What is the firms income?
Net income: if the firm paid income tax of 2,000 and the average tax rate was .20. the taxable income must have been 2,000/.20=10,000 What were the firms revenues?
Rev: 23,000 (Add all from above) +taxable income from part a. What was EBIT:
Shareholders’ equity = total assets − total liabilities
Cash flow from operations = net income + depreciation expense Rev-expenses=net income
Managers use information from financial markets to estimate the opportunity cost of capital It’s the return that investors demand for alternative investments at the same level of risk
2 major decisions made by financial managers: investment or capital budgeting decision and 2 the financing decision. Firm has to decide which real assets to invest in and how to raise funds in order to pay for that investment.
Advantages/ disadvantages of corporations:
They are distinct, permanent legal entities. They allow for separation of ownership and control, can continue operating without disruption even as ownership changes. They provide limited liability to owners. DIS: double taxation on profits and the shareholders are taxed again when they receive dividends or sell their shares at profit.
Maximizing shareholder wealth: Value maximization is the natural goal of the firm. Shareholders can invest or consume the increased wealth as they wish, provided that they have access to well-functioning financial markets.
Financial markets: help channel savings to corporate investment and they help match borrowers and lenders. They provide liquidity and diversification opportunities for investors.
Financial institutions carry out a number of similar functions but in different ways. They channel savings to corporate investment, and they serve as intermediaries between borrowers and lenders.
Balance sheet: snapshot of firms assets and liabilities:
Income statement: measure profitability of the company during the yr. Statement of cash flows: measure the sources and uses of cash during the yr.
Diff. between book and market value: book values are the historical measures based on the original cost of an asset. Market value is the current price of an asset or liability. Income is different from cash flow because 1. Investment in fixed assets is not deducted immediately from income but is instead spread out over the life expectancy of equipment and 2. Accountant records revenues when sale is made rather when the customer pays the bill.
Is limited liability always an advantage for a corporation and its shareholders? Yes
Large corporations would not be able to obtain financing from thousands of shareholder if the shareholders were not protected by the fact that the corporation is a distinct legal entity.
Financing for public corporations must flow through financial markets: False Financing for private corporations must flow through financial intermediaries: False The sale of policies is a source of financing for insurance companies: False Almost all foreign exchange trading occurs on the floor of the FOREX exchanges in NY and London: False The opportunity cost of capital is the capital outlay required to undertake a real investment opportunity. False The cost of capital is the interest rate paid on borrowing from a bank or other financial institution: False