Financial Management (FIN 3200 | Weber State)

Chapter 1

Objective: Maximize shareholder wealth by maximizing fundamental value of stock price
Money market securities: Mature in less than a year
Capital Market Securities: Mature in more than a year or not at all
Four fundamental factors that affect the cost of money
1. Production opportunities
2. Time preference for consumption
3. Risk
4. Inflation

Direct: Giving cash for a claim on risky future cash

Primary market transaction
Investment Bank: underwriter serves as a middleman
Primary market transaction
Financial Intermediary: Savers pay intermediary in exchange for securities of the intermediary.

Financial Instrument: Any claim on future cash flows
Financial Security: A claim that is standardized and regulated

Proprietor
Partner
Corporation

Chapter 2

Indifference Tax Rate

C o r p o r a t e % \times (1 - T R) = M u n i %

Net Cash Flows

EBIT
(Interest)
(Tax)
NI
+Depreciation
NCF

Free Cash Flows

NOPAT	$E B I T \times (1 - T a x R a t e)$
	NOWC = $C A_{o}$ - $C L_{o}$
	$O C = N O W C + N F A_{o}$
- NIOC	$N I O C - O C - O C_{P}$
= Free Cash Flow

ROIC

\frac{Operating Profit}{Operating Capital}

EVA

N O P A T - (W A C C) (O C)

Chapter 3

Return: Net Income on Top
Turnover: Sales on Top (Except IT)

Liquidity Ratios

Current Ratio = \frac{Current Assets}{Current Liabilities}

Quick Ratio = \frac{Current Assets - Inventories}{Current Liabilities}

Leverage Ratios

Inventory Turnover = \frac{COGS}{Inventories}

Exception to turnover rule
$Fixed Assets Turnover = \frac{Sales}{Net Fixed Assets}$
$Total Assets Turnover = \frac{Sales}{Total Assets}$

DSO = \frac{Accounts Receivable}{(Sales/365)}

Debt Ratios

Debt Ratio = \frac{Total Debt}{Total Assets}

$TIE Ratio = \frac{EBIT}{Interest Expenses}$
$EBITDA Coverage = \frac{EBITDA + Lease Payments}{Interest + Principal Repayments + Lease Payments}$

Profitability Ratios

Profit Margin = \frac{Net Income}{Sales}

Earning Power = \frac{EBIT}{Total Assets}

$ROA = \frac{Net Income}{Total Assets}$
$ROE = \frac{Net Income}{Common Equity}$

Market Value Ratios

P/E Ratio = \frac{Price per Share}{Earnings per Share}

M/B Ratio = \frac{Market Price per Share}{Book Value per Share}

$Book Value per Share = \frac{Common Equity}{Shares Outstanding}$

Equity Multiplier = \frac{Total Assets}{Total Equity}

DuPont

R O E = P M \times E M \times T A T

PM = Return on Sales
EM = TA/TE (Emory Tate)
TAT = Sales/TA

Chapter 4

Make a timeline

TVM

N: Number of periods
I/YR: Interest money now would incur per period
PV: Current Value of future cash
PMT: Annuity
FV: Future Value

Ordinary (end mode) | Annuity due (begin mode)

Uneven Cash Flows

Enter Discount Rate
Enter Cash Flows
Find NPV
Net Future Value

SWAP from NPV

EFF%

Enter Nominal as I/YR
Enter # of compounding periods as P/YR
Solve EFF%

Amortization

Beg Period, INPUT, End Period, Red, FV (AMORT) - Y $\times$ 12 will give you the last month of the year +1 for the first month of next year

Principal PMT: $=_{1}$
Interest PMT: $=_{2}$
Remaining Loan Balance: $=_{3}$
Make sure N and I/YR are adjusted

Chapter 5

Bond Valuation

N: Time to maturity
r: Rate on debt ( $r_{d}$ ), Yield to maturity (YTM), Market, Yield to call (YTC)
PV: (Price)
PMT: par $\times$ Coupon rate
FV: par
1 payment per year, end mode

Pasted image 20251006160101.png|400

Bond Yield

Y T M = C Y + C G Y

C Y = \frac{P M T}{P V}

C G Y = Y T M - C Y

Bond Rates

r_{d} = r ⋆ + I P + M R P

MRP = Default risk + Liquidity Premium
MRP only on corporate bonds
For IP use Average IP though the time period

Bond Price

Use TVM
N
r
Price
Par x Coupon
Par
Adjust for semi annual (N x 2, r/2, PMT/2

Call

Call Period
r
Price
Par x Coupon
Call Price

Expect on premium bonds

Chapter 6

Regression

Enter Values

x, =, y, $Σ +$
Mean (Shift 7)
Stdev (Shift 8)
Population Stdev (Shift 9)
Alpha (Shift, 6, SWAP) - b
Beta (Shift, 5, SWAP) - m
Correlation (Shift, 4, SWAP) - r
Goodness of fit = $r^{2}$
Future Estimate (enter X value, orange, 5)

