Fin 331 Study Guide Free Essays

Finance Final Study Guide FIN 331 – Moser – Study Guide for Exam 1 – Spring 2011 Important Concepts * Forms of Business Organization * Proprietorship- an unincorporated business owned by one individual * Partnership- legal arrangement between two or more people who decide to do business together * Advantages * Ease of formation * Subject to few regulations * No corporate income taxes * Disadvantages * Limited life * Unlimited liability * Difficult to raise capital * Corporation- legal entity created by a state, and it is separate and distinct from its owner and managers. Advantages * Unlimited life * Easy transfer of ownership * Limited liability * Ease of raising capital * Disadvantages * Double taxation * Cost of set-up and report filing * Conflicts between Managers and Stockholders * Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). * But the following factors affect managerial b ehavior: * Managerial compensation packages * Direct intervention by shareholders * The threat of firing * The threat of takeover * Shareholder Value The price at which the stock would sell if all investors had all knowable information about a stock. We will write a custom essay sample on Fin 331 Study Guide or any similar topic only for you Order Now * The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price. * Value of any asset is present value of cash flow stream to owners. * Most significant decisions are evaluated in terms of their financial consequences. * Stock prices change over time as conditions change and as investors obtain new information about a company’s prospects. * Intrinsic value * In equilibrium, a stock’s price should equal its â€Å"true† or intrinsic value. Intrinsic value is a long-run concept. * To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value. * Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run. * Capital allocation process * In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. * Suppliers of capital – individuals and institutions with â€Å"excess funds. † These groups are saving money and looking for a rate of return on their investment. Demanders or users of capital – individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow. * Direct transfers * Investment banking house * Financial intermediaries * Types of financial markets * Physical asset markets versus financial asset markets * Physical asset markets are for products such as wheat, autos, real estate, computers, and machinery. * Financial asset markets, on the other hand, deal with stocks, bonds, notes, and mortgages. Spot markets versus future markets * Spot markets are markets in which assets are bought or sold for â€Å"on-the-spot† delivery. * Future markets are markets in which participants agree today to buy or sell an asset at some future date * Money markets versus capital markets * Money markets are the markets for short-term, highly liquid debt securities. The New York, London, and Tokyo money markets are among the world’s largest. * Capital Markets are the markets for intermediate- or long-term debt and corporate stocks. The NYSE * Primary markets versus secondary markets Primary markets are the markets in which corporations raise new capital. If a company were to sell a new issue of common stock to raise capital. * Secondary markets are markets in which existing, already outstanding securities are traded among investors. * Private markets versus public markets * Private markets, where transactions are negotiated directly between two parties, are differentiated from†¦public markets. Ex. Common stock and corporate bonds * Public markets, where standardized contracts are traded on organized exchanges. Ex. Bank loans and private debt payments to an insurance company. * Importance of financial markets * Well-functioning financial markets facilitate the flow of capital from investors to the users of capital. * Markets provide savers with returns on their money saved/invested, which provides them money in the future. * Markets provide users of capital with the necessary funds to finance their investment projects. * Well-functioning markets promote economic growth. * Economies with well-developed markets perform better than economies with poorly-functioning markets. * Derivatives A derivative security’s value is â€Å"derived† from the price of another security (e. g. , options and futures). * Can be used to â€Å"hedge† or reduce risk. For example, an importer, whose profit falls when the dollar loses value, could purchase currency futures that do well when the dollar weakens. * Also, speculators can use derivatives to bet on the direction of future stock prices, inte rest rates, exchange rates, and commodity prices. In many cases, these transactions produce high returns if you guess right, but large losses if you guess wrong. Here, derivatives can increase risk. * Financial institutions Commercial banks * Bank of America, Citibank, Wells Fargo * Investment banks * Help companies raise capital * Financial services corporations * Conglomerates that combine many different financial institutions within a single corporation. * Credit unions * Employees, members or organization * Pension funds * Life insurance companies * Mutual funds * Hedge funds * Largely unregulated * Large minimum investment * Exchange traded funds (ETF’s) * Private equity companies * Like hedge funds * IPO * An initial public offering (IPO) is where a company issues stock in the public market for the first time. â€Å"Going public† enables a company’s owners to raise capital from a wide variety of outside investors. Once issued, the stock trades in the secon dary market. * Public companies are subject to additional regulations and reporting requirements. * Efficient market hypothesis – implications * Securities are normally in equilibrium and are â€Å"fairly priced. † * Investors cannot â€Å"beat the market† except through good luck or better information. * Efficiency continuum * When markets are efficient, investors can buy and sell stocks and be confident that they are getting good prices. When markets are inefficient, investors may be afraid to iinvest and may put their money â€Å"under the pillow,† which will lead to a poor allocation of capital and economic stagnation. * Balance sheet * Provides a â€Å"snapshot† of a