The coverage suggested above is designed to give students a broad view of the role of financial management. If managers have a substantial stake in the company, they will have more insight into the company's valuation.
AMBROSE BIERCE The Devil’s Dictionary
L. MENCKEN From A Mencken Chrestomathy
With the advent of calculators, this is much easier and the benefit of present value tables is reduced. The present value equation, 1/(1 +i)n, is such that if you divide 1 by (linearly) increasing amounts of i, the present value decreases to zero, but at a decreasing rate.
OSCAR WILDE
When students work with present value tables, they should still be able to determine an approximation of the return to be claimed using a trial and error procedure.). All things being equal except the term, the longer the term, the greater the price fluctuations associated with a given change in the required market return.
The yield to maturity is higher than the coupon rate of 8 percent because the bond is selling at a discount to its face value. The value of this type of bond is based on simply discounting the maturity value of each bond to the present.
GENERAL GEORGE S. PATTON
The characteristic line shows the expected relationship between additional returns (above the risk-free rate) for the security in question and for the market portfolio. This indicates that the excess returns for the stocks fluctuate less than the excess returns for the market portfolio.
ABRAHAM BRILLOFF
The purpose of a balance sheet is to give a picture of the company's financial position at a point in time. The income statement, on the other hand, shows an overview of the company's profitability over time. An increase in receivables will be reflected in a longer average collection period and possibly in a stretch of the aging plan for debtors.
34;earning power" of the company represents the actual limit of credit risk in the long run regardless of the initial strength of the assets. The impact of the increase in debt and the general decrease in profitability is also reflected in the decrease in coverage (No. 11) In addition, he should worry about everything else, because he would deterioration of liquidity and profitability affected the company's 10-year debt.
Net fixed assets increased in 20X2 and then decreased as a percentage of the total to almost 1% in 20X1. In 20X2, this decline was due to cost of goods sold and interest expense as other expenses and taxes decreased as a percentage of sales.
ANONYMOUS
The quality of cash planning can also convince lenders to lower their risk perceptions of the business and therefore charge a lower interest rate. An insight is gained regarding the use of the funds provided by the banker as well as the source that will enable the business to pay off the banker's loan. The statement of sources and uses of funds deals with accounting flows and not necessarily cash flows.
It is really the cornerstone on which the cash budget is built and should come first in the preparation of the cash budget. While the cash budget and the projected income statement are projections of the future, the former is monthly and includes cash on hand, not accounting income. The two main ways in which forecast statements are prepared are through a cash budget and direct item estimates.
In addition to the same points highlighted by the analysis of the statement of resources and the use of assets, we see that all of the company's cash flow from operating activities (and then some) went into increasing fixed assets. In general, a statement of cash flows prepared using the indirect method gives you about the same information gathered by analyzing the statement of sources and uses of funds.
PIETRO METASTASIO
Working
Working capital management involves managing the firm's current assets -- that is, cash and marketable securities, receivables, and inventory -- and the financing (specifically, current liabilities) needed to support current assets. As the level of current assets increases (a move toward a more "conservative" working capital strategy), the firm's riskiness generally decreases -- but so does the firm's profitability. The permanent component of current assets would be financed with long-term debt or equity.
Using permanent financing for short-term needs can result in inefficient operation of the firm. Thus, the firm is paying a higher cost of capital in exchange for a reduction in the firm's characteristic risk. The reduced margin of safety against adverse fluctuations in net cash flow results in an increased level of risk for the firm.
Excessive investment in working capital reduces the profitability of the company without corresponding reduction in risk. The hidden cost is that part of the company's debt capacity is used up to finance increased levels of current assets with debt.
FRANCIS BACON
Reducing resources in the collection pipeline will not impact the risk characteristics of the business as these resources are reinvested in productive assets. Because the gross benefit of the lockbox system ($87,500) exceeds the cost of the lockbox system, the system must be restarted. Commercial paper is less attractive than Treasury bills because of the state income tax from which Treasury bills are exempt.
34;deadbeats" (less bad debt loss and other costs) do not exceed the required return on the additional (and long-term) investment in accounts receivable should the firm cease sales to these customers. Each step involves a cost and the value of additional information must be balanced against the profitability of the order and the cost of the information. Beyond a certain point, increased expenses will not produce any results, since those accounts will default regardless of the pressure placed on them to pay.
Since the sum of the return on the receivables reduction at a 20 percent opportunity cost plus the bad debt reduction exceeds the increased collection costs of $180,000, the intensified collection program should be undertaken. However, credit information costs are a percentage of the average order and these costs apply to all new orders.
BENJAMIN FRANKLIN
With this instrument, the acceptance of the draft by a bank substitutes the bank's credit for that of the parties involved. The quality of the borrower and its cash flow ability to service debt largely determines whether a borrower is willing to make an unsecured loan. If the lender does not have a very high degree of confidence in the borrower's ability to repay, he will insist on some sort of secured lending arrangement.
The advanced percentage depends on the marketability of the collateral, the synchronization of its life with that of the loan and the underlying riskiness of the collateral. In determining an appropriate mix of short-term financing, such as the relative cost of funds, the availability of different types of financing, whether or not the type of financing requires collateral, the timing of borrowing in the money market or from a private lender, and the flexibility associated with the different types of funding available should be taken into account. The main disadvantages of the extension are the cost of the cash discount and the possible deterioration of the credit rating.
The annual dollar cost decreases while the annual percentage charge increases as less of the entire revolving credit agreement is used up. Bank financing is about 3.4 percent more expensive than commercial paper; therefore, a commercial note must be issued.
SHERLOCK HOLMES IN THE COPPER BEECHES
Ultimately, however, we add it back to the net change in after-tax income, so as not to underestimate the project's effect on cash flow. Ignore any taxes due to sale.. An old machine would be added.. In inventory Add Ignore c) Shipping Add Add .. d) Concrete foundation Add Add . e) Machine training. Capital budgeting is concerned with the net cash flows that occur now and in the future.
If the required rate of return is the cost of capital, where investors' expectations include an increase to protect purchasing power, then the benefits generated by a project should include the higher price of the product over time due to inflation. This procedure is used by many companies under the implicit assumption that management time is valuable and must be rationed. The product expansion project will produce new future cash revenues, but will also involve higher future cash operating costs.
If it is purely arbitrary, it may be impossible for us to solve it. If, on the other hand, it is systematic, I have no doubt that we will still get to the bottom of it.
SHERLOCK HOLMES IN THE ADVENTURE OF THE DANCING MEN
JAMES T. KIRK, CAPTAIN OF THE STARSHIP ENTERPRISE
The semivariance is the variance of the distribution to the left of the expected value and can be thought of as a measure of downside risk. Mathematically, it is defined as the ratio of the standard deviation of a distribution to the expected value of the distribution. To standardize the spread of a probability distribution, one takes differences from the distribution's expected value (mean) and divides them by the standard deviation.
The larger the premium, the narrower the spread of NPVs -- that is, the lower the. standard deviation of the probability distribution of NPVs. Risk will then be evaluated in a comparison of the standard deviation with the expected value. The greater the correlation of net present values between projects, the greater the standard deviation of the portfolio of projects, all other things being equal.
The effect of the correlation coefficient on the standard deviation of a portfolio of projects is shown in equations (14-6) and (14-7) in the chapter. The greater the uncertainty or volatility of possible outcomes, the greater the value of the option.
