lecture 1 Introduction and Review of Accounting.pdf

Tubagus Nur Ahmad Maulana

Nick name : Amet

Email : [email protected] : [email protected]

[email protected]

Financial ManagementFinancial Management

1. Introduction and Review of Accounting

2. The Time Value of Money

3. Valuing Bonds

4. Valuing Stocks

5. Net Present Value and Other Investment Criteria

Course Outline (tentative)

5. Net Present Value and Other Investment Criteria

6. Using Discounted Cash-Flow Analysis to Make

Investment Decisions

7. Introduction to Risk, Return, and the Opportunity

Cost of Capital

8. Risk, Return, and Capital Budgeting

9. The Weighted-Average Cost of Capital and

Company Valuation

10. International Financial Management

11. Merger and Acquisition

Course Outline

References:

1) Brealey, Myers and Marcus, Fundamentals of

Corporate Finance, 5th Edition. McGraw-Hill

2) Block and Hirt, Foundations of Financial

Management, 10th Edition, McGraw-Hill.

Text Books

Management, 10th Edition, McGraw-Hill.

3) Ross, Westerfield, Jordan, Fundamentals of

Corporate Finance, 8th or 9th Edition, McGraw-

Hill

• Suad Husnan dan Enny Pudjiastuti. Dasar-dasar

manajemen Keuangan.

• Lukas Setia Atmaja. Teori dan Praktik Manajemen

Keuangan.

• What is Finance all about?

• Goals of Financial Management

• Functions of Financial Management

• Forms of Business Organization

Lecture 1 - Outline

• Forms of Business Organization

• Financial Markets

• Summary

• Income Statement

• Income and Value

• Balance Sheet

• Income and Cash Flow

Lecture 1 - Outline

• Income and Cash Flow

• Statement of Cash Flows

• Free Cash Flow

• Tax and Financial Decision

• MVA and EVA

• Summary and Conclusions

• Finance is about making decisions that focus on creating value within the firm.

• Finance builds upon the disciplines of economics and accounting.

-- economics provides theories about economic system

and decision making,

-- accounting supplies financial data and data analysis

What is Finance?

-- accounting supplies financial data and data analysis

tools.

• Finance has evolved from a purely descriptive legalistic discipline to an analytical, decision-oriented discipline used by financial managers.

• Finance tries to help financial managers to answer (i.e. make decisions about) the following questions:1. What long-term investments or projects the firm

should undertake? (capital budgeting decision)

2. How the firm should pay for these assets? By issuing

What is Finance?

2. How the firm should pay for these assets? By issuing

equity or debt? (capital structure decision)

3. How much cash or inventory the firm should carry?

How much trade credit the firm should provide or

use? (working capital management decision)

• These decisions are made within a risk-returnframework.

• The primary goal is shareholder wealth maximization because the firm is owned by the shareholders.

• This goal should be measured in terms of market share price, which is a value that investors collectively are prepared to pay.

• The alternative uppermost in the mind of the public,

Goals of Financial Management

• The alternative uppermost in the mind of the public, profit, fails to consider risk and timing and more importantly, it is almost impossible to accurately measure profit.

• The goal of maximizing shareholder wealth may

conflict with

- interests of management (their compensation)

- social/ethical goals

• Agency theory is about the potential conflict between


• Agency theory is about the potential conflict between

shareholders and managers.

• Tradeoffs exist between the agency costs of

monitoring management actions and the possible loss

of incentives.

• The goal of shareholder wealth maximization can be consistent with a concern for social responsibility.

• Firms should take socially desirable actions even if certain actions like pollution control may at times conflict with this goal.

• Managers should strictly follow the rules of fairness and honesty.


honesty.

• Insider trading and manipulation of financial results are detrimental to confidence in the financial system.

• Ignoring social responsibility can lead to a backlash of anti business sentiment, reflected in legislation.

• The study of finance covers a variety of topics.- Corporate finance

- Banking

- Securities trading and underwriting

- Money management

Functions of Financial Management

- Money management

- Financial planning

- Risk management (insurance)

• Some of these functions are performed on a daily basis and others are less routine.

• All these functions are carried out with the intention to proper balance profitability against risk.

