FM (PRELIM)

To be able to become owners of a corporation we need to buy shares of

stocks of the corporation. A corporation maybe publicly owned or
privately owned.
Stocks of a privately owned corporations can only be bought with the
express consent of the family members.
The main objective of a shareholder should be wealth maximization or maximizing
the wealth of shareholders.
Finance is defined by Webster’s Dictionary as “the system that includes the
circulation of money, the granting of credit, the making of investments, and the
provision of banking facilities.”
Financial management, also called corporate finance, focuses on decisions relating
to how much and what types of assets to acquire.
Capital markets relate to the markets where interest rates, along with stock and
bond prices, are determined.
Investments relate to decisions concerning stocks and bonds and include a
number of activities:
(1) Security analysis deals with finding the proper values of individual
securities (i.e., stocks and bonds)
(2) Portfolio theory deals with the best way to structure portfolios, or
“baskets,” of stocks and bonds.
(3) Market analysis deals with the issue of whether stock and bond markets
at any given time are “too high,” “too low,” or “about right.”
Economists developed the notion that an asset’s value is based on the future cash
flows the asset will provide, and accountants provided information regarding the
likely size of those cash flows.
Maximizing shareholders’ wealth through maximization of stock price should be
the overriding objective of management
To maximize the value of the firm’s common stock it’s market price must increase.
The financial manager of the firm plays a crucial role in the company’s goals,
policies, and success.
Investment Decisions This entails an outflow of resources with the expectation of a
benefit in the form of a cash inflow in the near future.
Financing Decisions One of the responsibility of a financial manager is to find
ways to provide money for the activities of the firm.
The main idea in financing decisions is to look for resources that will give the
company the lowest weighted average cost of capital.
Dividend Policy Decisions Dividend payouts is a sign that company is profitable.
A sound dividend policy is a good financial sign to the market that continually
assess a company.
Agency Theory The agency theory poses a potential conflict of interest between
the stockholders and the managers. Such conflict starts when the stockholders
entrust to the managers the authority to make decisions for the business.
WEEK 2
The purpose of financial reporting is to aid interested parties in evaluating a
company’s past performance and in forecasting its future performance.
The financial statements provided us with the financial information from the
company.
According to J. Weygandt (2016) “Analyzing financial statements involves
evaluating three characteristics: a company’s liquidity, profitability, and solvency.
Intracompany basis. Comparisons within a company are often useful to detect
changes in financial relationships and significant trends. (Weygandt, Kimmel, &
Kieso,2015)
Industry averages. The company can compare its financial data with industry
averages.
Intercompany basis. Comparison with other companies, like competitors, may
provide insights into the company’s competitive edge.
Horizontal analysis or trend analysis is a technique for evaluating a series of
financial statement over a period of time.
Vertical analysis, also called common-size analysis, is a technique that expresses
each financial statement item as a percentage of a base amount.
RATIO ANALYSIS To express the relationship among selected items of financial
statement data accountants use financial ratios. A ratio expresses the mathematical
relationship between one quantity and another.
Profitability ratios measure the income or operating success of a company for a
given period of time. Income, or the lack of it, affects the company’s ability to
obtain debt and equity financing.
Gross profit margin expresses gross profit as a percentage of sales. (Salazar, 2017)
From the gross profit margin, we can also establish the pricing policy of the
company.
Operating profit margin expresses operating income as percentage of sales.
(Salazar,2017) Operating income is the result after deducting operating expenses
from gross profit.
Return on assets or ROA us used to compute for the profitability of assets. It
answers the question: how much was earned from the employed assets. It shows
the company’s efficiency in using its assets.
return on equity or ROE is one of the measures that take into account the efficiency
of using the investments made by the owners.
Asset Turn Over Ratio To generate sales, the company needs assets. It is necessary
for businesses to be able to measure how efficiently assets are used.
Fixed Asset turnover This is the same as asset turnover except that this directly
looks at the fixed assets.
Inventory turnover measures the number of times, on average, the inventory is sold
during the period. Its purpose is to measure the liquidity of the inventory.
Accounts Receivable turnover This ratio measures the number of times the
company can convert accounts receivable into cash during the year.
Solvency Ratios The company’s capacity to pay their long-term debt
or obligations can be analyzed by using solvency ratios.
Debt to equity ratio will show us the how much of the company’s assets are
financed by debt or equity.
This ratio is similar to debt to equity ratio. It indicates the percentage of the
company’s assets finance by debt.
Interest coverage ratio or times interest earned Measures ability to meet interest
expense payments as they come due. This ratio will show us if the company is able
to earn income that can be paid for interest.
Liquidity ratios is used to asses if the business will be able to pay it’s currently
maturing obligations if it falls due.
Current ratio Measures ability to meet interest expense payments as they come due.
This ratio will show us if the company is able to earn income that can be paid for
interest.
Quick ratio or Acid test ratio Measures ability to meet interest expense payments
as they come due. This ratio will show us if the company is able to earn income
that can be paid for interest.