FNAN 522: Managerial
Finance with verified
solutions
What is the goal of the firm?
The goal of the firm is to maximize shareholder's wealth or
maximize the value of the firm; the goal is NOT to maximize profits
What are the three key attributes to success for a company?
1) Successful companies have skilled people, 2) successful
companies have strong relationships with groups outside of the
company, and 3) successful firms have sufficient capital to execute
plans and support their operations
What are the financial documents used in financial forecasting and
financial planning?
Pro Forma Balance Sheet and Pro Forma Income Statement (Forward
Looking), Cash Budgets (Predicts Cash Flows), Financial Statement
Analysis (Ratio Analysis), Common Size Income Statement and
Balance Sheet
Stock Price is a fu
nction of what variables?
It is a function of expected cash flows (ECF), timing of cash flows
(TCF), risk of cash flows (RCF), dividend policy (DP), and capital
structure (CS); looks like SP = f(ECF, TCF, RCF, DP, CS)
What are some ways to overcome agency conflicts?
1) if over 1 million in salary, their actions must be tied to
performance or the income will not be tax deductible, 2) all
stockholders must approve golden parachutes, and 3) the CEO will
give stock options for the future to protect company
What is a market?
, Entity that brings together a buyer and a seller to perform a
transaction; anything that facilitates a transaction
What is a Money Market?
Instruments of less than one year maturity (such as CDs,
Commercial Paper, Treasury Bills); financial relationship created
between suppliers and demanders of short-term funds
What is a Capital Market?
Instruments of more than one year maturity (such as Bonds, Private
Stock, and Common Stock); a market that enables suppliers and
demanders of goods of long-term funds to make transactions
What is a Primary Market?
the financial market in which securities are initially issued; the only
market in which the insurer is directly involved in the transaction
What is a Secondary Market?
Financial market in which preowned securities (those that are not
new issues) are traded; provides liquidity for the Primary Market
Corporate Taxes Are....
...Progressive in nature. At certain income levels for Corporations,
taxes are different. In Ireland, the Corporate Tax Rate is under 3%,
which makes it an attractive destination for Corporations to go and
set up their headquarters.
What are some key notes for Dividends and Interest For
Corporations is they are PAYING with debt instruments, such as
issuing bonds?
It is recorded as an interest expense, which is tax deductible on the
Income Statement and is recorded as "Interest Expense." Dividends
are not deductible for taxes and they do not appear on the income
statement.
What are some key notes for Dividends and Interest For
Corporations is they are RECEIVING with debt instruments, such as
issuing bonds?
The interest received is fully taxed at an ordinary tax rate and is
shown as "Interest Income" on the Income Statement; Dividends
have a tax exclusion and the exclusion amount depends on the
percent of ownership to avoid double taxation.
, What is the Time Value of Money?
You would rather have the money today than later, so that you can
have to opportunity to invest, so money received now is worth more
than money received later; It's usually a problem of three known
variables and one unknown variable
What is Future Value?
what a dollar, an annuity, or a mixed stream will grow to for a
specified time at a specified interest rate.
What is compounding?
It's when interest becomes principle (you earn interest on interest)
What is an income statement? Is it a flow or a stock?
The Income Statement is a FLOW; it represents the performance of
the firm for some specified time period (month, quarter, year);
Measures Revenue generated for that period and to it we match all
associated expenses (matching principle)
What is an balance sheet? Is it a flow or a stock?
The Balance Sheet is a STOCK; it shows the financial position of the
firm
What is a statement of cash flow? Is it a flow or a stock?
The Statement of Cash Flow is a FLOW; it is a summary of cash flow
that shows where cash came from, how it is used, and the change in
the cash balance
What is a Statement of Retained Earnings? Is it a flow or stock?
The Statement of Retained Earnings is a FLOW; a report on how
Retained Earning was changed
What is Depreciation?
The Allocation of the cost of a fixed asset over some prescribed time
period; not losing value, not a cash flow or an allocation of cost
What is the importance of Financial Statements in the future of the
company?
Financial Statements can reveal problems or potential problems,
including poor or ineffective management practices. The real
importance for investors of financial statements lies in the fact that
Finance with verified
solutions
What is the goal of the firm?
