Summary
IFA Summary - Chapter 1 - 4 Finance BMA
- Course
- Institution
UU Introduction to Finance and Accounting - Summary of Chapter 1, 2, 3 and 4 (1-4) of 'Principles of Corporate Finance' by Brealey, Myers and Allen (BMA)
[Show more]
Seller
Follow
bjornlabrie
Reviews received
Content preview
Summary BMA (Midterm material):Chapter 1:
Corporation legal entity, limited liability (advantage), unlimited lifespan (because managers can take
over each other's jobs), shareholders own the corporation, managers control the corporation.
Other types of entities Partnership and sole proprietorship.
Goals of Corporations investing in real (tangible or intangible) assets and maximising shareholder
value managers will raise value whenever the corporation earns a higher return than the
shareholders incentives lead to increase in value all together.
Disadvantages of Corporations double-taxation.
Financial decisions 1) investing decisions what investments should be made, and 2) financing
decisions how investments should be financed.
Economic benefits ability for assets to generate future cash flows.
Three ways of obtaining money to invest in real assets liabilities (borrowing from banks), equity
(making sure shareholders buy additional shares) and retained earnings L E R (in DEALER).
Bonds and stock are securities (tradable financial asset, representation of ownership). Real assets are
financed by liability and shareholders' equity.
CAPEX = capital budgeting = investment decisions to be found in an annual report on capital budget
(projects).
Investment 'today' generates cash in the future. Risk = cash returns are not always guaranteed.
Capital Structure decision = choosing between financing through banks (debts) or through
stockholders (equity).
Bond coupon rate r, yield to maturity y, face value F, time t, cash flows c, price P.
Retained earnings = reinvesting earned profits / revenues into the corporation, hereby not paying
dividends to stockholders.
Market Value = number of shares * share price.
Separation of ownership and control owners and managers.
Managers stand between operations and markets.
Investments will be done when the rate of return is higher than the opportunity cost of capital.
NPV > 0 or IRR > r then invest.
Agent vs Principle problem managers and stockholders asymmetrical information and
differences in interests/needs.
Chapter 2:
Tangible assets are touchable, intangible assets are not touchable (patents / brand name / goodwill).
When corporations invest (in assets), these assets are expected to generate cash flows in the
foreseeable future. Most corporations take on liabilities when investing, to finance the investments.
Time value of money/cash flows interest rate, opportunity cost of capital, discount rate r
Future Value, Present Value, Discount Factor, NPV (Net PV) the longer time money is saved, the
more it will become due to interest. Vice versa, the longer you have to wait for money, the lower the
present value (today) will be.
Rate of Return = profit / investment.
Market Price = present value of an asset or a good/service (historical cost – depreciation).
Perpetuities (infinite cash flows per period of time, but no repayment of face value), Annuities (cash
flows for a certain period of time, with repayment of the face value) PV and FV of Annuities.
Growing perpetuities and annuities.
APR ≠ EAR EAR = (1 + APR/n)n – 1
APR = quoted annual rate total annual payment / number of payments.
Continuous Compounding infinite n ert
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller bjornlabrie. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $4.89. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
66475 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now