firm’s position at a specific point in time. The left side shows the assets that the company owns, while the right side shows the firm’s liabilities and stockholders’ equity, which are claims against the firm’s assets. * Assets * Current assets: * Cash and equivalents * A/R * Inventories * Total Current Assets * Net fixed assets: Net plan and equipment(cost minus depreciation) * Other assets expected to last more than a year * Total Assets * Liabilities and Equity * Current liabilities: * A/P * Accruals * Notes Payable * Total current liabilities * Long-term bonds * Total debt * Common equity: * Common stock * Retained earning * Total common equity * Total liabilities and equity * Income statement * Summarizes a firm’s revenues and expenses over a given period of time. * Sales * (COGS) * (Other Expenses) * (Depreciation) * EBIT * (Interest Expense) * EBT * (Taxes) * Net Income Statement of cash flows * Reports the impact of a firm’s activities on cash flows over a given period of time. Shows how much cash the firm is generating. * Cash @ end 2007 * O/A * I/A * F/A * Cash @ end 2008 * Working capital * Anything that is cash or can be converted to cash within a year. A/R and Inventory * Net working capital (NWC) * Current assets (A/R, Inventory, Cash) – (Payables + Accruals) * Free cash flow (FCF) * Everything left over for investors. Amount of cash that can be withdrawn to investors without harming the ability of the company to operate and produce. FCF = EBIT(1-T) + Depreciation – (Capital expenditures + Increase in NWC) (Income Statement) ( in gross FA/current) Balance Sheet * Corporate and personal taxes * Both have a progressive structure (the higher the inc ome, the higher the marginal tax rate). * Corporations * Rates begin at 15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18. 33 million pay a marginal tax rate of 38%. * Also subject to state tax (around 5%). * Individuals * Rates begin at 10% and rise to 35% for individuals with income over $349,700. May be subject to state tax. * Tax treatment of interest and dividends * Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception). * Interest earned – usually fully taxable (an exception being interest from a â€Å"muni†). * Dividends paid – paid out of after-tax income. * Dividends received – Most investors pay 15% taxes. * Investors in the 10% or 15% tax bracket pay 0% on dividends in 2008-2010. * Dividends are paid out of net income which has already been taxed at the corporat e level, this is a form of â€Å"double taxation†. A portion of dividends received by corporations is tax excludable, in order to avoid â€Å"triple taxation†. * Taxes – carrybacks and carryforwards * Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely, the Tax Code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future. * Taxes – capital gains * Defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for less than a year, and at the capital gains rate if held for more than a year. Corporations face somewhat different rules. * Importance of ratios * Ratios standardize numbers and facilitate comparisons. * Ratios are used to highlight weaknesses and strengths. * Ratio comparisons should be made through time and with competitors. * Trend analysis. * Peer (or industry) analysis. * 5 categories of ratios * Liquidity: Can we make required payments? * Current = current assets/current liabilities * Quick = Current assets-inventories/current liabilities * Asset management: right amount of assets vs. sales? * Inventory T/O Ratio = Sales/Inventories * Days sales outstanding(DSO) = AR/(Sales/365) Fixed Asset T/O Ratio = Sales/Net Fixed AssetsNet FA=Balance Sheet * T/A Turnover = Sales/Total AssetsTA=Balance Sheet * How many times the PM is earned each year * Below avg. T/A T/O means that it has more assets than it needs * Debt management: Right mix of debt and equity? * Debt Ratio = Total Debt/Total AssetsBalance Sheet * Times-Interest-Earned(TIE) = EBIT/Interest ExpenseI ncome Statement * Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? * Operating Margin = EBIT/Sales * Profit Margin = Net income/Sales PM is how much a firm earns on its sales * Below avg. PM means that the firm’s costs are not being controlled as well as they should be, therefore they cannot charge premium prices * Basic Earning Power(BEP) = EBIT/Total Assets * ROA = Net Income/Total Assets * ROE = Net Income/total common equityBalance Sheet * ROE and shareholder wealth are correlated, but problems can arise when ROE is the sole measure of performance. * ROE does not consider risk. * ROE does not consider the amount of capital invested. * Might encourage managers to make investment decisions that do not benefit shareholders. ROE focuses only on return and a better measure would consider risk and return. * Market value: Do investors like what they see as reflected in P/E and M/B ratios? * Price/Earnings (P/E) ratio = Price per share/Earnings per share * Earnings per share * Market/Book Ratio (M/B)= Market price per share/Book value per share * Book Value per share = Common equity/Shares outstandingBalance Sheet * P/E: How much investors are willing to pay for $1 of earnings. * M/B: How much investors are willing to pay for $1 of book value equity. For each ratio, the higher the number, the better. * P/E and M/B are high if ROE is high and risk is low. * DuPont system * ROE = Profit Margin(PM) X Total Asset Turnover X Equity Multiplier(EM) NI/Sales Sales/TA TA/Total common equity I______ _______I I ROA * ROA Focuses on expense control (PM), asset utilization (TA TO), and debt utilization (equity multiplier). * Uses of freed up cash * Old A/R * (New A/R) * Cash freed up * Uses: * Repurchase stock * Expand business * Reduce debt * All these actions would likely improve the stock price. * Limitations of ratio analysis Comparison with industry averages is difficult for a conglomerate firm that opera tes in many different divisions. * â€Å"Average† performance is not necessarily good, perhaps the firm should aim higher. * Seasonal factors can distort ratios. * â€Å"Window dressing† techniques can make statements and ratios look better. * Different operating and accounting practices can distort comparisons. * Sometimes it is hard to tell if a ratio is â€Å"good† or â€Å"bad. † * Difficult to tell whether a company is, on balance, in strong or weak position. * Sales forecast * Use historical sales data (approx. 