Daily

Cash management

(receipt and disbursement of Intermediate financing

Bond issues

Profitability

Goal:

Maximize

Figure 1-1

Functions of the Financial Manager

Occasional

Trade-off

(receipt and disbursement of

funds)

Credit management

Inventory control

Short-term financing

Exchange and interest rate

hedging

Bank relations

Bond issues

Leasing

Stock issues

Capital budgeting

Dividend decisions

Forecasting Risk

Maximize

shareholder

wealth

↑↑↑↑ Profitability →→→→ ↑↑↑↑ Risk

↓↓↓↓ Profitability →→→→ ↓↓↓↓ Risk

• e.g., investing in stocks vs.savings accounts

• Stocks may be more profitable but are riskier

Risk-Return Tradeoff

• Stocks may be more profitable but are riskier

• Savings accounts are less profitable and less risky

(or safer)

Financial manager must choose appropriate

combination of potential profit (return) and level

of risk (safety)

Forms of Business Organization

We look at three different legal forms:

� Sole proprietorship

� General or limited partnership

� Corporation

17

Sole Proprietorship

� No distinction between owner and business

� Owner Keeps all profits

� Unlimited Liability

18

� Unlimited Liability

� Small ventures owned by a single person

- Doctor or dentist’s practice

- Kebab Stand at Botani Square

- Small Farm in Bogor

Sole Proprietorship

� Easy and inexpensive to

setup

� Profits are taxed once as

� Unlimited liability – can

lose personal assets.

� Equity capital limited to

Advantages Disadvantages

19

� Profits are taxed once as

personal income

� Equity capital limited to

proprietor’s wealth

� Difficult to transfer –

must sell entire business

to new owner

� Life of business limited

to life of owner

Partnership

• Similar to a proprietorship, but

– Two or more owners

– Shared resources, revenues and responsibilities

– One partner can act on behalf of others

• Two types of partnership agreements:

� General partnership

� Limited partnership

20

General Partnership

• Everything is shared

• All general partners have unlimited liability

• Partnership terminates when a general partner wishes

to sell out or dies

21

Limited Partnership

• General partners run the business and have unlimited liability, but some partners have limited liability.

• Limited partners do not actively participate in the business and liability is limited to what they contributed to the business.contributed to the business.

• A limited partner’s interest can be sold without dissolving the partnership

22

Partnership

� Relatively easy to start

� Profits taxed once as

personal income

� Unlimited liability for

general partners

� Partnership dissolves


23

personal income

� More capital available

� Partnership dissolves

when one general partner

wishes to sell or dies

� Difficult to transfer

ownership

Corporation

� Most important form of business organization.

� Exists as a separate legal entity from the owners.

� Unique powers

- can occur debts

24

- can occur debts

- can sue and be sued

- enter into legal contracts

- limited liability of owners (shareholders)

- shares of common stock easily transferred.

Corporation

� Limited liability

� Separation of ownership

and management

� Double taxation

- corporate income tax

- dividends are taxed


25

and management

� Easier to raise capital

� Transfer of ownership is

easy

� Unlimited lifespan!

- dividends are taxed

� Separation of ownership

and management

� Slightly complicated to

setup� Articles of incorporation (charter)

� Bylaws

• Financial markets are a vast global network of

corporations, financial institutions, governments and

individuals that either need money or have money to

lend or invest.

• Public financial markets assist governments and

Role of Financial Markets

business to access funds for investment and

operations.

• The effect of managerial decisions on the value of the

firm is realized in financial markets.

• Money markets deal in short-term securities (<1 year)

– e.g.: Treasury Bills, commercial paper…

• Capital markets deal in long-term securities

– e.g.: common stock, preferred stock, corporate and

government bonds

Overview of Financial Markets

• Primary market: new issues of bonds or shares

• Secondary market: where investors buy and sell

(trade) outstanding bonds or shares.

Stock (Share) = ownership or equity

• Shareholders own the company

Bond = debt or liability

Securities in Financial Markets

• Bondholders are owed $ by issuer

• Creditors

• Financial markets determine value.

• Well functioning markets allocate resources to their

highest and best use.

– To those firm best able to satisfy consumer wants and

needs.

Role of Financial Markets

– Investors receive an “appropriate” rate of return for the

risks incurred.

• Finance links economics and accounting.

