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Study Guide

FIN/571 Version 7

Week 1 Study Guide: Foundations of Finance


Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database.
In-Text Citation
Insert the paraphrased material (Parrino, Kidwell, & Bates, 2012, p. 1).
According to Parrino, Kidwell, and Bates (2012), Insert the paraphrased material (p. 1).
Insert the quotation (Parrino, Kidwell, & Bates, 2012, p. 1).
Reference
Investopedia.com. (2015). Retrieved from
http://www.investopedia.com/terms/l/llc.asp
In-Text Citation
Insert the paraphrased material ("Investopedia.com", 2015).
The "Investopedia.com" (2015) website Insert the paraphrased material.
According to "Investopedia.com" (2015), "Insert the quotation (Limited Liability Company LLC).
Glossary 721
Subject Index 729
Readings and Key Terms
Ch. 1 of Fundamentals of Corporate Finance p.1
Agency conflicts - "Conflicts of interest between a principal and an agent"(Parrino,
Kidwell, & Bates, 2012, p.14).
Agency confl icts, 1318, 14
and agency relationships, 14, 19
aligning interests of management and
stockholders, 1416
for diff erent forms of business, 572, 573
manager-stockholder, 14
with ownership and control, 14
payoff functions leading to, 658661
in private equity fi rms, 494
and regulatory reforms, 1618
Agency costs - "The costs arising from conflicts of interest between a principal and an
agent; for example, between a fi rms owners and its management"(Parrino, Kidwell, &
Bates, 2012, p.14).
Agency costs, 14, 523526
of debt, 659660
of equity, 660661
ethics confl icts involving, 19
and payoff functions, 658661
in private equity fi rms, 494
stockholder-lender, 524526

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stockholder-manager, 523
Bankruptcy - "Legally declared inability of an individual or a company to pay its
creditors" "(Parrino, Kidwell, & Bates, 2012, p.4).
Bankruptcy, 4
of Blockbuster, 200
and debt fi nancing, 5
of Enron and WorldCom, 16, 1820
losses limited in, 659
from mismanagement of working
capital, 6
Bankruptcy costs, 520523
direct, 521
indirect, 521523
Capital markets - "Financial markets where equity and debt instruments with
maturities greater than one year are traded"(Parrino, Kidwell, & Bates, 2012, p.6).
Capital markets, 6, 31, 32, 689691
Capital structure - "The mix of debt and equity that is used to finance a firm"(Parrino,
Kidwell, & Bates, 2012, p.6).
Capital structure, 6, 504530
choosing, 526529
decisions on, 612
dividends in management of, 556
and fi nancial risk, 510
in fi nancing plan, 609
leasing, 535544
and Modigliani and Miller propositions,
506514
optimal, 505506, 520, 676
pecking order theory of, 526528
for selected industries, 527
trade-off theory of, 526528
use of debt in, 514526
Corporation - "A legal entity formed and authorized under a state charter; in a legal
sense, a corporation is a person distinct from its owners" (Parrino, Kidwell, & Bates,
2012, p.7).
Corporations, 78
capital for, 572573
C-corporations, 572574
characteristics of, 572
fi nancial liabilities of, 574
and fi nancial system, 3637
life of, 573
multinational, 673, 674
privately held, 8, 12
professional, 8
S-corporations, 8, 571, 572

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stateless, 673
transnational, 673
Limited liability company (LLC) - According to "Investopedia.com" (2015),"A
corporate structure whereby the members of the company cannot be held personally
liable for the company's debts or liabilities" (Limited Liability Company - LLC).
Limited liability companies (LLCs),
8, 571, 572
capital for, 573
characteristics of, 572
fi nancial liabilities of, 574
life of, 573
partnership agreements in, 573
private equity funds as, 493
taxes as C-corporations, 574n.1
Limited liability partnership (LLP) - "Hybrid business organizations that combine
some of the advantages of corporations and partnerships; in general, income to the
partners is taxed only as personal income, but the partners have limited liability"
(Parrino, Kidwell, & Bates, 2012, p.8).
Limited liability partnerships (LLPs), 8
Limited partners, 7, 493
Limited partnerships, 7
capital for, 572, 573
characteristics of, 572
fi nancial liabilities of, 573
life of, 573
private equity funds as, 493
Net working capital (NWC) - "The dollar difference between current assets and current
liabilities" (Parrino, Kidwell, & Bates, 2012, p.6).
Net working capital (NWC), 4, 6
cash fl ow invested in, 6869
on fi nancial statements, 5354
in working capital management, 443, 450451
Partnership - 'Two or more owners who have joined together legally to manage a
business and share in its profits" (Parrino, Kidwell, & Bates, 2012, p.7).
Partnerships, 7
characteristics of, 572
life of, 573
limited liability, 8
maximizing stock value for, 12
taxation of, 8
Partnership agreements, 572, 573
Prviately held corporations - "Corporations whose stock is not traded in public
markets" (Parrino, Kidwell, & Bates, 2012, p.8).
Privately held corporations, 8, 12

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Residual cash flows - "The cash remaining after a firm has paid operating expenses and
what it owes creditors and in taxes; can be paid to the owners as a cash dividend or
reinvested in the business" (Parrino, Kidwell, & Bates, 2012, p.3).
Residual cash fl ows, 3
Sole proprietorship - "A business owned by a single individual' (Parrino, Kidwell, &
Bates, 2012, p.6).
Sole proprietorships, 67
capital for, 572, 573
characteristics of, 572
fi nancial liabilities of, 573574
life of, 573
taxation of, 7
Stakeholders - "Anyone other than an owner (stockholder) with a claim on the cash
flows of a fi rm, including employees, suppliers, creditors, and the government"
(Parrino, Kidwell, & Bates, 2012, p.2).
Stakeholders, 2, 3
Wealth - "The economic value of the assets someone possesses' (Parrino, Kidwell, &
Bates, 2012, p.2).
Wealth, 2

Ch. 2 of Fundamentals of Corporate Finance p.24

Financial and real assets - "Assets that are claims on the cash fl ows from other assets;
business loans, stocks, and bonds are fi nancial assets. nonfi nancial assets such as plant
and equipment; productive assets are real assets; many fi nancial assets are claims on
cash fl ows from real assets"(Parrino, Kidwell, & Bates, 2012, p.723, 725).
Financial assets, 25, 305, 306
Real assets, 25, 305, 306
Financial intermediation - "Conversion of securities with one set of characteristics into
securities with another set of characteristics"(Parrino, Kidwell, & Bates, 2012, p.723).
Financial intermediation, 34, 35
Initial public offering (IPO) - "The first offering of a corporations stock to the
public"(Parrino, Kidwell, & Bates, 2012, p.724).
Initial public off erings (IPOs), 36, 37, 479488
advantages of, 480
bundling options and common stock in, 654
cost of, 480, 486488, 491
disadvantages of, 480481
distribution of shares, 483
investment banking services for, 481483
origination of, 481482
proceeds from, 483484
underpricing of, 485486
underwriting for, 482483
as venture capitalists exit strategy, 478
Inside directors, 17