5 years) Collect input from product development, marketing, and operations * Sales growth has a cost * Bad forecasts have a cost * Forecasting sales is the most important input in predicting future financial performance * Additional Financing Needed (AFN) * AFN = (A*/S0)? S – (L*/S0) ? S – M(S1)(RR) * = Projected asset increase – Spontaneous liabilities increase – Increase in retained earnings (How many assets to b uy)L*(liab. Bs) M(S1)=future profits * A* = assets * L* = spontaneous liabilities * S = sales * M = profit margin * RR = retention ratio * FIN 331 – Moser – Study Guide for Midterm II – Spring 2011 Important Concepts * Time Value of Money * The  idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This  core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. * Future Value (FV) * The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate. * Finding the FV of a cash flow or series of cash flows is called compounding * What is the FV of an initial $100 after 3 years, if I/YR = 10%? N=3I/YR=10PV=100PMT=0FV=CPT * Future Value = 133. 10 * Present Value (PV) * The value today of a future cash flow or series of cash flows * What is the PV of $100 due in 3 years, if I/YR= 10%? * N=3I/YR=10PV=CPTPMT=0FV= 100 * PV=-75. 13 * Solving for Interest Rate * Solving for I: What interest rate would cause $100 to grow to 125. 97 in 3 years? * N=3I=CPTPV=100 PMT=0 FV=125. 97 * Interest Rate = 8% * Solving for # of Time Periods * N = Number of periods involved in the analysis. * If sales grow at 20% per year, how long before sales double? * N=? I/YR=20PV=-1PMT=0 FV=2 * N=3. 8 * Ordinary Annuity vs. Annuity Due Ordinary Annuity * Payments occur at the end of each year(deferred annuity) * Set calculator to END * FV * 3-year ordinary annuity of $100 at 10%? * N=3 I/YR=10 PV=0 PMT=100 FV=CPT * FV=331 * PV * N=3 I/YR=10 PV=CPT PMT=100 FV=0 * PV=-248. 69 * Annuity Due * Set calculator to BEGIN * The payments are made at the beginning of each year * FV * 3-year annuity due of $100 at 10%? * N=3 I/YR=10 PV=0 PMT=100 FV=CPT * FV=364. 10 * PV * N=3 I/YR=10 PV=CPT PMT=100 FV=0 * PV=273. 55 * Perpetuity * An annuity with an extended life. * N=infinity * PV of a perpetuity = PMT/I * PV=PMT/I=$100/0. 1 = $1,000 Compound Interest * A 20-year-old student wants to save $3 a day for her retirement. Every day she places $3 in a drawer. At the end of the year, sh e invests the accumulated savings ($1,095) in a brokerage account with an expected annual return of 12%. * How much money will she have when she is 65 years old? * N=45 I/YR= 12 PV=0 PMT= 1095 FV=CPT * FV = 1,487,262 * Solving for annual payment * PV of uneven cash flows * * Effect of compounding more often * Compounding more often results in building interest upon interest * Nominal vs. Periodic vs. Effective Interest Rate * Written into contracts, quoted by banks and brokers. Not used in calculations or shown on time lines. * Nominal rate (INOM) – also called the quoted or stated rate. An annual rate that ignores compounding effects. * INOM is stated in contracts. Periods must also be given, e. g. 8% quarterly or 8% daily interest. * Periodic rate (IPER) – amount of interest charged each period, e. g. monthly or quarterly. * * IPER = INOM/M, where M is the number of compounding periods per year. M = 4 for quarterly and M = 12 for monthly compounding. * Effective (or equivalent) annual rate (EAR = EFF%) – the annual rate of interest actually being earned, accounting for compounding. Used to compare returns on investments with different payments per year. Used in calculations when annuity payments don’t match compounding periods. * EFF% for 10% semiannual investment * EFF%= ( 1 + INOM/M )M – 1 * = ( 1 + 0. 10/2 )2 – 1 = 10. 25% * Should be indifferent between receiving 10. 25% annual interest and receiving 10% inter est, compounded semiannually. * Semiannual/quarterly/monthly compounding * Annually * N=3 I/YR=10. 25 PV=0 PMT=100 FV=CPT * FV=331. 80 * 100(1. 025)^3=331. 80 * Semiannual * N=6 I/YR=5. 125 PV=0 PMT = 100 FV=CPT * FV=682. 33 * 100(. 5125)^6 * Quarterly * N=12 I=2. 6 PV=0 PMT=100 FV=CPT * * Loan Amortization * Amortization tables are widely used for home mortgages, auto loans, business loans, retirement plans, etc. * Financial calculators and spreadsheets are great for setting up amortization tables. * A loan that is to be repaid in equal amounts on a monthly, quarterly, or annual basis * Bonds * A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond. * Treasury * Government bonds * No default risk * Municipal * Bonds issued by state and local governments * Some default risk Advantage: Munis are exempt from Federal Taxes and from state taxes if the holder is resident of issuing state. * Corporat e * Issued by business firms * Exposed to default risk * Higher the risk, the higher interest rate is demanded * Foreign * Issued by a foreign government * Currency exchange issues * Par value * face amount of the bond, which is paid at maturity (assume $1,000). * Coupon interest rate * Stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest. * Maturity date * Years until the bond must be repaid. * Yield to maturity Rate of return earned on a bond held until maturity (also called the â€Å"promised yield†). * Call Provision * Allows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor). * Borrowers are willing to pay more, and lenders require more, for callable bonds. * Most bonds have a deferred call and a declining call premium. * Sinking Fund * Provision to pay off a loan over its life rather than all at maturity. * Similar to amortization on a term loan. * Reduces risk to inve stor, shortens average maturity. * But not good for investors if rates decline after issuance. * Convertible Bond May be exchanged for common stock of the firm, at the holder’s option. * Warrant * Long-term option to buy a stated number of shares of common stock at a specified price. * Puttable bond * Allows holder to sell the bond back to the company prior to maturity. * Indexed bond * Interest rate paid is based upon the rate of inflation. * Valuing a bond * Problem * Discount bond vs. Premium bond and how you can tell by comparing the coupon and the YTM * Bond Values over time * Solving for YTM * Expected Total return= YTM = (Expected Current Yield) + (Expected Capital Gains Yield) * CY=Annual coupon payment/Current Price . 