CORPORATE FINANCE

GUIDELINES FOR EXAMINATION

Ioan Alin Nistor Faculty of Business

Overview Requirements for the chapters to be covered

2

CHAPTERS: Financial statements

Balance

Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows

Financial Ratios Present value & Future Value

Examination involves multiple choice questions as well as problems following the chapter requirements mentioned previously. Below will be presented a brief explanation for the requirements. Please note that any learning material that covers the data mentioned is welcomed. Please check the problems covered in class.
Ex: Brealey & Myers - Corporate Finance Ex: Ioan Alin Nistor Finante antreprenoriale, Ed EFES, 2012

Financial statements
4

Annual report four basic financial statements

Balance

Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows

Balance sheet
5

ASSETS

Cash Marketable securities Accounts receivable Inventory

LIABILITIES & EQUITY Accounts payable Notes payable Accruals

Total current liabilities Total Liabilities

Total current assets

Long term bonds

Fixed assets (property, plant, equipment, intangible assets)

Stock (preferred, common) Retained earnings

Total equity

TOTAL ASSETS

TOTAL LIABILITIES AND EQUITY

Balance sheet
6

ASSETS

Cash Marketable securities Accounts receivable Inventory

LIABILITIES & EQUITY Accounts payable Notes payable Accruals

Total current liabilities Total Liabilities

Total current assets

Long term bonds

Fixed assets (property, plant, equipment, intangible assets)

Stock (preferred, common) Retained earnings

Total equity

TOTAL ASSETS

TOTAL LIABILITIES AND EQUITY

Balance sheet
7

ASSETS 15 5 265 575

860

Cash Marketable securities Accounts receivable Inventory

LIABILITIES & EQUITY Accounts payable 45 Notes payable 125 Accruals 130

Total current liabilities Total Liabilities

300

Total current assets

Long term bonds

250
550

Fixed assets (property, plant, equipment, intangible assets) 1140

Stock (preferred, common) Retained earnings

1000 450
1450

Total equity

TOTAL ASSETS

2000

TOTAL LIABILITIES AND EQUITY 2000

Income statement
8

Net sales Costs excluding depreciation Depreciation

Total operating costs

Earnings before interest and taxes (EBIT) Less interest Earning before taxes (EBT) Taxes Net income

3000 2650 183 2833 167 30 137 22 115

Statement of Cash-flow
9

OPERATING ACTIVITIES (+ or -)

Operating activities Depreciation and amortization Changes in other accounts affecting operations:

(Increase)/decrease in accounts receivable (Increase)/decrease in inventories Increase/(decrease) in accounts payable

Net cash provided by operating activities Capital expenditures Investments in subsidiary Proceeds from sales of investments Increase in notes payable Payments of long-term debt Increase in bonds

LONG-TERM INVESTING ACTIVITIES (+ or -)

FINANCING ACTIVITIES (+ or -)

Statement of Retained Earnings

10

Balance of retained earnings at Dec. 31, 2010

Add:

525 75 35 565

Net income, 2011 Less: Dividends to common stockholders

Balance of retained earnings at Dec. 31, 2011

Analysis of Financial Statements Ratios Analysis

11

Liquidity Analysis Ratios Asset Management Ratios Debt Management Ratios Profitability Ratios

Ratios Analysis Liquidity Analysis Ratios

12

Current assets Current ratio Current liabilities

Quick , or acid test Current assets Inventories Current liabilitie s
Industry Average Industry Average Comment Comment

Current assets Current liabilities Current assets Inventories Quick , or acid test Current liabilities Current ratio

860/ 300 (860 - 575) /300

2.87 0.95

Ratios Analysis Asset Management Ratios

13

Inventory turnover

Sales Inventorie s

Fixed assets turnover

Sales Net fixed assets

Total assets turnover

Sales Total assets

Days sales outs tan ding

Re ceivables Annual sales / 360

Ratios Analysis Asset Management Ratios

14

Inventory turnover

Sales Inventories

3000/575

5.21

Industry Average Industry Average Industry Average Industry Average

Comment

Fixed assets turnover

Sales Net fixed assets

3000/1140

2.63

Comment

Total assets turnover

Sales Total assets Re ceivables Annual sales / 360

3000/2000

1.5

Comment

Days sales outs tan ding

Comment

265/ (3000/360)

32 days

Ratios Analysis Debt Management Ratios

15

Total debt to total assets

Total debt Total assets

Total debt to total assets

Total debt Total assets

550/2000

27.5 %

Industry Average

Comment

Ratios Analysis Profitability Ratios

16

Return on total assets( ROA)

Netincome Total assets

Return on equity( ROE)

Net income Commonequity

Pr ofit m argin on sales

Net income Sales

Ratios Analysis Profitability Ratios

17

Re turn on total assets ( ROA)

Net income Total assets

115/2000

5.75 % 7.9%

Industry Average Industry Average Industry Average

Comment

Re turn on equity ( ROE )

Net income Common equity

115/1450

Comment

Pr ofit m arg in on sales

Net income Sales

115/3000

3.83 %

Comment

Future Value and Preset Value

18

Simple interest Compound interest Future value Present value

19

Simple interest is determined by multiplying the interest rate by the principal by the number of periods. Simple interest = P x I x N Where: P is the amount I is the interest rate N is the duration, using number of periods (years)

Simple interest is called simple because it ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included.

Compound interest. Future value

20

Compound interest = Interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.
FV future value PV = present value I = interest rate n nr of periods (years)

FV PV (1 i )

Net Present Value

21

NPV

Cfwi I i i 1 (1 c )

Cfw cash-flow c - average cost of capital I - Investment NPV shows the expected increase in value of an investment if adopted If NPV > 0 - value increases => investment recommended If NPV < 0 - value decreases => investment not recommended

22

Example of a NPV Problem : A firm would like to make an investment worth of 10.000 Euro. The managers estimated that the Cash-flow brought by this investment for a period of 4 years is: Cash-flow for the first year 1.400 Euro, Cash-flow year two = 1.500 Euro, Cash-flow year three = 1.300 and Cash-flow year four 1.200. Knowing that the average cost of capital is 10%, using the NPV method, make a recommendation whether the investment should be carried out or not. Example of a FV problem: Using the compound interest, calculate the interest of 100.000 USD after a period of 5 years at an interest rate of 7%.