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Insider trading, 299300


Liquidity - "The ability to convert an asset into cash quickly without loss of
value"(Parrino, Kidwell, & Bates, 2012, p.724).
Liquidity, 30, 444
marketability vs., 30
in money markets, 31
of seasoned vs. unseasoned stocks, 481
Liquidity discounts, 585n.3
Liquidity position, 8788
Liquidity ratios, 8790
Marketability - "The ease with which a security can be sold and converted into
cash"(Parrino, Kidwell, & Bates, 2012, p.724).
Marketability, 30, 255, 595
Marketability discount, 584585
Marketability risk premium MRP), 255
Market efficiency - "The degree to which the transaction costs of bringing buyers and
sellers together are minimized / the degree to which current market prices refl ect
relevant information and, therefore, the true value of the security"(Parrino, Kidwell, &
Bates, 2012, p.2).
Primary and secondary markets - "A financial market in which new security issues are
sold by companies directly to investors / a financial market in which new security issues
are sold by companies directly to investors"(Parrino, Kidwell, & Bates, 2012, p.
725,726).
Primary markets, 30
Secondary markets, 30, 271273
corporate bonds transactions in, 239
effi ciency of, 272273
transactions in, 271272
types of, 273
Private and public markets - " / financial markets where securities registered with the
SEC are sold"(Parrino, Kidwell, & Bates, 2012, p.2).
Private markets, 32
private equity fi rms, 493494
private investments in public equity, 494
private placements, 32, 492493
public markets vs., 492
raising capital in, 491494
Public markets, 8, 3133. See also Initial
public off erings
private markets vs., 492
as wholesale markets, 491
Real and nominal interest - "The interest rate that would exist in the absence of
inflation / the rate of interest that is unadjusted for inflation"(Parrino, Kidwell, &
Bates, 2012, p.725,726).
Real rate of interest, 3840, 259

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Nominal rate of interest, 38, 676


Ch. 3 of Fundamentals of Corporate Finance p.48

Average and marginal tax rate - "Total taxes paid divided by taxable income / the tax
rate paid on the last dollar of income earned" (Parrino, Kidwell, & Bates, 2012,
p.722,724).
Average tax rate, 7273, 356, 357
Marginal tax rate, 7273, 344, 356, 357, 364
Balance sheet - "Financial statement that shows a firms fi nancial position (assets,
liabilities, and equity) at a point in time"(Parrino, Kidwell, & Bates, 2012, p.722).
Balance sheet, 5260
assets on, 5255, 619
book-value vs. market-value, 5758
common-size, 8485
dividends on, 552
eff ect of decision making on, 4
equity on, 5557, 619
fi nance, 411412
in fi nancial planning models, 614, 617622
historical trends on, 617618
liabilities on, 5455, 619
pro forma, 614615, 617622
relationship of other statements and, 6667
stock repurchases on, 552
working capital accounts on, 618619
Balance sheet identity, 411412
Cash flows to investors - 'The cash fl ow that a fi rm generates for its investors in a
given period, excluding cash inflows from the sale of securities to investors"(Parrino,
Kidwell, & Bates, 2012, p.722).
Cash fl ows to investors (CFI), 6771
Depreciation - "Allocation of the cost of an asset over its estimated life to refl ect the
wear and tear on the asset as it is used to produce the fi rms goods and
services"(Parrino, Kidwell, & Bates, 2012, p.722).
Depreciation, 5455. See also Incremental
depreciation and amortization
accelerated, 55, 61
and cash fl ow invested in long-term assets, 70
and FCF, 349
GAAP vs. IRS rules for, 356359
on statement of cash fl ows, 64, 65
straight-line, 55, 6162, 358
Depreciation charges, 358
Depreciation expense, 6162
Generally Accepted Accounting Principles (GAAP) - "A set of rules that defines how
companies are to prepare financial statements"(Parrino, Kidwell, & Bates, 2012, p.723).
Generally accepted accounting principles

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(GAAP), 16, 5052


fundamental accounting principles in, 5051
international, 5152
revenue recognition under, 6768
sales vs. leases, 536
for tax depreciation, 356
Income statement - "A financial statement that reports a fi rms revenues, expenses,
and profi ts or losses over a period of time" (Parrino, Kidwell, & Bates, 2012, p.723).
Income statement, 6063
common-size, 8586
in fi nancial planning models, 613, 616617
pro forma, 613, 616617
relationship of other statements and, 6667
Market value - "The price at which an item can be sold"(Parrino, Kidwell, & Bates,
2012, p.724).
Market value (MV), 50, 57
of assets, 5758, 411412
book value vs., 5758
of common stock, 56
of liabilities, 58
of stockholders equity, 58
in WACC, 428
Market-value balance sheet, 5860
Market-value ratios, 89, 100101
Statement of cash flows - "A financial statement that shows a fi rms cash receipts and
cash payments and investments for a period of time"(Parrino, Kidwell, & Bates, 2012,
p.726).
Statement of cash fl ows, 6367
Treasury stock - "Stock that the fi rm has repurchased from investors"(Parrino,
Kidwell, & Bates, 2012, p.727).
Treasury stock, 56

Content Overview
Key financial decisions

Key finance axioms - Axioms - a statement or idea that people accept as self-evidently
true

Identify and define various axioms of finance, such as agency, financial intermediation,
stakeholders, IPO, liquidity, and so on.
The Risk-Return Trade-off
The more risk an investment has, the higher its expected return should be If you bet on a