The goal of the firm is to maximize shareholder's wealth or
maximize the value of the firm; the goal is NOT to maximize profits
What are the three key attributes to success for a company?
1) Successful companies have skilled people, 2) successful
companies have strong relationships with groups outside of the
company, and 3) successful firms have sufficient capital to execute
plans and support their operations
What are the financial documents used in financial forecasting and
financial planning?
Pro Forma Balance Sheet and Pro Forma Income Statement (Forward
Looking), Cash Budgets (Predicts Cash Flows), Financial Statement
Analysis (Ratio Analysis), Common Size Income Statement and
Balance Sheet
Stock Price is a fu
nction of what variables?
It is a function of expected cash flows (ECF), timing of cash flows
(TCF), risk of cash flows (RCF), dividend policy (DP), and capital
structure (CS); looks like SP = f(ECF, TCF, RCF, DP, CS)
What are some ways to overcome agency conflicts?
1) if over 1 million in salary, their actions must be tied to
performance or the income will not be tax deductible, 2) all
stockholders must approve golden parachutes, and 3) the CEO will
give stock options for the future to protect company
What is a market?
, Entity that brings together a buyer and a seller to perform a
transaction; anything that facilitates a transaction
What is a Money Market?
Instruments of less than one year maturity (such as CDs,
Commercial Paper, Treasury Bills); financial relationship created
between suppliers and demanders of short-term funds
What is a Capital Market?
Instruments of more than one year maturity (such as Bonds, Private
Stock, and Common Stock); a market that enables suppliers and
demanders of goods of long-term funds to make transactions
What is a Primary Market?
the financial market in which securities are initially issued; the only
market in which the insurer is directly involved in the transaction
What is a Secondary Market?
Financial market in which preowned securities (those that are not
new issues) are traded; provides liquidity for the Primary Market
Corporate Taxes Are....
...Progressive in nature. At certain income levels for Corporations,
taxes are different. In Ireland, the Corporate Tax Rate is under 3%,
which makes it an attractive destination for Corporations to go and
set up their headquarters.
What are some key notes for Dividends and Interest For
Corporations is they are PAYING with debt instruments, such as
issuing bonds?
It is recorded as an interest expense, which is tax deductible on the
Income Statement and is recorded as "Interest Expense." Dividends
are not deductible for taxes and they do not appear on the income
statement.
What are some key notes for Dividends and Interest For
Corporations is they are RECEIVING with debt instruments, such as
issuing bonds?
The interest received is fully taxed at an ordinary tax rate and is
shown as "Interest Income" on the Income Statement; Dividends
have a tax exclusion and the exclusion amount depends on the
percent of ownership to avoid double taxation.
, What is the Time Value of Money?
You would rather have the money today than later, so that you can
have to opportunity to invest, so money received now is worth more
than money received later; It's usually a problem of three known
variables and one unknown variable
What is Future Value?
what a dollar, an annuity, or a mixed stream will grow to for a
specified time at a specified interest rate.
What is compounding?
It's when interest becomes principle (you earn interest on interest)
What is an income statement? Is it a flow or a stock?
The Income Statement is a FLOW; it represents the performance of
the firm for some specified time period (month, quarter, year);
Measures Revenue generated for that period and to it we match all
associated expenses (matching principle)
What is an balance sheet? Is it a flow or a stock?
The Balance Sheet is a STOCK; it shows the financial position of the
firm
What is a statement of cash flow? Is it a flow or a stock?
The Statement of Cash Flow is a FLOW; it is a summary of cash flow
that shows where cash came from, how it is used, and the change in
the cash balance
What is a Statement of Retained Earnings? Is it a flow or stock?
The Statement of Retained Earnings is a FLOW; a report on how
Retained Earning was changed
What is Depreciation?
The Allocation of the cost of a fixed asset over some prescribed time
period; not losing value, not a cash flow or an allocation of cost
What is the importance of Financial Statements in the future of the
company?
Financial Statements can reveal problems or potential problems,
including poor or ineffective management practices. The real
importance for investors of financial statements lies in the fact that
