Finance 101
Exam Notes and Chapter Summaries
, TABLE OF CONTENTS
Chapter 1: Introduction to Corporate Finance 5
1.1 Financial Management Decisions 5
1.1.1 Capital Budgeting 5
1.1.2 Capital Structure 5
1.1.3 Working Capital Management 5
1.2 Forms of Business Organisation 6
1.3 Goal of Financial Management 7
1.4 The Agency Problem 8
1.4.1 Solving the Agency Problem 8
1.5 Cash Flows To And From The Firm 9
Chapter 2: Financial Statements, Taxes and Cash Flow 10
2.1 Balance Sheet 10
2.1.1 Liquidity 10
2.1.2 Debt Versus Equity 10
2.1.3 Market Value Versus Book Value 11
2.2 Income Statement 11
2.2.1 GAAP and the Income Statement 12
2.2.2 Non-cash Items 12
2.2.3 Time and Costs 12
2.3 Taxes 13
2.3.1 Corporate Tax Rates 13
2.3.2 Average Versus Marginal Tax Rates 13
2.4 Cash Flow 13
2.4.1 Cash Flow from Assets 14
2.4.2 Cash Flow to Creditors and Stockholders 15
Chapter 3: Working with Financial Statements 17
3.1 Cash Flow and FInancial Statements 17
3.1.1 Sources and Uses of Cash 17
3.2 Statement of Cash Flows 18
3.3 Ratios for Financial Analysis 19
3.3.1 Liquidity Ratios 19
3.3.2 Long-term Solvency Ratios 19
3.3.3 Asset Management, or Turnover, Measures 20
3.3.4 Asset Turnover Ratios 20
3.3.5 Profitability Measures 20
3.3.6 Market Value Measures 20
Chapter 5: Introduction to Valuation: Time Value of Money 21
5.1 Future Value and Compounding 21
2
, 5.1.1 Investing For A Single Period 21
5.1.2 Investing For More Than One Period 21
5.2 Present Value and Discounting 22
5.2.1 The Single-Period Case 22
5.2.2 Present Values for Multiple Periods 22
5.3 Present Versus Future Value 22
Chapter 7: Interest Rates and Bond Valuation 24
7.1 Bonds and Bond Valuation 24
7.1.1 Bond Features and Prices 24
7.1.2 Bond Values and Yields 24
7.2 Interest Rate Risk 25
Current Yield vs. Yield to Maturity 26
Differences Between Debt and Equity 27
Inflation and Interest Rates 27
The Fisher Effect 28
Inflation and Present Values 28
Chapter 8: Stock Valuation 29
Common Stock Valuation 29
Characteristics of a Common Stock 29
Chapter 9: Net Present Value Calculations and Other Investment Criteria 29
The Payback Rule 29
The Discounted Payback 29
The Average Accounting Return 29
The Internal Rate of Return (IRR) 30
Chapter 13: Return, Risk and the Security Line 30
Chapter 14: Cost of Capital 31
The Cost of Equity 31
The Cost of Debt 32
The Cost of Preferred Stock 32
The Weighted Average Cost of Capital 33
The Capital Structure Weights 33
Taxes and the Weighted Average Cost of Capital 33
Company Valuation with the WACC 34
Chapter 15: Raising Capital 35
Venture Capital 35
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Exam Notes and Chapter Summaries
, TABLE OF CONTENTS
Chapter 1: Introduction to Corporate Finance 5
1.1 Financial Management Decisions 5
1.1.1 Capital Budgeting 5
1.1.2 Capital Structure 5
1.1.3 Working Capital Management 5
1.2 Forms of Business Organisation 6
1.3 Goal of Financial Management 7
1.4 The Agency Problem 8
1.4.1 Solving the Agency Problem 8
1.5 Cash Flows To And From The Firm 9
Chapter 2: Financial Statements, Taxes and Cash Flow 10
2.1 Balance Sheet 10
2.1.1 Liquidity 10
2.1.2 Debt Versus Equity 10
2.1.3 Market Value Versus Book Value 11
2.2 Income Statement 11
2.2.1 GAAP and the Income Statement 12
2.2.2 Non-cash Items 12
2.2.3 Time and Costs 12
2.3 Taxes 13
2.3.1 Corporate Tax Rates 13
2.3.2 Average Versus Marginal Tax Rates 13
2.4 Cash Flow 13
2.4.1 Cash Flow from Assets 14
2.4.2 Cash Flow to Creditors and Stockholders 15
Chapter 3: Working with Financial Statements 17
3.1 Cash Flow and FInancial Statements 17
3.1.1 Sources and Uses of Cash 17
3.2 Statement of Cash Flows 18
3.3 Ratios for Financial Analysis 19
3.3.1 Liquidity Ratios 19
3.3.2 Long-term Solvency Ratios 19
3.3.3 Asset Management, or Turnover, Measures 20
3.3.4 Asset Turnover Ratios 20
3.3.5 Profitability Measures 20
3.3.6 Market Value Measures 20
Chapter 5: Introduction to Valuation: Time Value of Money 21
5.1 Future Value and Compounding 21
2
, 5.1.1 Investing For A Single Period 21
5.1.2 Investing For More Than One Period 21
5.2 Present Value and Discounting 22
5.2.1 The Single-Period Case 22
5.2.2 Present Values for Multiple Periods 22
5.3 Present Versus Future Value 22
Chapter 7: Interest Rates and Bond Valuation 24
7.1 Bonds and Bond Valuation 24
7.1.1 Bond Features and Prices 24
7.1.2 Bond Values and Yields 24
7.2 Interest Rate Risk 25
Current Yield vs. Yield to Maturity 26
Differences Between Debt and Equity 27
Inflation and Interest Rates 27
The Fisher Effect 28
Inflation and Present Values 28
Chapter 8: Stock Valuation 29
Common Stock Valuation 29
Characteristics of a Common Stock 29
Chapter 9: Net Present Value Calculations and Other Investment Criteria 29
The Payback Rule 29
The Discounted Payback 29
The Average Accounting Return 29
The Internal Rate of Return (IRR) 30
Chapter 13: Return, Risk and the Security Line 30
Chapter 14: Cost of Capital 31
The Cost of Equity 31
The Cost of Debt 32
The Cost of Preferred Stock 32
The Weighted Average Cost of Capital 33
The Capital Structure Weights 33
Taxes and the Weighted Average Cost of Capital 33
Company Valuation with the WACC 34
Chapter 15: Raising Capital 35
Venture Capital 35
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