• It helps managers make decisions to maximize shareholder wealth.

• However, managers may pursue their own interests instead of those of shareholders.

• Agency theory studies the conflicts between shareholders and management.

Summary and Conclusions

management.

• Financial managers make investment and financing decisions.

• Financial markets are where financial managers raise funds and are given feedback about the effect of their decisions.

Accounting and Finance

• In making decisions to produce value, it is important

to understand a firm’s past and present financial

position

• Accounting provides such information

• key financial statements:• key financial statements:

-- income statement

-- balance sheet

-- statement of cash flows

©2005 McGraw-Hill Ryerson Limited

The Income Statement

• An Income Statement shows profitability for a

time period (e.g., 1 year)

Revenues

Less: Expenses

Equals: Net Income

Revenues

Less: Expenses

Equals: Net Income

time period (e.g., 1 year)

• Revenues from customers for services or

merchandise

• Expenses from vendors for merchandise, services

or supplies


The Income Statement

Sales

– Cost of goods sold

Step 1 = Gross profit

– Operating expenses

Step 2 = Operating profitStep 2 = Operating profit

– Interest expense

Step 3 = Earnings before taxes

– Income taxes

Step 4 = Earnings after taxes


KRAMER CORPORATIONIncome Statement

For the Year Ended December 31, 2005

1. Sales . . . . . . . . . . . . . . . . . $2,000,000

2. Cost of goods sold . . . . . . . . . . . 1,500,000

3. Gross profits . . . . . . . . . . . . . 500,000

4. Selling and administrative expense . . . . 220,000

Table 2-1

4. Selling and administrative expense . . . . 220,000

5. Amortization expense . . . . . . . . . . 50,000

6. Operating profit (EBIT)* . . . . . . . . 230,000

7. Interest expense . . . . . . . . . . . . 20,000

8. Earnings before taxes (EBT) . . . . . . . 210,000

9. Taxes . . . . . . . . . . . . . . . . . 99,500

10. Earnings aftertaxes (EAT) . . . . . . . . 110,500

11. Preferred stock dividends . . . . . . . . 10,500

12. Earnings available to common shareholders. $ 100,000

13. Shares outstanding . . . . . . . . . . . 100,000

14. Earnings per share . . . . . . . . . . . $1.00

*Earnings before interest and taxes.


Returns to Suppliers of Capital

• Bondholders:

-- interest

• Preferred Shareholders:

-- preferred stock dividends

• Common Shareholders:

-- dividends

--capital gains through shrewd management of retained earnings


Statement of Retained Earnings

Statement of Retained Earnings

For the Year Ended December 31, 2005

Retained earnings, balance, January 1, 2005 $250,000

Add: Earnings available to common shareholders, 2005 100,000

Deduct: Cash dividends declared in 2005 50,000Deduct: Cash dividends declared in 2005 50,000

Retained earnings, balance, December 31, 2005 $300,000


Income and Value: P/E Ratio

• Finance focuses on value

• The P/E ratio is an indicator of perceived value.

P/E = Market share priceP/E = Market share price

Earnings per share (EPS)

If the market expects better than average

returns from a company, its P/E ratio will

be higher.


Limitations of the Income Statement

• Income statement records past events, which are

irrelevant for valuation purposes

• Accountants focus on income while financial

managers/analysts are interested in value

• Accountants have some flexibility in reporting • Accountants have some flexibility in reporting

transactions and resultant income


Balance Sheet

A Balance Sheet (B/S) shows what a firm owns and

how it is financed at a point in time (ex.;

December 31)December 31)

Assets = Liabilities + Owners’ Equity


KRAMER CORPORATIONBalance Sheet (Statement of Financial Position)

December 31, 2005Assets

Current assets:Cash . . . . . . . . . . . $ 40,000Marketable securities . . . . . 10,000Accounts receivable . . . . . . $ 220,000

Less: Allowance for bad debts . 20,000 200,000Less: Allowance for bad debts . 20,000 200,000Inventory . . . . . . . . . 180,000Prepaid expenses . . . . . . . 20,000

Total current assets . . . . . 450,000Other assets:

Investments . . . . . . . . . 50,000Capital assets:

Plant and equipment, original cost. . $1,100,000Less: Accumulated amortization 600,000