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horse, you want greater odds on the long shot If you invest in a risky business
Semiconductor, oil wells, junk bonds), you should demand a greater return. Every decision
you make should be evaluated for risk
The Time Value of Money
A dollar received today is worth more than a dollar received in the future If you receive a
dollar today, you can invest it and earn more Because of inflation, a dollar you receive today
will buy more than a dollar you receive in the future So the sooner you get the money, the
better The sooner you invest your money, the better (i.e. retirement)
Cash is King
You can not spend profit or net income. These are paper figures only Cash is what is received
by the firm and can be reinvested or used to pay bills. Cash flow does not equal net income;
there are timing differences in accrual accounting between when you record a transaction and
when you receive or pay the cash
Incremental Cash Flows
Its only the increase or decrease in cash that really counts. Its the difference between cash
flows if the project is done versus if the project is not done Consider all related cash flows,
i.e., equip., inventory, etc.
Curse of Competitive Markets
Its hard to find and maintain exceptionally profitable projects. High profits attract
competition
How to keep very profitable projects Product differentiation (Kleenex, Xerox),
Low cost (Costco, Honda), Service and quality (Mercedes, Lexus)
Efficient Capital Markets
The markets are quick and the prices are right. Information is incorporated into security
prices at the speed of light! Assuming the information is correct, then the prices will reflect
all publicly available information regarding the value of the firm. Example: announcing a
stock split
The Agency Problem
Managers are typically not the owners of a company. Managers may make decisions that are
in their best interests and not in line with the long term best interests of the owners
Example, cutting Research and Development costs on new products to maximize current
income
Taxes Bias Business Decisions
Because cash is king, we must consider the after-tax cash flow on an investment. The tax
consequences of a business decision will impact (reduce) cash flow. Companies are given tax
incentives by the government to influence their decisions. Examples : investment tax credit
and environmental credits reduce taxes; purchase of Prius
All Risk is Not Equal
Some risk can be diversified away and some cannot Dont put all your eggs in one basket
Diversification creates offsets between good results and bad results. Example: drilling for oil
wells
Ethical Behavior Means Doing the Right Thing
Ethical Dilemmas are everywhere in finance; just read the news (back date stock options,
Madoff). Unethical behavior eliminates trust, results in loss of public confidence
Shareholder value suffers and it takes a long time to recover

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Social responsibility means firms have to be responsible to more than just owners, all
stakeholders.
http://10axioms.blogspot.com/2011/05/10-axioms-of-financial-management.html
Determine difference between nominal and real interest rates.
The nominal interest rate (or money interest rate) is the percentage increase in money you
pay the lender for the use of the money you borrowed. For instance, imagine that you
borrowed $100 from your bank one year ago at 8% interest on your loan. When you repay
the loan, you must repay the $100 you borrowed plus $8 in interesta total of $108.
But the nominal interest rate doesnt take inflation into account. In other words, it is
unadjusted for inflation. To continue our scenario, suppose on your way to the bank a
newspaper headline caught your eye stating: Inflation at 5% This Year! Inflation is a rise in
the general price level. A 5% inflation rate means that an average basket of goods you
purchased this year is 5% more expensive when compared to last year. This leads to the
concept of the real, or inflation-adjusted, interest rate. The real interest rate measures the
percentage increase in purchasing power the lender receives when the borrower repays the
loan with interest.. In our earlier example, the lender earned 8% or $8 on the $100 loan.
Fortunately, the market for U.S. Treasury securities provides a way to estimate both nominal
and real interest rates. You can start comparing current real and nominal interest rates by
looking at rates on comparable maturity Treasury securitiespick one that is not adjusted for
inflation and one that is adjusted for inflation (more about these below). Chart 1 illustrates
that there is certainly a difference between the real and nominal interest rates. This difference
gives us an idea of the current inflation premium.100 loan.
Interest Rates in the Real World. Advertised interest rates that you may see at banks or other
financial service providers are typically nominal interest rates. This means its up to you to
estimate how much of the interest rate a bank may pay you on a savings deposit is really an
increase in your purchasing power and how much is simply making up for yearly
inflation.Now, lets look at some of the inflation-adjusted securities that provide a real
interest rate. The blue line in Chart 1 plotted the inflation-adjusted interest rates paid on these
securities over the past several years, In 1997, the U.S. government began offering bonds
called Treasury Inflation-Protected Securities (TIPS). Unlike other investments that pay a
nominal interest rate, TIPS earn a real interest rate. The TIPS securities earn a fixed rate of
interest just like many other types of government bonds. But, in addition to the fixed rate, the
principal value of your TIPS bond is adjusted for inflation. So, at maturity, TIPS investors
receive an inflation-adjusted principal amount. Also, for the unlikely event of deflation, there
is a safeguard built into the TIPS system: the final payment of principal cannot be less than
the original par value. I-bonds, issued by the U.S. Treasury, are another type of investment
that earns a real rate of return. Unlike TIPS investors, who receive an adjusted principal value
at the end of the investment time period, I-Bond investors receive interest payments that
are adjusted for inflation twice each year.
As with any investment or loan, its simply important to understand the interest rate that you
are paying or receiving. With this knowledge, you will be able to compare it with other
investments or loans and make sure you are getting a deal that is right for you and your
financial situation.
http://www.frbsf.org/education/publications/doctor-econ/2003/august/real-nominal-interestrate
Determine difference between private and public markets.

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Private Market - On the private market transactions are directly between two parties and can
take any form the parties agree to. Public Market - Transactions in public markets are
conducted on organized exchanges. Securities traded on public markets use standardized
contracts because they involve so many parties.
http://www.answers.com/Q/Private_market_vs_public_market
Determine difference between financial and real assets.
Businesses are evaluated according to the assessment of both financial and real assets and the
ability of each to generate cash flow. Financial assets usually show continued growth and
increased value, but the building and vehicle components of the real assets lose value over
time. Real estate is a stable real asset that generally appreciates over time and adds value to
the business portfolio.
Businesses require both financial and real assets to continue to deliver their products and
meet the financial obligations that enable them to remain in operation. Financial assets
generate the income to purchase real assets, and in turn, real assets are used to produce goods
and services to generate revenue. A diversified portfolio with a balance of financial and real
assets creates a strong company that is able to weather the ups and downs of the financial
market.
http://www.ask.com/business-finance/difference-between-financial-real-assets3ac187ab4c82c658
Understand financial intermediation.
The process performed by banks of taking in funds from a depositor and then lending them
out to a borrower. The banking business thrives on the financial
intermediation abilities of financial institutions that allow them to lend out money at
relatively high rates of interest while receiving money on deposit at relatively low rates of
interest.
http://www.businessdictionary.com/definition/financial-intermediation.html
Finanacial statements
Identify the components of a balance sheet.
The three key sections of a balance sheet are:
Assets
Liabilities
Owners equity
Assets and liabilities are sub-divided into current (short-term) and non-current (long-term)
and may have several components within each sub-division such as cash at bank, inventory,
property, accounts payable, or business bank loans. The individual items will differ
depending on the nature of the business and industry.
It is called a balance sheet because assets minus liabilities (net assets) must equal the owners
equity (they must balance). A balance sheet is based on the formula:
Owners equity = Assets Liabilities
https://www.smallbusiness.wa.gov.au/business-topics/money-tax-and-legal/moneymatters/understand-your-accounts/understanding-balance-sheets/components-of-a-balancesheet/
Explain the balance sheet identity and why it must balance.
The balance sheet reflects a companys health. It lists the assets and liabilities for a specified
period, such as the most recent quarter or a fiscal year. Potential investors or loan officers

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examine the balance sheet when a business applies for a commercial mortgage or other loan.
One of the calculations they make is balance sheet identity.
http://smallbusiness.chron.com/balance-sheet-identity-37248.html
A balance sheet should always balance. The name "balance sheet" is based on the fact
that assets will equal liabilities and equity every time.
The assets on the balance sheet consist of things of value that the company owns or will
receive in the future and which are measurable. Liabilities are what the company owes, such
as taxes, payables, salaries and debt. The equity sections displays the company's retained
earnings and the capital that has been contributed by shareholders.
The balance between assets, liability and equity makes sense when applied to a simpler
example, such as buying a car for $10,000. In this case, you might use a $5,000 loan (debt),
and $5,000 cash (equity) to purchase it. Your assets are worth $10,000 total, while your debt
is $5,000 and equity is $5,000. In this simple example, assets equal debt plus equity.
http://www.investopedia.com/ask/answers/09/does-balance-sheet-always-balance.asp

Describe how market values differ from book values.