09(1000)/887 * CGY= Change in price/Beginning price * Or CGY = Current yield + Capital gains yield * Interest rate risk * The concern that rising interest rates will cause the value of a bond to fall. * 10year bond has more risk than just a 1 year bond * Reinvestment rate risk * Reinvestment rate risk is the concern that rd will fall, and future CFs will have to be reinvested at lower rates, hence reducing income. * EXAMPLE: Suppose you just won $500,000 playing the lottery. You intend to invest the money and live off the interest. * You may invest in either a 10-year bond or a series of ten 1-year bonds. Both 10-year and 1-year bonds currently yield 10%. * If you choose the 1-year bond strategy: * After Year 1, you receive $50,000 in income and have $500,000 to reinvest. But, if 1-year rates fall to 3%, your annual income would fall to $15,000. * If you choose the 10-year bond strategy: * You can lock in a 10% interest rate, and $50,000 annual income for 10 years, assuming the bond is not callable. * Semiannual bonds * Multiply years by 2: Number of periods = 2N * Divide nominal rate by 2: Periodic rate (I/YR) = rd/2 * Divide annual coupon by 2: PMT = Annual coupon/2 * Yield to Call * Problem * Default risk If an issuer defaults, investors receive less than the promised return. Therefore, the expected return on corporate and municipal bonds is less than the promised return. * Influenced by the issuer’s financial strength and the terms of the bond contract. * Mortgage bond vs. debenture * Mortgage bond- backed up by collateral e. g. house,car,jewelry * Debenture- Not backed up * Investment-grade vs. junk bond * Investment grade-GE bond, lower risk and thus lower return * Junk bond- Speculative bonds that have high risk, but sometimes higher return * Significant risk of going default * 2 chapters of bankruptcy Two main chapters of the Federal Bankruptcy Act: * Chapter 11, Reorganization * If company can’t meet its obligations †¦ * It files under Chapter 11 to stop creditors from foreclosing, taking assets, and closing the business and it has 120 days to file a reorganization plan. * Court appoints a â€Å"trustee† to supervise reorganization. * Management usually stays in control. * Company must demonstrate in its reorganization plan that it is â€Å"worth more alive than dead†. * If not, judge will order liquidation under Chapter 7. * Chapter 7, Liquidation * Typically, a company wants Chapter 11, while creditors may prefer Chapter 7. Priority of Claims in Liquidation * Secured creditors from sales of secured assets. * Trusteeâ⠂¬â„¢s costs * Wages, subject to limits * Taxes * Unfunded pension liabilities * Unsecured creditors * Preferred stock * Common stock * Reorganization * In a liquidation, unsecured creditors generally get zero. This makes them more willing to participate in reorganization even though their claims are greatly scaled back. * Various groups of creditors vote on the reorganization plan. If both the majority of the creditors and the judge approve, company â€Å"emerges† from bankruptcy with lower debts, reduced interest charges, and a chance for success. Formulas that will be provided * Chapters 5 and 7 from Appendix C * Instructions on switching your calculator from END to BGN mode Chapter 8 * Investment Risk * Investment risk is related to the probability of earning a low or negative actual return. * The greater the chance of lower than expected or negative returns, the riskier the investment. * stand-alone risk * The asset is considered by itself * The risk an investor would face if he or she held only this one asset. * Portfolio risk * Asset is held as one of a number of assets in a portfolio * Average returns (stocks vs. bonds) Bonds offer relatively low returns, but with relatively little risk * Stocks offer the chance of higher returns, but stocks are generally riskier than bonds * Expected return r^ * The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results * Standard deviation (sigma) * A statistical measure of the variability of a set of observat ions * The tighter the probability distribution, the lower the risk * Measure of how far the actual return is likely to deviate from the expected return * Coefficient of variation (CV) The standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return * CV= ? /r^ * Risk aversion * Assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities. * Risk premium * The difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities. * Portfolio expected return r^p The weighted average of the expected returns on the assets held in the portfolio * The weights being the percentage of the total portfolio invested in each asset * Diversification effects on a portfolio * ? p decreases as stocks added, because they would not be perfectly correlated with the existing portfolio. * Expected return of the portfolio would remain relatively constant. * Eventually the diversification benefits of adding more stocks dissipates (after about 10 stocks), and for large stock portfolios, ? p tends to converge to 20%. * Market risk vs. diversifiable risk Stand-alone risk = Market risk + Diversifiable risk * Market risk – portion of a security’s stand-alone risk that cannot be eliminated through diversification. Measured by beta. * Diversifiable risk – portion of a security’s stand-alone risk that can be eliminated through proper diversification. * Failure to diversify * If an investor chooses to hold a one-stock portfolio (doesn’t diversify), would the investor be compensated for the extra risk they bear? * NO! * Stand-alone risk is not important to a well-diversified investor. * Rational, risk-averse investors are concerned with ? , which is based upon market risk. * There can be only one price (the market return) for a given security. * No compensation should be earned for holding unnecessary, diversifiable risk. * Capital Asset Pricing Model (CAPM) * Model linking risk and required returns. CAPM suggests that there is a Security Market Line (SML) that states that a stock’s required return equals the risk-free return plus a risk premium that reflects the stock’s risk after diversification. * ri = rRF + (rM – rRF)bi * Primary conclusion: The relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio. Beta * Measures a stock’s market risk, and shows a stock’s volatility relative to the market. * Indicates how risky a stock is if the stock is held in a well-diversified portfolio. * Can the beta of a security be negative? * Yes, if the correlation between Stock i and the market is negative (i. e. , ? i,m 0). * If the correlation is negative, the regression line would slope downward, and the beta would be negative. * However, a negative beta is highly unlikely. * The Security Mark et Line (SML) (calculating required rates of return) * SML: ri = rRF + (rM – rRF)bi * ri = rRF + (RPM)bi Assume the yield curve is flat and that rRF = 5. 