Net plant and equipment . . . . 500,000Total assets . . . . . . . . . $1,000,000


Liabilities and Shareholders’ Equity

Current liabilities:Accounts payable . . . . . . . . . . $ 80,000Notes payable (bank indebtedness) . . . . . 100,000Accrued expenses . . . . . . . . . . 30,000

Total current liabilities . . . . . . . 210,000

Long-term liabilities:Long-term liabilities:Bonds payable, 2012. . . . . . . . . 90,000

Total liabilities . . . . . . . . . 300,000

Shareholders’ equity:Preferred stock, 500 shares . . . . . . . 50,000Common stock, 100,000 shares . . . . . . 350,000Retained earnings . . . . . . . . . . . 300,000

Total shareholders’ equity . . . . . . 700,000Total liabilities and shareholders’ equity . . . . $1,000,000


Classifications on the Balance Sheet

Assets:what a business owns

Current Assets

– e.g.: Accounts

receivable, Inventory

– Will be sold or used up

Liabilities: what a business

owes

Current Liabilities

– e.g.: Accounts payable

– Due within 1 year– Will be sold or used up

within 1 year

Capital Assets

– e.g.: Building

– Due within 1 year

Long-term Liabilities

– Due some time after 1

year

Equity: what the owner(s) have

invested in the business

Shareholders’ Equity

– Capital stock

– Retained earnings©2005 McGraw-Hill Ryerson Limited

• One number related to a firm’s value on the

balance sheet is net worth or book value, which is

defined as:

• Shareholders’ Equity minus Preferred Stock

• It represents common shareholders’ original • It represents common shareholders’ original

investment plus all earnings reinvested in the firm

so far.

• The relationship between this number and the

firm’s market value is an interesting ratio

Price to Book Value Ratio = Market Price/Book Value/share


Limitations of the Balance Sheet

• Based on past transactions rather than future

forecasts

• May not recognize important economic changes as

they occur

– increase in property values

– new competition

• Variety of accounting policies and methods are

used

– amortization

– inventory valuation


Income and Cash Flow

• A profitable firm does not necessarily generate high cash flow probably because it sells on credit.

• Accrual accounting attempts to match revenues and expenses even if the related cash flows occur at quite different times.

• Financial managers are mainly concerned with cash flow because only cash can be spent.flow because only cash can be spent.

• The statement of cash flows reports changes in cash and cash equivalents resulting from activities of the firm during a given period.


The Statement of Cash Flows

The Statement of Cash Flows (CFs) measures the flow

of cash into and out of a firm:

CF from operating activities PLUS

CF from financing activities PLUS

CF from investing activities EQUALS

Net increase (decrease) in cash


Operations: cash paid and received from

buying and selling of goods and services

Investments: cash paid and received from

Sources (Uses) of Cash

Investments: cash paid and received from

investment activities (bonds, stocks, property,

equipment)

Financing: cash paid and received from financing

activities (dividends, borrowing or issuing shares,

repaying or issuing debt)


FIGURE 2-1

Illustration of

concepts

behind the

statement of

cash flows


Figure 2-2Steps in computing cash provided by operating activities using the indirect method

Net income

Amortization and other non-cash items

Increase in current assets

+

+

-

Decrease in current assets

Increase in current liabilities

Decrease in current liabilities

equals

Cash provided by (used in) operating activities

+

+


-

KRAMER CORPORATIONComparative Balance Sheets

AssetsCurrent assets:

Cash . . . . . . . . . . $ 40,000 30,000Marketable securities . . . . . 10,000 10,000

Dec. 31 Dec. 31 2005 2004

Table 2-6a

Marketable securities . . . . . 10,000 10,000Accounts receivable (net) . . . 200,000 170,000Inventory . . . . . . . 180,000 160,000Prepaid expenses . . . . . . 20,000 30,000

Total current assets . . . . 450,000 400,000Investments (long term) . . . . . 50,000 20,000Plant and equipment . . . . . 1,100,000 1,000,000

Less: Accumulated amortization . 600,000 550,000Net plant and equipment . . . . 500,000 450,000Total assets . . . . . . . . $ 1,000,000 $ 870,000