Book value is the price paid for a particular asset. This price never changes so long as you
own the asset. On the other hand, market value is the current price at which you can sell an
asset.
For example, if you bought a house 10 years ago for $300,000, its book value for your entire
period of ownership will remain $300,000. If you can sell the house today for $500,000, this
would be the market value.
Book values are useful to help track profits and losses. If you have owned an investment for a
long period of time, the difference between book and market values indicates the profit (or
loss) incurred.
The need for book value also arises when it comes to generally accepted accounting
principles. According to these rules, hard assets (like buildings and equipment) listed on a
company's balance sheet can only be stated according to book value. This sometimes creates
problems for companies with assets that have greatly appreciated - these assets cannot be repriced and added to the overall value of the company.
http://www.investopedia.com/ask/answers/183.asp
Identify the components of an income statement.
The income statement consists of revenues and expenses along with the resulting net
income or loss over a period of time due to earning activities. The income statement
shows investors and management if the firm made money during the period reported.
The operating section of an income statement includes revenue and expenses. Revenue
consists of cash inflows or other enhancements of assets of an entity, and expenses consist
of cash outflows or other using-up of assets or incurring of liabilities.
The non-operating section includes revenues and gains from non-primary business activities,
items that are either unusual or infrequent, finance costs like interest expense, and income tax
expense.
The "bottom line" of an income statement is the net income that is calculated after
subtracting the expenses from revenue. It is important to investors - also on a per share basis
(as earnings per share, EPS) - as it represents the profit for the accounting period attributable
to the shareholders.

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https://www.boundless.com/finance/textbooks/boundless-finance-textbook/financialstatements-taxes-and-cash-flow-2/the-income-statement-32/elements-of-the-incomestatement-179-8370/
Identify the basic income statement equation and the information it provides.
The income statement is one of the three primary financial statements used to assess a
companys performance and financial position (the two others being the balance sheet and
the cash flow statement). The income statement summarizes the revenues and expenses
generated by the company over the entire reporting period.
How it works/Example:
The income statement is also known as a profit and loss (P&L) statement, statement
of earnings, statement of operations or statement of income.
The basic equation on which an income statement is based is:
Revenues Expenses = Net Income
All companies need to generate revenue to stay in business. Revenues are used to pay
expenses,interest payments on debt and taxes owed to the government. After the costs of
doing business are paid, the amount left over is called net income. Net income is theoretically
available to shareholders, though instead of paying out dividends, the firm's management
often chooses to retain earnings for future investment in the business.
Income statements are all organized the same way, regardless of industry. The basic outline is
shown in the following example:
Income Statement for Company XYZ, Inc.
for the year ended December 31, 2008
Total Revenue

$100,000

Cost of Goods Sold


Gross Profit

($ 20,000)
$ 80,000

Operating Expenses
Salaries
$10,000
Rent
$10,000
Utilities
$ 5,000
Depreciation $ 5,000
Total Operating Expenses
Operating Profit (EBIT)

($ 30,000)
$ 50,000

Interest Expense
Earnings before tax (EBT)

($ 10,000)
$ 40,000

Taxes
Net Income

($ 10,000)
$ 30,000

Number of Shares Outstanding


Earnings Per Share (EPS)

30,000
$1.00

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Anyone interested in active investing, picking stocks or investigating the financial health of
a company must know how to read financial statements, including the income statement. The
importance of the information contained in the income statement cannot be overemphasized.
A firm's ability or inability to generate earnings over the long term is the key driver
of stock and bondprices. Operating profit (EBIT) is the source of debt repayment, and if a
company can't generate enough EBIT to pay its debt obligations, it will have to
enter bankruptcy or sell itself. Net income is the source of compensation to shareholders
(owners of the company), and if a company cannot generate enough profit to compensate
owners for the risks they've taken, the value of the owners' shares willplummet. Conversely,
if a company is healthy and growing, higher stock and bond prices will reflect the increased
availability of profits.
Please note that earnings/net income/profits are not the same as cash or cash flow. It is
possible for a firm to be profitable on the income statement, but not be generating cash flow,
and vice versa. To see a company's cash flow, you will need to examine its statement
of cash flows
http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/incomestatement-1104
Understand the calcualtion of cash flows from operating, investing, and financing
activities required in the statement of cash flows.
Under U.S. and ISA GAAP, the statement of cash flow can be presented by means of two
ways:
The indirect method
The direct method
The Indirect Method
The indirect method is preferred by most firms because is shows a reconciliation from
reported net income to cash provided by operations.
Calculating Cash flow from Operations
Here are the steps for calculating the cash flow from operations using the indirect method:
Start with net income.
Add back non-cash expenses.
(Such as depreciation and amortization)
Adjust for gains and losses on sales on assets.
Add back losses
Subtract out gains
Account for changes in all non-cash current assets.
Account for changes in all current assets and liabilities except notes payable and dividends
payable.
In general, candidates should utilize the following rules:
(Such as depreciation and amortization)
The following example illustrates a typical net cash flow from operating activities:

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Cash Flow from Investment Activities


Cash Flow from investing activities includes purchasing and selling long-term assets and
marketable securities (other than cash equivalents), as well as making and collecting on loans.
Here's the calculation of the cash flows from investing using the indirect method:

Cash Flow from Financing Activities


Cash Flow from financing activities includes issuing and buying back capital stock, as well as
borrowing and repaying loans on a short- or long-term basis (issuing bonds and notes).
Dividends paid are also included in this category, but the repayment of accounts payable or
accrued liabilities is not.
Here's the calculation of the cash flows from financing using the indirect method:

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http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/cash-flowindirect.asp
Understand the difference between marginal and average tax rates.
The difference between marginal and average tax rates is a fairly important concept for all
tax payers to better understand the way the government gets paid. Youve probably heard
both terms, but maybe never knew what they were. Well, lets fix that.Marginal Tax Rate
Your marginal tax rate is the highest rate that you are taxed. For many people, a portion of
their income is taxed at one rate, and the rest is taxed at another rate. For instance, if you
make right around $40,000 a year, you may pay 15% on the first $20,000 or so and 28% on
anything over $20,000. So, lets break that down:
15% of $20,000 is $3,000
28% of $20,000 is $5,600
Total tax liability is $8,600
In this case, your marginal tax rate would be 28%, the highest rate at which your income is
taxed.
Average Tax Rate
The average tax rate is the actual percentage of income going to pay taxes. In the example
above we can calculate average tax rate as follows:
$8,600 / $40,000 = .215 * 100 = 21.5%
So, in this example, your average tax rate is 21.5%, a bit lower than your 28% marginal rate.
Its good to know this because this represents your actual tax liability.
Why the Two Tax Rates?
In the United States, we have something called a progressive tax system, meaning, the more
money you make, the higher your tax rate. If the person in the example above only made
$20,000, hed wouldnt have had to pay the 28%instead only the 15% would apply. Our
progressive tax system taxes you at a lower rate for the first so many dollars you make,
everything over that amount gets taxed at a higher rate, and so on until you reach the cap,
which, for 2008, was 35%.
So, it all boils down to this, your marginal tax rate is the highest rate at which youre taxed,
but it does not represent the percentage of your income that goes toward paying taxes. That
number is the average tax rate.
https://answers.yahoo.com/question/index?qid=20101010231157AANR6E0
Understand how each of the financial statements articulates with the other.
"Financial statement articulation" describes how different financial statements link together.
For example, the same net income figure appears on a year's income statement, statement of
stockholders' equity, and statement of cash flows. "Articulation" is based on the mathematical

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properties of accounting records; failure to articulate in the following ways indicates that the
financial statements are in error.
Net income reconciles to statement of retained earnings
Net income at the bottom of the income statement should equal Net income on the statement
of retained earnings, presented as part of the statement of stockholders' equity. Note that this
link works for "net income attributable to shareholders," also known as "net income
attributable to the parent company." It does not always work for "consolidated net income."
Net income reconciles to cash flows statement
Net income at the bottom of the income statement should equal net income on the cash flows
statement, as presented at the beginning of operating cash flows, under the indirect method.
This works for "consolidated net income" only.
Current assets and liabilities reconcile to cash flows statement
Under the indirect method, operating cash flows present a series of changes in current assets
and liabilities. These changes should equal changes in all current assets and liabilities
presented in the balance sheet.
Stockholders' equity on the balance sheet reconciles to the stockholders' equity statement
All stockholders' equity items listed on the balance sheet should equal individual stockholder
equity balances listed in the statement of stockholders' equity. Most statements of
stockholders' equity are presented in the columnar format. The numbers in the last row
should equal the year-end balances on the balance sheet.
Cash on the balance sheet reconciles to the cash flows statement
Cash, usually presented as "cash and cash equivalents" on the balance sheet, should equal
cash presented on the statement of cash flows.
Reconciliation to notes
Notes to the financial statements provide more detail explaining values in the financial
statements themselves. Values in the notes sometimes, but not always, reconcile to the
financial statements themselves.
Financial statement "articulation" describes how financial statements should link together.
Ultimately, the income statement, the statement of cash flows, and the statement of
stockholders' equity explain how balances in the balance sheet change from one period to the
next.
http://accounting.answers.com/financial-statements/6-ways-that-financial-statementsarticulate
Fundamental decisions in financial management
There are two fundamental types of financial decisions that the finance team needs to make
in a business: investment and financing. The two decisions boil down to how to spend money
and how to borrow money. Recall that the overall goal of financial decisions is to maximize
shareholder value, so every decision must be put in that context.
Investment
An investment decision revolves around spending capital on assets that will yield the
highest return for the company over a desired time period. In other words, the decision is
about what to buy so that the company will gain the most value.
To do so, the company needs to find a balance between its short-term and long-term goals. In
the very short-term, a company needs money to pay its bills, but keeping all of its cash means
that it isn't investing in things that will help it grow in the future. On the other end of the
spectrum is a purely long-term view. A company that invests all of its money will maximize

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its long-term growth prospects, but if it doesn't hold enough cash, it can't pay its bills and will
go out of business soon. Companies thus need to find the right mix between long-term and
short-term investment.
The investment decision also concerns what specific investments to make. Since there is no
guarantee of a return for most investments, the finance department must determine
an expected return. This return is not guaranteed, but is the average return on an investment
if it were to be made many times.
The investments must meet three main criteria:
It must maximize the value of the firm, after considering the amount of risk the company is
comfortable with (risk aversion).
It must be financed appropriately (we will talk more about this shortly).
If there is no investment opportunity that fills (1) and (2), the cash must be returned to
shareholder in order to maximize shareholder value.
Financing
All functions of a company need to be paid for one way or another. It is up to the finance
department to figure out how to pay for them through the process of financing.
There are two ways to finance an investment: using a company's own money or by raising
money from external funders. Each has its advantages and disadvantages.
There are two ways to raise money from external funders: by taking on debt or selling equity.
Taking on debt is the same as taking on a loan. The loan has to be paid back with interest,
which is the cost of borrowing. Selling equity is essentially selling part of your company .
When a company goes public, for example, they decide to sell their company to the public
instead of to private investors. Going public entails selling stocks which represent owning a
small part of the company. The company is selling itself to the public in return for money.
https://www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-tothe-field-and-goals-of-financial-management-1/introducing-finance-22/types-of-financialdecisions-investment-and-financing-145-3871/

Understand the concerns of capital budgeting, financing, and working capital decisions
and how they affect the balance sheet.

Organizational structures and forms

Identify forms of business organization and their respective strengths and weaknesses.
5 Focuses of Organizational Structure Strengths and Weaknesses
1. Functional Structure
Strengths
Easier to manage work within a group
Contains people who speak the same language and nurtures technical expertise, attracts
and develops experts
Lower labor costs
Workload can be balanced upon demand
Weaknesses
Coordination and communication between departments may be slower and less accurate
Individual department managers have limited decision making authority