5% and RPM = 5. 0%. * Market risk premium * Additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. * Its size depends on the perceived risk of the stock market and investors’ degree of risk aversion. * Varies from year to year, but most estimates suggest that it ranges between 4% and 8% per year. * Portfolio beta * The beta of a portfolio is the weighted average of each of the stock’s betas. * bP = wHTbHT + wCollbColl * bP = 0. 5(1. 32) + 0. 5(-0. 87) * bP = 0. 225 * Portfolio required returns The required return of a portfolio is the weighted average of each of the stock’s required returns. * Or, using the portfolio’s beta, CAPM can be used to solve for expected return. * rRF + (rpm)(stocks beta) * Discounted dividend model * Value of a st ock is the present value of the future dividends expected to be generated by the stock. * * Valuing stock with constant growth * A stock whose dividends are expected to grow forever at a constant rate, g. * D1 = D0(1 + g)1 * D2 = D0(1 + g)2 * Dt = D0(1 + g)t * If g is constant, the discounted dividend formula converges to: * * Dividend yield vs. capital gains yield Dividend yield * = D1/P0 = $2. 12/$30. 29 = 7. 0% * Capital gains yield * = (P1 – P0)/P0 * = ($32. 10 – $30. 29)/$30. 29 = 6. 0% * Valuing stock with nonconstant growth * During nonconstant growth, dividend yield and capital gains yield are not constant, and capital gains yield ? g. * Corporate Valuation model * Also called the free cash flow method. Suggests the value of the entire firm equals the present value of the firm’s free cash flows. * Remember, free cash flow is the firm’s after-tax operating income less the net capital investment. * FCF = EBIT(1 – T) – Net capital inves tment * Terminal value Often preferred to the discounted dividend model, especially when considering number of firms that don’t pay dividends or when dividends are hard to forecast. * Similar to discounted dividend model, assumes at some point free cash flow will grow at a constant rate. * Terminal value (TVN) represents value of firm at the point that growth becomes constant. * Firm Multiple method * Analysts often use the following multiples to value stocks. * P/E * P/CF * P/Sales * EXAMPLE: Based on comparable firms, estimate the appropriate P/E. Multiply this by expected earnings to back out an estimate of the stock price. Preferred stock * Hybrid security. * Like bonds, preferred stockholders receive a fixed dividend that must be paid before dividends are paid to common stockholders. * However, companies can omit preferred dividend payments without fear of pushing the firm into bankruptcy. Chapter 10 * Sources of capital * Long-term capital * Long-term debt * Preferred S tock * Common Stock * Retained earnings * New common stock * Weighted average cost of capital (WACC) * WACC=Wdrd(1-T) + Wp rp + Wc rs * W’s refer to the firms capital structure weights * r’s refer to the cost of each component Before-tax vs. after-tax capital costs * Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, i. e. use A-T costs of capital in WACC. Only rd needs adjustment, because interest is tax deductible. * Historical costs vs. Marginal costs * The cost of capital is used primarily to make decisions that involve raising new capital. So, focus on today’s marginal costs (for WACC). * How weights are determined * Use accounting numbers or market value (book vs. market weights)? * Use actual numbers or target capital structure? * Cost of debt * WACC = wdrd(1 – T) + wprp + wcrs rd is the marginal cost of debt capital. * The yield to maturity on outstanding L-T debt is often used as a measure of rd. * Why tax-adjust; i. e. , why rd(1 – T)? * Cost of preferred stock * rp is the marginal cost of preferred stock, which is the return investors require on a firm’s preferred stock. * Preferred dividends are not tax-deductible, so no tax adjustments necessary. Just use nominal rp. * Our calculation ignores possible flotation costs. * The cost of preferred stock can be solved by using this formula: * rp= Dp/Pp * = $10/$111. 10 * = 9% * Cost of equity * Is there a cost of retained earnings? Earnings can be reinvested or paid out as dividends. * Investors could buy other securities, earn a return. * If earnings are retained, there is an opportunity cost (the return that stockholders could earn on alternative investments of equal risk). * Investors could buy similar stocks and earn rs. * Firm could repurchase its own stock and earn rs. * CAPM * CAPM: rs = rRF + (rM – rRF)b * DCF * DCF:rs = (D1/P0) + g * Bond-yield-plus-risk-premium * rs = rd + RP * Flotation costs * Flotation costs depend on the firm’s risk and the type of capital being raised. * Flotation costs are highest for common equity. However, since most firms issue equity infrequently, the per-project cost is fairly small. * We will frequently ignore flotation costs when calculating the WACC. * What affects WACC * Market conditions. * The firm’s capital structure and dividend policy. * The firm’s investment policy. Firms with riskier projects generally have a higher WACC. * The composite WACC reflects the risk of an average project undertaken by the firm. Therefore, the WACC only represents the â€Å"hurdle rate† for a typical project with average risk. * Different projects have different risks. The project’s WACC should be adjusted to reflect the project’s risk. How to cite Fin 331 Study Guide, Essay examples

New CGT Withholding Regime †Free Samples to Students

