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An Introduction to
Finance:
Chapters 1 3 of
Essentials of Corporate
Finance
Edward Graham
Professor of Finance
Department of Economics and
Finance
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Introduction to Finance
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I.
II.
An Introduction to Finance
What is finance?
Finance is the study of the art and the science of money
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I.
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II.
Evidence of the Results of Financial Decisionmaking: The Financial Statement and Ratio
Analysis
Providing valid and timely information to the varied
stakeholders in the firm is key. These stakeholders, both
within and outside the firm, include the owners, the
employees, neighbors, the community-at large, suppliers,
lenders, bankers, and the competition.
This information is typically provided within financial
statements, and notes to those statements. Three
statements attract our attention:
The Income Statement
The Statement of Cash Flows
The Balance Sheet
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Ratio Analysis
Five types of ratios support our discussion, and underscore
important features of the information we are providing our
varied stakeholders:
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50,000
20,000
30,000
100,000
Fixed Assets
150,000
Total Assets
250,000
Total C/Liabilities
50,000
100,000
150,000
Owners Equity
Par Value
APIC
Ret. Earnings
Total Owners Eq.
10,000
40,000
50,000
100,000
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What is the meaning of the each of the metrics? For example, what does
a current ratio of 2 really mean? The quick ratio? The Long Term
Solvency measures?
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Assume our firm had sales in the most recent year of $200,000 and Net Income of
$20,000.
EIC, Inc. has 10,000 shares outstanding. Those shares were initially issued for $5
each with a par value of $1 per share. With net income of $20,000, EPS or
Earnings Per Share becomes 20,000/10,000 or $2. Book value per share is total
equity divided by shares outstanding or 100,000/10,000 or $10 per share.
Dividends were $1 per share or a total of $10,000. Thus, the firm paid out 50% of
earnings (dividends paid/net income = the dividend payout ratio of 10,000/20,000
or 50%)
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Profitability Ratios
Profit Margin: net income/sales = 20,000/200,000 = .1
Return on Assets (ROA): net income/total assets
= 20,000/250,000 = .08
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