Finance Exam 1 Study Guide Essay

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Chapter 1

Financial Management Decisions
• Capital budgeting – What long-term investments or projects should the business take on?
Capital structure
 – How should we pay for our assets? – Should we use debt or equity?
• Working capital management – How do we manage the day-to-day finances of the firm?

What should be the goal of a corporation? – Maximize profit? – Minimize costs? – Maximize market share? – Maximize the current value per share of the company’s existing stock – Maximize the market value of the existing owners’ equity

• Agency relationship – Principal hires an agent to represent its interests – Stockholders (principals) hire managers (agents) to run the company
• Agency problem – Conflict of interest between principal and agent
• Management goals and agency costs

• Managerial compensation – Incentives can be used to align management and stockholder interests – Incentives need to be carefully structured to insure that they achieve their goal
• Corporate control – Threat of a takeover may result in better management
• Other stakeholders

Chapter 2

Net working capital
 – Current Assets minus Current Liabilities – Usually positive for a healthy firm

Cash Flow From Assets (CFFA)
= Cash Flow to Creditors (CF/CR)
+ Cash Flow to Stockholders (CF/SH)

CFFA = CF/CR + CF/SH

CF/CR = interest paid – net new borrowing

CF/SH = dividends paid – net new equity

Cash Flow From Assets (CFFA)
= Operating Cash Flow (OCF)
– Net Capital Spending (NCS)
– Changes in NWC (ΔNWC)

CFFA = OCF – NCS - ΔNWC

OCF = EBIT + depreciation – taxes NCS = ending net FA– beginning net FA + depreciation

ΔNWC = ending NWC – beginning NWC

Chapter 3

Equity Multiplier = TA/TE = 1 + D/E

Times Interest Earned = EBIT / Interest

Cash Coverage = (EBIT + Depreciation) / Interest

Capital Intensity Ratio = 1/TAT

Earnings per Share - EPS- = NI/shares outstanding

Book value per share = Total Equity/shares outstanding

Enterprise value = Total market value of the stock + Book value of all liabilities – Cash

EBITDA = EBIT
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