Question: Discuss about the New CGT Withholding Regime. Answer: Introduction: The taxation ruling of TR 2005/13 provides the explanation of the gift for the purpose of gift deductions under the provision Division 30 of the ITAA 1997[1]. The ruling provides the principle that is relevant in the determination of fact that whether the particular transfer of money or property may constitute gift. As evident from the current situation it can be seen that Johanna received a gift of $2,000 from her parents and under section 78 A of the ITAA 1936 concerning gifts states the situations in which gift are considered as deductible gift recipient which is not allowed as permissible deductions under division 30 of the ITAA 1997[2]. In order to determine whether the gifts shall be considered as the necessary to take into the considerations the entire set of circumstances that is necessary to take into the considerations the entire set of circumstances that surrounds the transfer and this might be included in the considerations of parties instead of the person giving the gift. In accordance with the present circumstances it can be stated that Section 78 A is not applicable in the present context of Johanna for deductions of genuine gifts that is made under the ordinary situations. Hence, the gifts will be considered as assessment and no deductions will be allowed to Johanna. The Taxation Rulings of TR 1999/6 is dealing with the implications of tax for flight rewards that is derived from the programs of customer faithfulness scheme following the verdict made in Payne v. FC of T (1996) 66 FCR[3]. According to the section 6-5 or 6-10 of the Income Tax Assessment Act 1997 flight rewards and package holidays will be considered as assessable income. At the time of ascertaining the implications of tax for rewards that is obtained from the supplier the flight reward will be assessed in the form of regular income under the section 6-5 of ITAA 1997 for the reason that only the taxpayer can include the non-cash benefit treated as taxable income and therefore will constitute an assessable income. In the present circumstances of Suka flight reward received from supplier for a free return trip to New Zealand shall be considered as the chargeable profits under section 6-5 or 6-10 of the Income Tax Assessment Act 1997. As held in FC of T v.Cooke and Sherden 80 ATC 4140 (1980) the court concluded that the flight reward will be considered as income in accordance with the ordinary concepts. It was determined by the court that the flight reward does not constitute cash or moneys significance and flight reward could not be exchangeable in cash. Therefore, for an employee flight reward would not be regarded as income. In accordance with Section 21 A of the ITAA 1936 it states that in ascertaining the proceeds generated by the taxpayer as a non-cash commercial benefit which is not convertible to cash must be assessed in the form of convertible to cash[4]. The issue in the present scenario of Suka represents a non-cash business benefits which is regarded under Taxation ruling of TR 2005/13. For a flight return to be considered as chargeable income to a business taxpayer, it should possess the character of the ordinary profits with the exemption that it should not be exchangeable in cash. Citing the reference of Scott v. FC of T(1966) 117 CLR 514, the high court stated its viewpoint that before bringing an amount within the paragraph 26 (e) of the ITAA 1936 or section 15-2 of the ITAA 1997 it will be considered as ordinary income. In the present context of Suka being a commercial taxpayer could have the flight return being treated in the form of regular income under section 6-5. This is because Suka is a business tax payer and the receipt of non-cash benefit will be treated in the form of income and hence it will be considered as the ordinary income. Reside test is used in determining the whether a person lives in Australia in accordance with the ordinary sense of the word Resides. From the current scenario of Bin it is evident that he intends to set up the business in Melbourne however to finalize the matters he had to return to Hong Kong in the month of March 2017[5]. According to the section 995-1 of the 1936 it can be stated that a person needs to satisfy the primary test of Resident or resident of Australia to be regarded as an Australian resident. As held in FC of T v. Applegate 79 ATC 4307 (1979) ATR 899 the place of abode forms the major determinant in determining the tax liability of an individual. According to the Taxation ruling of IT 2650 to ascertain the residential status it is necessary to perform the 183 day test or the domicile test to determine the residential status of Bin. According to the ruling of IT 2650 it is necessary to determine the actual length of stay of an individual in the overseas country[6]. From the present case study it is evident that Bin had not stayed in Australia continuously for a period of six months or more. The period and permanence of the Bins existence in Australia was not continuous in nature however it is evident that to consider the intention of the Bin of taking up home in Australia to make their home indefinitely. In conformity with the subsection 6 (1) of the Income Tax Assessment Act 1936 Bin will not be considered as the Australian resident because he did not resided in Australia constantly for a minimum period of six months and does not attracts tax liability for the year ended 30 June 2017[7]. Reference List: Anderson, Colin, Jennifer Dickfos, and Catherine Brown. "The Australian Taxation Office-what role does it play in anti-phoenix activity?."INSOLVENCY LAW JOURNAL24.2 (2016): 127-140. Barkoczy, Stephen. "Foundations of Taxation Law 2016."OUP Catalogue(2016). Braithwaite, Valerie, ed.Taxing democracy: Understanding tax avoidance and evasion. Routledge, 2017. James, Kieran. "The Australian Taxation Office perspective on work-related travel expense deductions for academics."International Journal of Critical Accounting8.5-6 (2016): 345-362. Newman, Sally. "The new CGT withholding regime: More than meets the eye."Proctor, The36.5 (2016): 18. ROBIN, H.AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017. Tran-Nam, Binh, and Michael Walpole. "Tax disputes, litigation costs and access to tax justice."eJournal of Tax Research14.2 (2016): 319. Woellner, R. H., et al.Australian Taxation Law Select: Legislation and Commentary 2016. Oxford University Press, 2016.

