Financial Management
– Financial markets vs financial intermediaries
– Financial intermediaries are predominantly concerned with the recycling of funds from surplus to deficit agents; that is, facilitating the transfer of funds from those that wish to save to those that wish to borrow.
– A financial market is defined as a market where financial assets are traded and exchanged.
Business Organization
1. Sole proprietorship
– The sole proprietorship is the simplest business form under which one can
operate a business.
– The sole proprietorship is not a legal entity.
– It simply refers to a person who owns the business and is personally
responsible for its debts
2. Partnership
– Limited partnership: A Limited Partnership is a partnership consisting of a
general partner, who manages the business and has unlimited personal
liability for the debts and obligations of the Limited Partnership, and a limited
partner, who has limited liability but cannot participate in management.
– Limited liability partnership (LLP): A limited liability partnership (LLP) is a
partnership in which some or all partners (depending on the jurisdiction) have
limited liabilities. It therefore can exhibit elements of partnerships and
corporations. In an LLP, each partner is not responsible or liable for another
partner’s misconduct or negligence.
3. Corporation
– Goal is to maximize value
– Firm value: market price, intrinsic value
– Separation of ownership and management > conflict of interest
– Maximizing firm value done through:
a) capital budgeting
b) capital structure
c) debt vs equity; creditors will have priority in getting paid during the bankruptcy
d) working capital management
Lecture 2
Financial statements
Balance sheet: assets​ = liabilities + equity
Gift cards (revenue recognition)
- When a gift card is purchased, it is recorded as a liability not revenue
- When a gift card is redeemed by the customer, the firm reduces your company’s gift card liability and record revenue
- Breakage: unredeemed gift card amounts
Statement of retained earnings
Formula:
Standardized financial statements
– Common-size balance sheets > compute all accounts as a percent of total assets
– Common-size income statements > compute all line items as a percent of sales
– Common-base year statements > compute all line items as a percent of base year
Values
Book value (of shareholder’s equity)
– Shareholder’s equity as reported in the balance sheet
– Common stocks (how much the firm has raised from selling stocks) + RE
Market Value
– Both market and book values are used, for eg: by taking the ratio of the two
– Market value of the firm’s assets
– Market value of shareholders’ equity
The enterprise value of a firm
– Total value of the firm’s business assets
– Two sources of firm’s financing: debt & equity
– Therefore, enterprise value includes both (market value of) equity and debt (excl.
non-operating assets eg: excess cash)
Cash flows
– Cash generated from operations over the life of three asset/investment
– Sources of cash:
a) decreases in assets (other than cash), for eg: a decrease in account
receivable associated with receiving payments
b) Increase in liability and equity
– Uses of cash (activities that involve cash outflows)
a) Increases in assets (other than cash), for eg: an increase in inventory that you pay for with cash
b) Decrease in liability and equity, for eg: a decrease in account payable
associated with making payments to suppliers.