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Different departments have different priorities; resolving conflicts may be costly; customers
interests could be overlooked
2. Product or Service-Based Structure
Strengths
Responsibility for each product can be pinpointed at the division level
Focus on one product can produce higher quality state-of-the-art output
Team spirit develops around each product line
Competition among divisions can boost business
Encourages independent decision making
Quicker response to customer request
Weaknesses
Less sharing of resources across divisions
More duplication of effort resulting in higher costs
Customers who want more than one product/service will have to work with more than one
division
Company may be slow to recognize that a product should be changed, dropped or added
Could be stifled by one product focus
3. Customer or Geography-Based Structure
Strengths
Unique needs of each type of customer are well served
Focus on customers needs and preferences
Unprofitable product lines more likely to be dropped
Weaknesses
May be less sharing of resources across division/departmental boundaries
More duplication of effort and infrastructure resulting in higher costs
Internal systems may evolve in different ways to serve different customer segments
4. Business Process Team Structure
Strengths
Focus on organization is outward to customer
Reduces number of levels of management flatten organizations (reduced management
cost; less need for coordination)
Time and money saved due to reduced need to pass information up and down the hierarchy
and between departments
Promotes self-management by employees (greater job satisfaction because of more
involvement)
Broadens individuals knowledge and skill bases
Faster decision making, reduced cycle time and improved responsiveness to customers
Weaknesses
Involves major transformation of the organization (difficult, timely and costly change; new
systems required for virtually everything)
Company may need to retain functional expertise if not sufficient within each process
May require major and costly training initiative
5. Matrix (Hybrid) Structure (contains more than one focus; has two or more bosses)
Strengths
Enables organization to use its resources efficiently (provides flexibility to assign staff to
project requirements and reassign as needed)

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Takes full advantage of the use of teams (maintaining in-depth technical expertise in critical
functions)
Provides individuals an opportunity to work with different skills and expertise
Requires managers to cooperate with one another and moderates their power over
subordinates
Weaknesses
Multiple bosses may result in confusion
Slows down decision making
Conflicting demands from bosses leads to personal stress and reduced work quality
Power struggle between managers regarding resources
Can disrupt the work and get in the way of customer service
Subordinates may play one boss against another
https://www.mbaboost.com/5-focuses-of-organizational-structure-strengths-and-weaknesses/
Determine types of business forms needed for specific business applications.

Business goals

Wealth maximization

Identify agency conflicts.


Confl icts of interest between a principal and an agent
Know the concept of wealth maximization
Wealth maximization is a modern approach to financial management. Maximization of profit
used to be the main aim of a business and financial management till the concept of wealth
maximization came into being. It is a superior goal compared to profit maximization as it
takes broader arena into consideration. Wealth or Value of a business is defined as the market
price of the capital invested by shareholders. Wealth maximization simply means
maximization of shareholders wealth. It is combination of two words viz. wealth and
maximization. Wealth of a shareholder maximize when the net worth of a company
maximizes. To be even more meticulous, a shareholder holds share in the company /business
and his wealth will improve if the share price in the market increases which in turn is a
function of net worth. This is because wealth maximization is also known as net worth
maximization.
Finance managers are the agents of shareholders and their job is to look after the interest of
the shareholders. The objective of any shareholder or investor would be good return on their
capital and safety of their capital. Both these objectives are well served by wealth
maximization as a decision criterion to business.
How to calculate wealth?
Wealth is said to be generated by any financial decision if the present value of future cash
flows relevant to that decision is greater than the costs incurred to undertake that activity.
Wealth is equal to the present value of all future cash flows less the cost. In essence, it is the
net present value of a financial decision.
Wealth = Present Value of cash inflows Cost.
http://www.efinancemanagement.com/financial-management/wealth-maximization

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Understand the difference between profit and stock valuation.


The relationship between a company's earnings and its stock price can be complicated. High
profits don't necessarily mean a high stock price, and big losses don't always lead to a low
stock price. Of course, without earnings it is hard for companies to stay in business for long.
You could say that two of the major factors that influence stock price are current earnings and
promise of future earnings.
http://finance.zacks.com/relationship-between-earnings-stock-market-value-4890.html
Identify the major factors that affect stock prices.
Have you ever wondered about what factors affect a stock's price? Stock prices are
determined in the marketplace, where seller supply meets buyer demand. But unfortunately,
there is no clean equation that tells us exactly how a stock price will behave. That said, we do
know a few things about the forces that move a stock up or down. These forces fall into three
categories:fundamental factors, technical factors and market sentiment.
Fundamental Factors
In an efficient market, stock prices would be determined primarily by fundamentals, which,
at the basic level, refer to a combination of two things: 1) An earnings base (earnings per
share (EPS), for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the
owner's return on his or her investment. When you buy a stock, you are purchasing a
proportional share of an entire future stream of earnings. That's the reason for the valuation
multiple: it is the price you are willing to pay for the future stream of earnings.
Part of these earnings may be distributed as dividends, while the remainder will be retained
by the company (on your behalf) for reinvestment. We can think of the future earnings stream
as a function of both the current level of earnings and the expected growth in this earnings
base.
As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of
EPS, is a way of representing the discounted present value of the anticipated future earnings
stream. (To learn about present value, see Understanding the Time Value of Money.)
http://www.investopedia.com/articles/basics/04/100804.asp

Week 2 Study Guide: Financial Statement Analysis


Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd
ed.). Retrieved from The University of Phoenix eBook Collection database.

Readings and Key Terms


Ch. 4 of Fundamentals of Corporate Finance p.81
1. Financial statement analysis
Professor Bolder and classmates,

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After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Financial statement analysis is defined as " the use of financial statements to evaluate a
companys overall performance and assess its strengths and shortcomings" (p. 82)
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
2. Trend analysis
Professor Bolder and classmates,
After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012), Trend
analysis is defined as "
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
3. Benchmark
Professor Bolder and classmates,
After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Benchmark is defined as "

I look forward to any and all responses,


Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database

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4. Common-size financial statements


Professor Bolder and classmates,
After reading chapter four of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Common-size financial statements is defined as "
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
According to Parrino, Kidwell, and Bates (2012), Financial ratio is defined as "
According to Parrino, Kidwell, and Bates (2012), Insolvency is defined as "
According to Parrino, Kidwell, and Bates (2012), Financial leverage is defined as "
According to Parrino, Kidwell, and Bates (2012), Default risk is defined as "
According to Parrino, Kidwell, and Bates (2012), Standard Industrial Classification (SIC)
System is defined as "
According to Parrino, Kidwell, and Bates (2012), North American Industry Classifcation System
(NAICS) is defined as "
Ch. 18 of Fundamentals of Corporate Finance p.569
5. Replacement cost
Professor Bolder and classmates,
After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Replacement cost is defined as "
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
6. Book value
Professor Bolder and classmates,
After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),

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Book value is defined as "


I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
7. Enterprise value
Professor Bolder and classmates,
After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Enterprise value is defined as "

I look forward to any and all responses,


Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
8. Nonoperating assests (NOA)
Professor Bolder and classmates,
After reading chapter 18 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Nonoperating assests (NOA) is defined as "

I look forward to any and all responses,


Greg Fowler
gregfowler61@outlook.com
662-996-7164
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
According to Parrino, Kidwell, and Bates (2012), Terminal value is defined as "

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According to Parrino, Kidwell, and Bates (2012), Cash flow is defined as "
According to Parrino, Kidwell, and Bates (2012), Free cash flows is defined as "
According to Parrino, Kidwell, and Bates (2012), Break-even is defined as "
o According to Parrino, Kidwell, and Bates (2012), Dividend discount model (DDM) is
defined as "
Content Overview
Financial ratios
o

Understand components of financial ratios.

