Understanding Corporate Finance: Analysis, Ratios, and Value
Corporate Finance: An Overview
Corporation: A virtual or fictitious entity created by the state. It possesses its own rights and liabilities, enabling it to enter into contracts, buy, sell, or own property, pay taxes, face prosecution for legal violations, and initiate lawsuits. Corporations offer owners protection through limited personal liability.
Objective: To conduct business activities that enhance corporate profit and shareholder gain. This must be done in accordance with the law, with ethical
Read MoreUnderstanding Financial Intermediaries and Market Ratios
Financial Intermediary
A financial intermediary acts as the middleman between two parties in a financial transaction. While a commercial bank is a typical financial intermediary, this category also includes other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds, and pension funds. Financial intermediaries offer several benefits to the average consumer, including safety, liquidity, and economies of scale.
Financial Markets
- Primary Market: Markets in
Financial Statement Analysis & Valuation Formulas
Financial Statement Analysis
Key Formulas & Concepts
Balance Sheet Analysis:
- Net Working Capital = Current Assets – Current Liabilities
- Book Equity = Assets – Liabilities
- Market Equity = Share Price x Market Capitalization
- Market-to-Book Ratio = Market Equity / Book Equity
- Enterprise Value = Market Equity + Debt – Cash
Cash Flow Analysis:
- An increase in Accounts Receivable (A/R) reduces cash flow.
- An increase in Accounts Payable (A/P) increases cash flow.
- An increase in Inventory reduces cash flow.
Profitability
Read MoreKey Investment Concepts: Cash Flow, Time Horizon, and Valuation
Key Investment Concepts
The financial dimension of an investment refers to the cash flows required to fund the fixed assets, working capital, and initial losses until the project starts to generate positive cash flows.
The time horizon of an investment refers to the time from the first cash flow of the project until the final cash flow occurs.
An investment project is a stream of cash flows over the time horizon of the investment.
Valuation Models and Concepts
Capital Asset Pricing Model (CAPM): The
Read MoreCapital Budgeting: IRR, NPV, and Project Selection
Capital Budgeting Problems and Solutions
CH8 HW A project has an initial cost of $12,100 and cash flows of -$2,100, $5,800, $16,600, and -$800 for Years 1 to 4, respectively. How many IRRs will this project have? # of IRR’s = number of sign changes (negative to positive=1)
A project has an initial cost of $12,670 and cash inflows of $2,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $15,400. The required return is 14.5 percent. What is the net present value of this project? Should
Read MoreAccounting for Investments in Associates: A Case Study
Accounting for Investments in Associates
At 1 July 2014:
| Net fair value of identifiable assets and liabilities of Chime Ltd | = | $20,000 + $10,000 (equity) |
| + $15,000 (1 – 30%) (assets) | ||
| = | $40,500 | |
| Net fair value acquired | = | 30% x $40,500 |
| = | $12,150 | |
| Cost of investment | = | $13,650 |
| Goodwill | = | $1,500 |
Depreciation:
Non-current assets: – 20% x $15,000 (1 -30%) = $2,100
A. Bell Ltd Does Not Prepare Consolidated Financial Statements
Profit for 2015-2016 period: $180,000
Adjustments for Inter-Entity Transactions:
Unrealised after tax
Read More