Finance: Test Two Study Guide
Chapter 4 Cash Flow:
A. Operating: cash flows directly related to sale and production of the firm’s products and services.
B. Investing: cash flows associated with purchase and sale of both fixed assets and equity investments in other firms.
C. Financing: cash flows that result from debt and equity financing transactions; include incurrence and repayment of debt, cash inflow from sale of stock, and cash outflow to repurchase stock or pay cash dividends.
Financial Planning Process: Begins with long-term, or strategic, financial plans that in turn guide the formulation of short-term, or operating, plans and budgets.
A. Long-term (strategic) financial plans: lay out a company’s planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years.
B. Short-term (operating) financial plans: specify short-term financial actions and the anticipated impact of those actions. Key inputs include sales forecast and other operating and financial data. Key outputs include operating budgets, the cash budget, and pro forma financial statements.
Begins with Sales Forecast, from that production plans are developed that consider lead times and raw material requirements. From production plans, direct labor, factory OH, and operating expense estimates are developed. From this information, the pro forma income statement and cash budget are prepared- ultimately leading to the development of the pro forma balance sheet.
Pro-forma financial statements: Projected, or forecast, income statements and balance sheets.
Weaknesses: the firm’s past financial performance will be replicated in the future, and that certain variables (cash, A/R, and inventories) can be forced to take on certain “desired” values.
Strengths: can be use them to analyze the firm’s inflows and outflows of cash, various ratios can be calculated from the statements, cash inflows and outflows can be evaluated by preparing pro forma statement of cash flows, after viewing pro-forma statements manager can take steps to adjust
Finance: Test Two Study Guide
Chapter 5
Present value: current dollar value of a future amount- the amount of money that would have to be invested today at a given interest rate over a specified period to equal future amount.
Formula: FVn / (1+r)n
Future value: value at a given future date of an amount placed on deposit today and earning interest at a specified rate. Found by applying compound interest over specified period of time.
Formula: FVn= PV x (1 + r) n
Compound interest: Interest that is earned on a given deposit and has become part of the principal at the end of a specified period.
Annuity: a stream of equal periodic cash flows, over a specified time period. These cash flows can be inflows of returns earned on investments or outflows of funds invested to earn future returns
Annuity due: is an annuity for which the cash flow occurs at the beginning of each period
Cash Flow Patterns:
Single Amount: a lump sum amount either held currently or expected at some future date.
Mixed Stream: A stream of unequal periodic cash flows. Perpetuity Problem: PV of a perpetuity= PMT / r
PMT= expected cost
Example: 6,000 / .10= 60,000
