University of Palestine Assistant Professor Dr. Gaber H. Abugamea 3rd semester Business Finance FINA201

Overview of Corporate finance Chapter 1- Introduction to corporate finance Describes the role of the financial manager and the goal of financial management. It also discusses some key aspects of the financial management environment. Concept questions 1- What is the capital budgeting decision? 2- What do you call the specific mixture of long-term debt and equity that a firm chooses to use? 3-Into what category of financial management does cash management fall? 4- What is the goal of financial management? 5- what are some shortcomings of the goal maximization? 6-Can you give definition of corporate finance? 7- What is an agency relationship? 8-What are agency problems and how do they come about? What are agency costs? 9- what role do financial institutions play in the raising of capital?

Chapter2:Finncial statements, taxes and Cash flow Objectives - the difference between accounting value and market value -The difference between accounting income and cash flow -The difference between average and marginal tax rates - How to determine a firm’s cash flow its financial statements

Main questions What is the balance sheet identity? What is liquidity? Why is it important? What do we mean by financial leverage? Explain the difference between accounting value and market value. Which is more important to the financial manager? Why?

Key equations The balance sheet identity or equation 1-Assets= Liabilities + Owners’ equity 2- The income statement equation 3-Revenue-Expenses= Profit 4-The cash flow identity: Cash flow from assets = Cash flow to lenders + Cash flow to shareholders Where a- Cash flow from assets = operating cash flow (OCF) – Net capital spending – Addition to net working capital (NWC): 1- Operating cash flow = Profit before interest and taxes (PbIT) + Depreciation – taxes 2- Net capital spending = Ending net non- current assets – Beginning non- current assets + depreciation 3- Additions to net working capital = Ending NWC – Beginning NWC b-Cash flow to lender= Interest paid – net new borrowing C- Cash flow to shareholders = Dividends paid – Net new equity raised.

Other Questions -What is the income statement equation? - What are the three things to keep in mind when looking at an income statement? -Why is accounting profit not the same as cash flow? Give two reasons? What is the difference between a marginal and an average tax rate?

Main Equations What is the cash flow identity? Explain what it says? What are the components of operating cash flow? Why is interest paid not a component of operating cash flow?

Financial ratios Key equations 1-the current ratio: Current ratio=Current assets/ Current liabilities 2- the quick or acid-test ratio: Quick ratio = (Current assets - Inventory)/ Current liabilities 3- The cash ratio: Cash ratio = Cash / Current liabilities

Ratios-- 4- the ratio of net working capital to total assets: Net working capital to total assets = Net working capital / total assets 5- The interval measure: Interval measure = current assets / Average daily operating costs 6-The total debt ratio: Total debt ratio = (Total assets – total equity) / Total assets The debt/ equity ratio: Debt / equity ratio = total debt / total equity

Ratio The equity multiplier: Equity multiplier = Total assets / Total equity 9- The long-term debt ratio: Long-term debt ratio = long-term debt / (Long- term debt + total equity) 10- The time interest earned (TIE) ratio: Time interest earned ratio = Profit before interest and taxes / Interest paid

Ratio The cash coverage ratio: Cash coverage ratio = (Profit before interest and taxes + Depreciation) / interest 12- The inventory turnover ratio: Inventory turnover = Cost of goods sold / inventory 13- The average day’s sales in inventory: Day’s sales in inventory = Inventory χ 365 days / Cost of goods sold 14- The day’s sales in receivable: Day’s sales in receivable = Accounts receivable χ 365 days / Credit sales 15- The day’s purchases in payables: Day’s purchases in payables = Accounts payable χ 365 / Credit purchases

Ratio The net working capital (NWC) turnover ratio: Net working capital turnover = Sales / Net working capital 17- The non-current asset turnover = Sales / Net non-current assets 18- The total asset turnover ratio: Total asset turnover ratio: Total asset turnover = Sales / total assets

Ratio Profit margin: Profit margin = Net profit after tax / sales 20- Return on assets = Net profit after tax / Total assets 21- return on equity: Return on equity= Net profits after tax / Total equity 22- The price/ earnings (P/E) ratio: P/E ratio = Price per share / earning per share

Ratio The market- to book ratio: = Market value per share / Book value per share 24- The Du Pont identity ROE = NPAT/ S χ S/TA χ TA/E ROE PBIT/S χ S/TA χ PBT/PBIT (1-T%) χ (TL/E +1)

Chapter 4 Long- Term Financial Planning and growth What is financial planning? Growth as a financial management goal Dimensions of financial planning - Planning horizon -Aggregation -What can planning accomplish? -Examining interactions -Exploring options -Avoiding surprises -Ensuring feasibility and internal consistency

Continue- A financial planning model: The ingredients - Sales forecast -Pro forma statements Summarize the different events projected for the future - Asset requirements -Financial requirements - The plug is the designated source or sources of external financing needed to deal with any shortfall in financing and thereby bring balance sheet into balance. -Economic assumptions

Key equations: chapter 4 related to financial planning 1-The dividend payout ratio: Dividend payout ratio = Cash dividend / Net profit after tax 2-The internal growth rate: Internal growth rate = [ROA χ b] / [1-(ROA χ b)] 3- The sustainable growth rate: sustainable growth rate = [ROE χ b] / [1-(ROE χ b)] sustainable growth rate = [ROE 0 χ b]