Statistics

$Expected rate = Σ (P \times r_{i})$
$V a r i a n c e = Σ (r_{i} - \hat{r})^{2} P$
$S t D e v = \sqrt{V a r}$
$C o V a r = S t D e v / \hat{r}$

Portfolio Analysis

$\bar{r}$ = Weighted Average Rate
$B e t a = (C o r r \times S t D e v_{i}) / S t D e v_{M}$

CAPM

$C A P M$ $(r_{i})$ = $r_{R F} + (r_{P M} \times b)$

$r_{P M} = r_{M} - r_{R F}$

Chapter 7

Constant Growth Model

P_{0} = \frac{D_{1}}{r_{s} - g_{L}}

P_{t} = P_{0} (1 + g_{L})^{t}

Preferred Stock

r_{p s} = \frac{D_{p s}}{V_{P S}}

Multistage Valuation Model

Cash Flow (HP10bII+)

$C F_{0} = 0$
$C F_{Non Constant} = Dividend$
$C F_{Constant Growth -1} = D i v i d e n d + P_{t}$
Enter $r_{s}$ as i/YR
Calculate NPV (Orange, PRC)
Cross out start and finish, used only for calculations $Div Yield = \frac{D i v}{P r i c e}$

Chapter 9

Component Cost of Debt ( $C C_{d}$ )

C C_{d A T} = C C_{d B T} (1 - T R)

Component Cost of Preferred Stock ( $C C_{p s}$ )

C C_{p s} = \frac{D i v i d e n d}{Net Price}

Component Cost of Common Equity ( $C A P M$ )

C A P M = r_{R F} + (R P M \times b)

$R P M = R M - r_{R F}$
or
OBY + JRP

Discounted Cash Flows (RE and NS)

Retained Earnings:

D C F_{r e} = \frac{D_{1}}{P_{0}} + g

New Stock:

D C F_{n s} = \frac{D_{1}}{Net Price} + g

Weighted Average Cost of Capital (WACC)

Identify: Target Capital Structure

Σ (w e i g h t \times C C)

Debt
Preferred Stock
Equity (Retained earnings or New Stock)

Breakpoint

\frac{Δ Retained Earnings}{Weight of Common Equity}

Largest capital budget without issuing new stock

Chapter 10

Discount with WACC

Payback

Investment
(Cash Flow)
Repeat
$+ \frac{Cash Remaining}{Final Cash Flow}$

Discounted Payback

Investment
(Discounted Cash Flow)
Repeat
$+ \frac{Cash Remaining}{Final DCF}$

TVM for DCF

N
WACC
0
Cash Flow

Net Present Value

Enter Cash Flows
Enter WACC as I/YR
Solve NPV

Equivalent Annual Annuity

TVM

# of periods
WACC
NPV
EAA
0

Profitability Index

\frac{N P V + I n v e s t m e n t}{I n v e s t m e n t}

Internal Rate of Return

Enter Cash Flows
Solve for IRR

Modified Internal Rate of Return

Terminal Value = NFV of future cash inflows

Enter future cash inflows (no outflows)
Enter I/YR
Solve NFV (NPV, SWAP)
TVM
# of periods
MIRR
Investment
0
TV

Crossover Rate

Enter Cash flow differences as cash flows
Solve for IRR%
Solve for NPV using IRR as Discount rate to check (should be the same for both)

Chapter 14

Irrelevant: Doesn't matter (can sell or buy for liquidity preference)
Bird in the hand: Dividends are more valuable
Tax Effect: Higher capital gains so taxes are deferred

Clientele Effect: Past policy has determined who bought in the past
Signaling: Increased dividends signal higher expected EPS

Residual distribution Model

Distribution Available = NI Available - Equity Needs

$Equity Needs = Target Equity Ratio \times Total Capital Budget$
$Payout Ratio = \frac{Distribution Available}{N I}$
Equity Ratio + Debt Ratio = 100%

Repurchase

Calculate Market Cap
($ Repurchase)
/ Market Price
# Shares Remaining

Chapter 16

Set up Relaxed, Moderate, and Tight Policies

Assets

Interest Expense (per policy)

Sales x Policy% = Current Assets
+ NFA = TA
x %Debt = Debt Level
x $C C_{d}$ = Interest Expense

Income Statement

Identify EBIT
(Interest)
x (1-TR)
Net Income

$R O E = \frac{N I}{C E}$

$C E = (1 - D %) \times T A$

Cash Conversion Cycle

C C C = I C + D S O - P D

$I C = \frac{I n v e n t o r y}{Daily COGS}$
$D S O = \frac{AR}{Daily Sales}$
PD = Time from purchase to Cash Outflow

Liabilities

Free Trade Credit = Daily Purchases \times Discount Days

Nominal Cost = \frac{Discount %}{1-Discount %} \times \frac{365}{Costly Time Period} \times 100 %

Enter as I/YR
Enter 365 / Costly Time Period as P/YR
Solve for EFF%
or
(D%/1-D%)
+1
^(365/Costly Time Period)
-1
= EFF%