Calculate key ratio equations


o Liquidity

Current ratio
Quick ratio
Cash ratio

Inventory turnover
Days sales in inventory
Accounts receivable turnover
Days sales outstanding
Total asset turnover
Fixed asset turnover

Total debt ratio


Debt-to-equity ratio
Equity multiplier
Times interest earned
Cash coverage

o Efficiency

o Leverage

o Profitability

Gross profit margin


Operating profit margin
Net profit margin
EBIT return on assets

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Market value indicator

ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier


ROE = (Net Income / Net Sales) x (Net Sales / Total Assets) x (Total Assets /
Total Equity)

Interpret financial ratio results

Earnings per share


Price-earnings ratio

DuPont equation

Return on assets (ROA)


Return on equity (ROE)

Interpret financial ratio results against historical company data.


Interpret financial ratio results against industry benchmarks.

Business valuation

Explain why the choice of organizational form is important.


Describe why cash flow and break-even are important in business.

Week 3 Study Guide: Working Capital Management


Readings and Key Terms
Ch. 14 of Fundamentals of Corporate Finance p.441
1. Professor Bolder and classmates,
After reading chapter 14 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Trade credit is defined as "
"
I look forward to any and all responses,

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Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
2. Professor Bolder and classmates,
After reading chapter 14 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Consumer credit is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
3. Professor Bolder and classmates,
After reading chapter 14 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Operating cycle is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
Carrying costs
Economic order quantity
Compensating balances
Float
Lockbox
Working capital

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Maturity matching strategy


Short- and long-term financing
Credit lines
Commercial paper
Ch. 15 p.472
4. Professor Bolder and classmates,
After reading chapter 15 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Bootstrapping is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
5. Professor Bolder and classmates,
After reading chapter 15 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Venture capitalists is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
Angel investors
Seasonal issue
Prospectus
Underwriting
Cash offer
Shelf registration

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Public placement
Private placement
Ch. 16 p.504
Optimal capital structure
6. Professor Bolder and classmates,
After reading chapter 16 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Firm value is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database
Financial restructuring
Business and financial risk
Costs of debt
Asset substitution problem
Ch. 17 p.545
7. Professor Bolder and classmates,
After reading chapter 17 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Payout policy is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database

Copyright 2013, 2011, 2010, 2008 by University of Phoenix. All rights reserved.

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Dividends
Declaration date
Ex-dividend date
Record date
Payable date
Stock repurchase
Stock dividends
Tender offer
Stock split
Ch. 19 p.606
8. Professor Bolder and classmates,
After reading chapter 19 of Fundamentals Of Corporate Finance, I would like to add to the
discussion by submitting the following. According to Parrino, Kidwell, and Bates (2012),
Internal and sustainable growth rate is defined as "

"
I look forward to any and all responses,
Greg Fowler
gregfowler61@outlook.com
662-568-2964
9am-9pm CST
Reference
Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database

Financial and strategic planning


Pro forma financial statements
Percent of sales method
External funding needed (EFN)
Payout and plowback ratios
Internal and sustainable growth rate
Content Overview
Working capital management
o Concepts of working capital

Understand working capital terms.


Know what trade and consumer credit is.

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Cash conversion cycle

Working capital management strategies

Understand carrying costs.

Cash management and budgeting

Identify various components of the cash conversion cycle.


Know how to calculate the cash conversion cycle.

Understand the terms of sale.


Calculate and interpret the cost of trade credit.
Calculate and interpret economic order quantity.
Identify reasons for holding cash.
Understand the concept of float.
Identify methods of float (lockboxes, EFTs, and so on).

Financing working capital

Understand differences in short- and long-term financing strategies.


Identify various forms of short-. and long-term financing.

Identify and differentiate between the various methods of raising capital.


Differentiate between the advantages and disadvantages of going public.
Understand the process of a company going public.
Differentiate between private and public markets.

Raising capital

Capital structure policy


o

Capital structure and firm value

Determine a companys optimal capital structure.


Identify the relation between business, financial, and total equity risk.

o Benefits and costs of using debt

Identify the benefits of financing a company with debt.


Identify the costs of financing a company with debt.

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Study Guide
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Understand how taxes influence capital structure.


Determine optimal capital structure of a company.

Dividends, stock repurchases, and payout policy


o Types of dividends

Identify various types of dividends.


Understand the dividend payment process.

o Stock repurchases and dividends

Identify how stock repurchases differ from dividends.


Understand concept of dividends and firm value.
Understand differences between stock dividends and stock splits.

Financial planning and forecasting


o

Finance and strategic planning

Differentiate among strategic, investment, financing, and divisional plans.


Identify various financial planning models.
Understand why sustainable growth is important.
Create a pro forma balance sheet.
Create a pro forma income statement.

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Study Guide
FIN/571 Version 7

Week 4 Study Guide: Business Valuation


Readings and Key Terms
Ch. 5 of Fundamentals of Corporate Finance p.124
o
o
o
o
o
o
o
o
o
o
o

Time value of money


Time zero
Future value (fv)
Principal
Simple interest
Compounding
Compound interest
Discounting
Discount rate
Present value (pv)
Rule of 72

Ch. 6 p.159
o
o
o
o
o
o
o
o

Annuity
Perpetuity
Ordinary annuity
Present value of an annuity (PVA)
Amortization
Future value of an annuity (FVA)
Annuity due
Annual percentage rate (APR)

Ch. 7 p.200
Total holding period return
o Expected return
o Variance (2)
o Standard deviation ()
o Normal distribution
o Portfolio
o Diversification
o Coefficient of variation (CV)
o Covariance
o Diversifiable and nondiversifiable risk
o Market portfolio
o

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Study Guide
FIN/571 Version 7

Market risk
o Beta ()
o Capital asset pricing model (CAPM)
o Security market line (SML)
o

Ch. 8 p.238
o
o
o
o
o
o
o
o
o
o
o
o

Coupon payments
Face value or par value
Coupon rate
Opportunity cost
Par value bonds
Discount bonds
Premium bonds
Yield to maturity
Effective annual rate (EAY)
Realized yield
Interest rate risk
Yield curve

Ch. 9 p.270
o
o
o
o
o

Bid price
Offer (ask) price
Dividend yield
Common stock
Preferred stock

Content Overview
Time value of money
o

Single sums

Calculate present value.


Calculate periods.
Calculate interest and discount rate.
Calculate future value.
Interpret and make decisions from the calculations.
Understand the relationship between time, rate, and value.

o Annuities

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Study Guide
FIN/571 Version 7

Identify various forms of annuities.