Comparative Balance SheetsLiabilities and Shareholders’ Equity

Current liabilities:Accounts payable . . . . . . . . $ 80,000 $ 45,000Notes payable . . . . . . . 100,000 100,000Accrued expenses . . . . . . . . 30,000 35,000

Total current liabilities . . . 210,000 180,000Long-term liabilities:

Bonds payable, 2015 . . . . . . . 90,000 40,000Total liabilities . . . . . 300,000 220,000

Dec. 31 Dec. 31 2005 2004

Total liabilities . . . . . 300,000 220,000

Shareholders’ equity:Preferred stock, . . . . . . . . 50,000 50,000Common stock, . . . . . . . . . 350,000 350,000Retained earnings . . . . . . . . 300,000 250,000

Total shareholders’ equity . 700,000 650,000Total liabilities and shareholders’ equity $ 1,000,000 $ 870,000


Table 2-7

Cash flows from operating activities

Operating Activities

Net income (earnings aftertaxes) (Table 2-1) $110,500

Add items not requiring an outlay of cash:

Amortization (Table 2-1) . . . . . . . . . $50,000

Cash flow from operations . . . . . . . . . $160,500

Changes in non-cash working capital:Changes in non-cash working capital:

Increase in accounts receivable (Table 2-6) (30,000)

Increase in inventory (Table 2-6) . . . . . (20,000)

Decrease in prepaid expenses (Table 2-6) . 10,000

Increase in accounts payable (Table 2-6) . 35,000

Decrease in accrued expenses (Table 2-6) . (5,000)

Net change in non-cash working capital . . . (10,000)

Cash provided by (used in) operating activities. $150,500


Table 2-8

Cash flows from investing activitiesInvesting ActivitiesIncrease in investments (long-term securities) (Table 2-6) ($30,000)

Increase in plant and equipment (Table 2-6) (100,000)

Cash used in investing activities ($130,000)


Table 2-9

Cash flows from financing activitiesFinancing Activities

Increase in bonds payable (Table 2-6) $50,000

Preferred stock dividends paid (Table 2-1) (10,500)

Common stock dividends paid (Table 2-2) (50,000)

Cash used in financing activities ($10,500)


KRAMER CORPORATION

Statement of Cash Flows

For the Year Ended December 31, 2005Operating Activities

Net income (earnings after taxes) . . . . . . . . $ 110,500

Add items not requiring an outlay of cash:

Amortization . . . . . . . . . . $ 50,000

Cash flow from operations 160,500

Changes in non-cash working capitalChanges in non-cash working capital

Increase in accounts receivable . . . . . . . (30,000)

Increase in inventory . . . . . . . . . . . (20,000)

Decrease in prepaid expenses . . . . . . . . 10,000

Increase in accounts payable . . . . . . . . . 35,000

Decrease in accrued expenses . . . . . . . . (5,000)

Net change in non-cash working capital . . . . . (10,000)

Cash provided by (used in) operating activities . . . $ 150,500


Investing Activities:

Increase in investments (long-term securities) . ( 30,000)

Increase in plant and equipment . . . . . . . (100,000)

Cash used in investing activities . . . . . . . ($130,000)

Financing Activities:

Increase in bonds payable . . . . . . . . . . . 50,000

Preferred stock dividends paid . . . . . . . . . (10,500)Preferred stock dividends paid . . . . . . . . . (10,500)

Common stock dividends paid . . . . . . . . . (50,000)

Cash used in financing activities. . . . . . . . . (10,500)

Net increase (decrease) in cash and cash equivalents

during the year . . . . . . . . . . . . 10,000

*Cash, beginning of year . . . . . . . . . . 30,000

*Cash, end of year . . . . . . . . . . . . $ 40,000*This would include cash equivalents, if there were any


(A) (B)

Accounting Flows Cash Flows

Earnings before amortization and taxes (EBAT) $1,000 $1,000

Amortization . . . . . . . . . . . 100 100

Year 1

Comparison of accounting earnings to cash

flows

Amortization . . . . . . . . . . . 100 100

Earnings before taxes (EBT) . . . . . . 900 900

Taxes . . . . . . . . . . . . . . 400 400

Earnings aftertaxes (EAT) . . . . . . . $ 500 500

Purchase of equipment . . . . . . . . -500

Amortization charged without cash outlay . . +100

Cash flow . . . . . . . . . . . . $ 100


Comparison of accounting earnings to

cash flows (more)