Asian Economic Growth Essays - Liberal Democracies,

Asian Economic Growth In his book Asia?s Miracle Economies, Jon Woronoff examines the dramatically quick economic growth of five Asian countries. The five countries examined are Japan, Taiwan, Korea, Singapore, and Hong Kong. Through his study the author demonstrates that there was no miracle involved in these countries growth. They applied specific strategies that were adapted to their local environment. Some of these strategies worked some didn?t. The author says that by examining these nations, one may be able to repeat there success. The book is divided into three parts. In "Part One: Places" the author tells where these countries started from. Some were poorer than average. Some had little natural resources. The people of these countries had different outlooks on the world thus different behavioral tendencies. Part I is divided into five chapters each examining a countries. Woronoff begins Chapter 1 "Japan?s Two Miracles," by discussing Japan?s first industrial revolution. In 1853 when Commodore Perry opened Japan?s ports to foreigners, Japan was feudal society. It was not very evolved nor very modern. Agriculture was good but not enough for the growing population. Japan wanted to learn from the West. Japan sent many students to Europe and the United States. Soon Japan began industrializing. Groups called zaibatsu formed. These zaibatsu dominated industry and commerce. They manipulated politics to suit their own needs. Japan soon began concentrating own building a War Machine. After the Russo-Japanese War, the country went into a recession. But after the First World War, Imperial Japan began growing up until the end of the WWII. The war left Japan resouceless and heavily overpopulated. The victorious Allies gave or rather imposed democratization onto Japan. The zaibatsu were disbanded. Japan was left weak. The United States provided much financial support. Japan?s economy then began growing very fast. The Japanese protected themselves by implementing quotas and then non-tariff barriers. Companies such as Sony, Honda, and YKK improved production methods. Businessmen and bureaucrats worked together. Many firms formed keiretsu. Keiretsu was a sort of lateral conglomeration of banks and companies loyal to each other. The author concluded that the 1980?s, Japan?s economy had surpassed those of France and Britain and rivaled the United States? economy. The Japanese could now purchase many luxury consumer goods, but at what price. Their obsession with production as their prewar obsession with military might had its drawbacks. Lack of urban planning has led to urban congestion with subsufficient pluming and sewage. Their economic success came at the cost of living conditions, human relations and natural beauty. The author begins Chapter 2 "Taiwan, Industrial Island" with a brief history of Taiwan. Taiwan, the island of Formosa was once a Dutch trading center. Then it became a part of the Chinese province of Fukien in 1683. With this Chinese began immigrating. In 1895, Formosa was ceded to Japan. The Japanese realized the agricultural potential of the island. They built roads, railways and harbors. After the Second World War, the island?s economy which had been based on exporting food and raw material to Japan was now greatly weakened. In 1949 when the Kumintang moved to the island , so came over one million refugees, fleeing from the communist mainland. The first priority of the new Republic of China was its military. Aid came from the U.S. in 1953 in the form of the Mutual Security Treaty. Taiwan attempted many things to help its economy. These implementations made matters worse. The Nineteen Point Program of Economic and Financial Reform enabled local businessmen to act more efficiently and purposely. Despite many factors against it the Republic of China has been able to steadily grow economically and is likely to continue to survive into the future. In chapter 3 "Korea Man-Made Miracle" the author explores the history of Korea. Korea has long had a history of Chinese domination. But as China became more an more under western spheres of influence, Korea began to be dominated by Russia and Japan. Soon after Japan took control. Japan used Korea as mercantilist colony. Japan did build roads and develop the economy. After the war, Korea was left in bad shape. The country was divided into a U.S. zone and a USSR zone. The zone formed two separate nations. North Korea had all of the industry and the South had all of the agriculture. Soon the North invaded the South. The U.S. came the aid of the South, driving the communists back north. The United States provided financial assistance for reconstruction in 1954. Economic progress was slow coming. In 1961, General Park takes charge. He was a military man.

Longfellows The Rainy Day

Longfellow's 'The Rainy Day' Children across New England are familiar with the works of Henry Wadsworth Longfellow, whose Paul Reveres Ride has been recited at many a grade school pageant. Longfellow, born in Maine in 1807, became an epic poet of sorts for American history, writing about the American Revolution in the way bards of old wrote about conquests across Europe. The Life of Longfellow Longfellow the second-oldest in a family of eight children, was a teacher at Bowdoin College in Maine, and later at Harvard University. Longfellows first wife Mary died in 1831 following a miscarriage, while they were traveling in Europe. The couple had been married for only four years. He did not write for several years following her death, but she inspired his poem Footsteps of Angels. In 1843, after years of trying to win her over for nearly a decade, Longfellow married his second wife Frances. The two had six children together. During their courtship, Longfellow often walked from his home in Cambridge, crossing the Charles River, to Frances family home in Boston. The bridge he crossed during those walks is now officially known as the Longfellow Bridge. But his second marriage ended in tragedy as well; in 1861 Frances died of burns she suffered after her dress caught fire. Longfellow was himself burned trying to save her  and grew his famous beard to cover the scars left behind on his face. He died in 1882, a month after people around the country celebrated his 75th birthday. Body of Work Longfellows best-known works include epic poems such as The Song of Hiawatha, and Evangeline, and poetry collections such as Tales of a Wayside Inn. He also wrote well-known ballad-style poems such as The Wreck of the Hesperus, and Endymion. He was the first American writer to translate Dantes Divine Comedy.  Longfellows admirers included President Abraham Lincoln, and fellow writers Charles Dickens and Walt Whitman. Analysis of The Rainy Day This 1842 poem has the famous line Into each life some rain must fall, meaning that everyone will experience difficulty and heartache at some point. The day is a metaphor for life. Written after the death of his first wife and before he married his second wife, The Rainy Day has been interpreted as a deeply personal look into Longfellows psyche and state of mind. Here is the complete text of Henry Wadsworth Longfellows The Rainy Day. The day is cold, and dark, and dreary;It rains, and the wind is never weary;The vine still clings to the moldering wall,But at every gust the dead leaves fall,And the day is dark and dreary.My life is cold, and dark, and dreary;It rains, and the wind is never weary;My thoughts still cling to the moldering Past,But the hopes of youth fall thick in the blastAnd the days are dark and dreary.Be still, sad heart! and cease repining;Behind the clouds is the sun still shining;Thy fate is the common fate of all,Into each life some rain must fall,Some days must be dark and dreary.

