes in retained earnings (net
income-dividends) + changes in common equity and paid in capital accts (sales of stock - repurchases of stock)
Competitive market- a good can be bought and sold for the same price. The value of the good is based on price and opinion
on fair value is irrelevant
Law of one price- securities with the same exact cash flows must trade at the same price. Equivalent investment
opportunities trading simultaneously in different competitive markets must trade at the same price in both. If not, arbitrage
exists. Arbitrage- risk free profit that cannot exist indefinitely, as supply/demand forces will adjust price.
Valuation principle- benefits and costs of a decision must be evaluated on market prices and when the value of benefits
exceed the value of costs, the decision increases the value of the firm. The method of using the market prices for both
benefits and costs makes them comparable so we can evaluate them properly. Benefits and costs must be in common
united, as well as evaluated using market prices, *benefits and costs must be evaluated in the same time period
Separate entity- business that is separate legally and financially from its owner(s) Agency- financing solution, offer guarantees to cover commercial banks credits and political risks also direct funding Taxation- mandatory payment to loc state or national gov Unlimited life- company will operate forever unless formally dissolved Unlimited owners- as many owners as they want Corporate structure aspects: shareholders- board of directors- CEO- CFO
Value in the future FV, I/Y, N, PV=0, CPT PMT Number of periods
A
Ex
4% interest, FV after the second deposit? Move $300 to future at 4% and add $ (300x (1)^1) + 200= 512
Ex
$9000 payments every year for 3 years or pay one lump sum at the end of 3 years. Interest rate 7% , solve for FV of annuity. *on calc -9000 PMT, 7 I/Y, 3 N, click FV, = $28,934 (if you pay the bank FV at end of 3 yrs, same as paying $9000 a year at an interest rate of 7%)
Ex
Putting away $2000 every year for 64 yrs, interest rate 8%, what is the PV of the annuity stream? -2000 PMT, 8 I/Y, 64 N, click NPV, = $24,818, (if you deposited PV today at the interest rate 8%, you’ll have the same amount in 64 yrs that you would have if you deposited $2000 every year for 64 years at 8% int rate. Lump sum deposit of $24,818: *on calc 24,818 PV, 8 I/Y, 64 N, click FV, =$3,418,977. $2000 every year for 64 yrs: -2000 PMT, 8 I/Y, 64 N, click FV, =$3,318,977 (difference due to rounding)
Ex New house for $420,000, must put 20% down so you can borrow $336,000, bank requires annual payments of $19,200 on 30 year loan, what’s the interest rate being charged by the bank? *on calc: 336,000 PV, 0 FV, 30 N, -19,200 PMT, click I/Y, = 3.
Ex Invest $20,000 today and make additional investments of $12,000 a year, interest rate 10%, how long will it take to accumulate $1,000,000? *on calc: -20,000 PV, -12,000 PMT, 1,000,000 FV, 10 I/Y, click N, = 21 years
C-corp: use personal tax rate on dividends S-corp: use personal tax rate on all NON dividend income Key disadvantage of c-corp : double taxation Quick ratio is a measure of : liquidity GAAP: comparability Annuity- stream consisting of a fixed number of equal cash flows paid at a regular interval, (value a common set of same cash flows that ends at a specified time) ex: loans Growing Perpetuity- cash flow stream growing at a constant rate for ever, (stream of equal cash flows that occur at regular intervals and last forever) *first cash flow does not occur immediately, it arrives at the end of the first period Valuation principle- when value of benefits exceeds costs, decision adds value Increasing retainer earnings is due to : net income greater than dividends Agency problem exists because of: the separation of ownership in a corporation Overall goal of financial manager: create value for shareholders Solve for FV of an annuity: sum FV of all cash flows, calc the FV of annuity using TVM keys on calc, calc the PV Of all cash flows and move forward Inventory rising on balance sheet= negative impact on Statement of cash flows Market value of equity= share price x shares outstanding Company’s market to book ratio above 1= there are assists not being accounted for on the balance sheet Primary market- trade directly with issuing company, like IPO Secondary market-investors trade among themselves in an organized market without the issuer being involved or knowing when ownership changes Private company- stock liquidity: does not require a sale or transfer of your shares, raise capital by offering equity stakes to family and friends by going public through an initial public offering (IPO) Public company- stock liquidity:available and easily traded, raise capital by selling off ownership stakes in the form of shares to investors who become shareholders Assets is liquid when: it had the ability to buy and sell it easily Financial cycle- move funds from savers to borrowers, spread out risk bearing, move funds through time Role of financial manager: investing, financial and managing cash investment decision is the most important one: because the overriding goal of the financial manager is to increase and maximize the wealth of the shareholders
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Midterm 1 cheat sheet FIN 320
Course: Finance (FIN 320)
University: California State University, Fullerton