Calculate present value.
Calculate periods.
Calculate interest and discount rate.
Calculate payments.
Calculate future value.
Interpret and make decisions from the calculations.
Identify and understand perpetuities.

Costs of loans

Calculate effective annual rate.


Compare interest rates on different loans.

Risk and return

Measuring risk

Calculate the return of an investment.


Determine expected rate of return.

Calculate variance and standard deviation.


Interpret variance and standard deviation.
Understand risk diversification.

Capital asset pricing model (CAPM)

Calculate expected return using capital asset pricing model.


Identify and interpret the security market line.
Choose between two investments using CAPM.

Bond valuation
o Wealth maximization

Identify types of bonds.


Calculate value of a bond.
Identify difference between par, discount, and premium bonds.
Calculate yield to maturity (YTM).
Compare bonds uisng effective annual rate.
Understand correlation between interest rate risk and bonds.

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Study Guide
FIN/571 Version 7

Stock valuation
o Markets

Differentiate between primary and secondary markets.


Differentiate between common and preferred stock.

Calculate value of common stock.


Calculate value of preferred stock.
Calculate yield of common and preferred stock.
Understand growth rates and how they affect dividend payments and stock
valuation.

o Valuation

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Study Guide
FIN/571 Version 7

Week 5 Study Guide: Capital Financing and Risk Analysis


Readings and Key Terms
Ch. 7 p.200
o Total holding period return
o Expected return
o Variance (2)
o Standard deviation ()
o Normal distribution
o Portfolio
o Diversification
o Coefficient of variation (CV)
o Covariance
o Diversifiable and nondiversifiable risk
o Market portfolio
o Market risk
o Beta ()
o Capital asset pricing model (CAPM)
o Security market line (SML)
Ch. 10 of Fundamentals of Corporate Finance p.301
o Capital budgeting
o Independent versus mutually exclusive projects
o Contingent projects
o Opportunity cost of capital
o Capital rationing
o Net present value (NPV)
o Payback period
o Discount payback period
o Accounting rate of return
o Internal rate of return
o Modified internal rate of return
o Conventional cash flow
Ch. 11 p.341
o Incremental cash flows
o Marginal tax rate
o Stand alone principle

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Study Guide
FIN/571 Version 7

o
o
o
o
o
o
o
o
o

Net operating profits after tax (NOPAT)


Tangible assets
Intangible assets
Current assets
Nominal dollars
Real dollars
Variable costs
Fixed costs
Equivalent annual cost (EAC)

Ch. 12 p.380
o
o
o
o
o
o
o
o
o
o
o

Operating leverage
Degree of operating leverage (DOL)
Break-even analysis
Pretax operating cash flow (EBITDA) break-even point
Per-unit contributions
Crossover level of unit sales (CO)
Accounting operating profit (EBIT) break-even point
Sensitivity analysis
Scenario analysis
Simulation analysis
Profitability index

Ch. 13 p.409
o Finance balance sheet
o Weighted average cost of capital (WACC)
Ch. 20 p.641
o
o
o
o
o
o
o
o

Financial option
Call option
Put option
Real option
Exercise
Call premium
Put premium
Arbitrage

Content Overview

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Study Guide
FIN/571 Version 7

Capital budgeting fundamentals


o Capital budgeting process

Identify reasons to make capital expenditures.


Understand capital budgeting terms.
Know how to classify capital investment project.
Differentiate the differences among independent, mutually exclusive, and
contingent projects.
Identify reasons to make capital expenditures.
Understand difference between nominal and real dollars.
Use adjusted rate of return from CAPM to evaluate projects NPV.
Determine project profitability.
Choose between two or more projects.

Capital budgeting calculations

Calculate annual cash flows (ACF).


Calculate terminal cash flows (TCF).
Calculate marginal and average tax rates.
Calculate cost of debt.
Calculate cost of equity.
Calculate cost of preferred stock.
Calculate cost of common stock.
Calculate cost of capital (WACC).
Calculate net present value (NPV).
Calculate payback period.
Calculate discounted payback period.
Calculate internal rate of return (IRR).
Calculate modified internal rate of return (MIRR).
Calculate profitability index (PI).
Calculate capital asset pricing model (CAPM).
Calculate operating leverage (DOL).
Calculate accounting operating leverage (ADOL).
Calculate break-even analysis cash flows (ACF).

Cash flows and capital budgeting

Identify forms of business organization and their respective strengths and


weaknesses.
Determine types of business forms needed for specific business applications.

Evaluating project economics and capital rationing

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Study Guide
FIN/571 Version 7

Variable and fixed costs and project risk

Identify various costs and changes in EBIT.

The cost of capital


o

Cost of capital calculations

Calculate cost of debt.


Calculate cost of equity.
Calculate cost of preferred stock.
Calculate cost of common stock.

Working capital management


o

Working capital accounts

Understand operating and cash conversion cycles.


Identify reasons for holding cash.
Identify discretionary financing needs (both short- and long-term).

Working capital calculations

Calculate operating and cash conversion cycles.


Calculate cost of trade credit.
Calculate economic order quantity.
Calculate effective annual rate (EAR).

Options and capital management


o

Financial options

Understand the concept of options.


Identify differences between call and put options.
Understand the concept of arbitrage.
Identify uses of hedging.

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Study Guide
FIN/571 Version 7

Week 6 Study Guide: Applications of Finance


Readings and Key Terms
Ch. 19 p.606
o
o
o
o
o
o

Financial and strategic planning


Pro forma financial statements
Percent of sales method
External funding needed (EFN)
Payout and plowback ratios
Internal and sustainable growth rate

Ch. 21 of Fundamentals of Corporate Finance p.671


o Globalization
o Multinational corporation
o Transnational corporation
o Country risk
o Exchange rate
o Spot rate
o Forward rate
o Exchange rate risk
o Hedge
o London Interbank Offer Rate (LIBOR)

Content Overview
International financial management
o Concepts

Identify and define various axioms of international finance, such as


globalization, multi-national companies, foreign exchange, spot rate, forward
rate, LIBOR, and so on.
Calculate cross rates.
Calculate forward premium (Discount).
High-level understanding of exchange rate risk.

Note: Ch. 19 content is also referred to in this week. Be sure to review the Week 3 Study Guide
to reference Ch. 19 content.

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Study Guide
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Reference Page Entry


Parrino, R., Kidwell, D.S., & Bates, D.S. (2012). Fundamentals Of Corporate Finance (2nd ed.).
Retrieved from The University of Phoenix eBook Collection database.
In-Text Citation
Insert the paraphrased material (Parrino, Kidwell, & Bates, 2012, Chapter Chapter 1).
According to Parrino, Kidwell, and Bates (2012), Insert the paraphrased
material (Chapter Chapter 1).
Insert the quotation (Parrino, Kidwell, & Bates, 2012, Chapter Chapter 1)

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