Class notes
Finance 1 midterm notes
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Notes from lectures and slides for finance 1 for midterm (week 1- 3)
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Week 1Ch. 1: The corporation
Objective of the firm = Maximize shareholder value
- including the value of all the stakeholders
Do firms maximize value?
We have agency problem - self interested managers or CEO may maximize own utility,
rather than that of the shareholders
- How to fix this?
- Board of directors(make the ultimate business decisions) overlook CEO
- Tie management's compensation to the firms performance
- Investors sell shares after poor performance, price of stock goes down
Hostile takeover - when a rich individual or organization buys a large share of a poorly
performing firm and gets enough votes to replace the Board of directors
The stock market
- Public vs private company
- Primary vs secondary
- Primary - person buys the market directly from the company
- Secondary - person buys stocks from someone else that's selling it
- When you buy you pay the ASK price, when you sell you pay the BID price
, Ch. 2 Financial Statement Analysis
Financial statement - accounting reports with past performance information that a firm has to
issue periodically
Every public company has to release 4 financial statements
Balance sheet - lists firms assets and liabilities
Assets = Liabilities + Stockholders’ Equity
Assets
- Current assets - cash, accounts receivable, inventories
- Long term assets - net property, plant and equipment
- Because properties and equipment lose value over time, the company will
reduce the value each year by reducing a depreciation expense.
Accumulated depreciation is total amount deducted over its life
- Book value - value shown in the financial statements
- Book value = acquisition cost - accumulated depreciation
Liabilities
- Current liabilities - accounts payable, short term debt or notes payable and current
maturities of lond term debt, unearned revenue
Net working capital = current assets - current liabilities
= cash needed to run the firm + debtors + inventory - creditors
- Long term liabilities - long term debt, capital leases, deferred taxes
Book holders value of equity = Stockholders’ Equity - accounting net worth of
the firm
Book Value of equity = Total assets - Total liabilities
Market value of equity = market cap = shareholders outstanding x market price per share
Market value of equity - total market value of the firm equity
- Market to book ratio - ratio of market capitalization to book value of
stockholders’ equity
- Market to book ratio = market value of equity / book value of equity
- Successful firms > 1
- LOW = value stoc ur ks
- HIGH = growth stocks
Income statement - lists forms revenues and expenses
(EBITDA) before depreciation
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