Maintaining a Healthy Lifestyle Essay Example | Topics and Well Written Essays - 500 words

Maintaining a Healthy Lifestyle - Essay Example Healthy lifestyle is directly related to longevity. However maintaining a healthy lifestyle means that besides evading the excessive use of certain drinks, one must keep an active and regular activity. Exercising contributes to the maintenance of normal weight. Physical activity benefits to your health by reducing the risk of hearth disease, type 2 diabetes, high blood pressure and osteoporosis (World Health Organization report, 1998). In addition regular exercising improves the posture, strengthens the muscles and bones and provides you with better mental health. The statistics from the American Cancer Society report (2009) show that in 2006 23% of the U.S. population suffered from cancer and eventually died. Smoking is the single greatest preventable factor of premature death. 20% of the deaths in the U.S. were related to smoking. The data indicates also that there are 430 thousand premature deaths caused by smoking (American Cancer Society report, 2009). People who quit smoking might enjoy a considerable more healthy life after that.

Who are you Essay Example | Topics and Well Written Essays - 500 words

Who are you - Essay Example The Canoe restaurant has to a great extent complied with the laid down regulations on food handling and storage. Referring to the Los Angeles county regulations, to evade food contamination, all frozen food should be prepared in a frozen state or refrigerated at a temperature of less than 38 degrees. From the assessment findings, it was noted that, staffs in the restaurant were reluctant in complying with the directives. The temperature in the kitchen was at 73 degrees which was far beyond the stipulated temperature. the kitchen staffs were extremely clean and had spotless and bright uniforms as required for by the Los Angeles county regulations. According to the existing regulations, potentially harmful foods such as fish, beef, and raw pottery ought to be prepared with sanitized and cleaned equipment. However, the inspection confirmed that, the kitchen staffs failed to act in accordance with the existing regulations. During the investigation, it was noted that, the chief assistant used one instrument to chop different meat without cleaning or sterilizing it. To ensure adequate hygiene in foo d preparation, the Los Angeles county regulations emphasizes on the significance of wearing a clean uniform, gloves, and hair nets. After investigation, it was observed that, the chef and its assistant wore gloves but they lacked a hair net. On the other hand, the restaurants did not comply with the regulations which define how foods should be handled when preparing them. At around one, the investigator noted a less frozen turkey on the counter. All foodstuffs are required by the law to be well wrapped and stored in a clean dry. During the investigation, the freezers and refrigerators were all well organized and spotlessly clean as required for in the regulations. The foods in the refrigerator were stored in sealed containers. However, it was impossible to recognize the stored food since the wrapped foods were neither dated nor labeled as specified by the

International Finance and Financial Crisis Case Study

International Finance and Financial Crisis - Case Study Example They should oversee if the sources of funds have an undisrupted flow and if they are able to pay their creditors. Having a clear understanding, the company should try to maximise the cash positions. In 2008, Woolworths had net cash flow of 39.2 millions in comparison to 27.1 millions in 2007. In due contrast to it, the company had 2.2 millions of net cash flow in 2003. So, it can be said Woolworths took required measures to have the increased cash flow during the time of crisis. Identify and aggressively minimise operational risks - The companies, amidst financial crisis, should try to identify and reduce all sorts of avoidable day-to-day risks. During crisis, it is desirable that the companies follow the basics. The operations generated over 61.7 millions in 2008, a drastic increase over the previous year. Conduct rigorous scenario planning - During crisis the companies should also take a proper stock of the economic scenario. They should strategise on the basis of the GDP growth, currency depreciations, etc. Woolworths Group scrapped the idea of paying interim dividend in 2008 considering the net loss it has incurred and the global meltdown. Review business performance and prepare for divestitures - The c... They should strategise on the basis of the GDP growth, currency depreciations, etc. Woolworths Group scrapped the idea of paying interim dividend in 2008 considering the net loss it has incurred and the global meltdown. Review business performance and prepare for divestitures - The company, to sustain and survive the crisis, should continuously review its performance and take necessary steps, as and when required. Also, the company should prepare itself for necessary divestments to increase the cash inflow. As the cash inflow was great for Woolworths, so we can say that the company took regular assessments of its business performance. Maintain the confidence of key stakeholders - Any company that wants to stay floated for long term, knows the value of its stakeholders. Relationship with shareholders, suppliers and customers if once lost can not be regained. The revenue has increased in 2008 compared to 2007 for Woolworths Plc and also there are no bank overdrafts in the year. Dividend Policies, Capital Structure and the Shareholders' Wealth Share-holders are the true owners of any company. And the dividend is the earning of the owner because of his stock holding on the basis of the company's profit. Apart from the capital yield (which a share-holder might earn, if he sale away the share), earning of dividend is the reason of purchasing shares by the shareholder. If a company earns profit from its professional and operational activities, the management can either retain the profit or future investments (called retained profit or retained earning) under the head of 'reserve and surplus' in the balance sheet or the management of the company can distribute the profit among its