Exam 1 Review
09/23/2008
Goal of the Firm
Shareholder Wealth
Maximization?
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price
Legal Forms of Business
1) Sole Proprietorship
2) Partnership
-- General Partnership
-- Limited Partnership
-- Limited Liability Company (LLC)
3) Corporation
The Corporation and
Financial Markets
 Primary Market
 Secondary Market
 Initial Public Offering (IPO)
 Seasoned New Issue
Financial Management Axioms
1) Risk - return trade-off.
2) Time value of money.
3) Cash - not profits - is king.
4) Incremental cash flows count.
5) The curse of competitive markets.
Financial Management Axioms
6) Efficient capital markets.
7) The agency problem.
8) Taxes bias business decisions.
9) All risk is not equal.
10) Ethical dilemmas are everywhere in
finance.
SALES
Income Statement
- Cost of Goods Sold
GROSS PROFIT
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT)
- Preferred Stock Dividends
- NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS
Balance Sheet
Assets
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Fixed Assets
Machinery &
Equipment
Buildings and Land
Other Assets
Investments & patents
Liabilities (Debt) & Equity
Current Liabilities
Accounts Payable
Accrued Expenses
Short-term notes
Long-Term Liabilities
Long-term notes
Mortgages
Equity
Preferred Stock
Common Stock (Par
value)
Paid in Capital
Retained Earnings
Free Cash Flows
Cash Flows from
Assets
Cash flows generated
through the firm’s
assets
=
=
Cash Flows from
Financing
Cash flows paid to - or
received from - the
firm’s investors
(creditors &
stockholders)
Taxes
 Marginal tax rate: the tax rate that
would be applied to the next dollar of
taxable income
 Average tax rate: taxes owned by a firm
divided by the firm’s taxable income
 Always marginal
We will want to answer
questions about the firm’s
 Liquidity
 Efficient use of Assets
 Leverage (financing)
 Profitability
Future and Present Value
 FV = PV (1 + i)n
 FV = PV (FVIF i, n )
 FV = PV (e i*n) -- continuous
compounding
 PV = FV (PVIF i, n )
Annuity and Annuity Due
 FV = PMT (FVIFA i, n )
 FV = PMT{ [ (1 + i)n – 1] / i }
 PV = PMT (PVIFA i, n )
 PV = PMT { [1 - 1 / (1 + i)n ] / i }
 Perpetuity: PV = PMT / i
Annual Percentage Yield
(APY)
APY =
(1
quoted rate
+
m
)
m
- 1