(A) (B)

Accounting Flows Cash Flows

Earnings before amortization and taxes (EBAT) . . $1,000 $1,000

Amortization . . . . . . . . . . . 100 100

Year 2

Amortization . . . . . . . . . . . 100 100

Earnings before taxes (EBT) . . . . . . . 900 900

Taxes . . . . . . . . . . . . . 400 400

Earnings aftertaxes (EAT) . . . . . . . $ 500 500

Amortization charged without cash outlay . . . +100

Cash flow . . . . . . . . . . . . $ 600


Free Cash Flow

• Free Cash Flow (FCF) can be calculated as

Cash Flow from Operating Activities

Minus: Capital Expenditures

Minus: Dividends

• FCF represents cash available for special financial activities:

-- share buyback and debt retirement

-- mergers and acquisitions

--dividend increases (yippee!


Tax and Financial Decisions

• Income taxes affect financial decisions

• Corporate taxes vary by province, by type of business and by size of business

• Cash flows aftertax are most relevant for decision-making

• Aftertax investment income paid to shareholders or other individuals varies depending upon the form of the income

• Expenses deductible from taxable income provide a tax shield (tax savings)


Amortization (Capital Cost Allowance) as a Tax Shield

Corporation A Corporation B Earnings before

amortization and taxes . $400,000 $400,000

Amortization (capital costallowance) . . . . . . 100,000 0

Earnings before taxes . 300,000 400,000

Taxes (40%) . . . . . 120,000 160,000

Earnings aftertaxes . . 180,000 240,000

+ amortization chargedwithout cash outlay . . . 100,000 0

Cash flow . . . . . . . 280,000 240,000

Difference - $40,000


Value and Value Added

• Market Capitalization

– Total market value of equity, equal to share price times

number of shares outstanding.

share)per (priceshares) (# tion CapitalizaMarket ×=

• Market Value Added

– Market capitalization minus book value of equity.

ValueBook Equity -tion CapitalizaMarket MVA =

Measuring Profitability

• Economic Value Added (EVA)

– Net income minus a charge for the cost of capital

employed. Also called residual income.

• Residual Income

– Net Dollar return after deducting the cost of capital

[ ]Equity Equity ofCost - IncomeNet

Income Residual

×=

=EVA

[ ] WACC Employed Capital - IncomeNet

Income Residual

×=

=EVA

Summary

• Financial statements provide financial managers with information about the firm’s profit, assets, liabilities, equity and cash flow.– Financial managers should be aware of the limitations of

financial statements.

• Financial managers should focus on cash flow as only cash can be spent.cash can be spent.

• The statement of cash flows gives a rough picture of operating cash flows and the nature of the firm’s investment and financing activities.

• Tax affects individual and corporate decision making.

• MVA and EVA are used to measure performance of the company.


1) Quantum Technology had $640,000 of retained

earnings on December 31, 2001. The company paid

common dividends of $30,000 in 2001 and had

retained earnings of $500,000 on December 31,

2000. How much did Quantum Technology earn

during 2001, and what would EPS be if 40,000

Review Questions

during 2001, and what would EPS be if 40,000

shares of common stock were outstanding?

2) As a potential shareholder, why should you look at

financial reports when you can easily get a

stockbroker to advise you as to what companies you

might invest in?

3) Coastal Pipeline, Inc. Anticipated cash flow from

operating activities of $8 million in 2002. It will

need to spend $1.5 million on capital investments in

order to remain competitive in the industry.

Common stock dividends are projected at $0.6

million and preferred stock dividends at $0.25

Review Questions

million and preferred stock dividends at $0.25

million.

a) What is the firm’s projected free cash flow for the

year 2002?

b) What does the concept of free cash flow represent?

4) Kordell Company recently reported $170,000 in

operating income (EBIT). The company total

operating capital is $800,000. The company’s after-

tax cost of that capital is 11.625 percent, and the

company is in the 40 percent tax bracket. What is

Kordell’s EVA?

Review Questions

Kordell’s EVA?

Mana di antara keputusan-keputusan ini yang

merupakan investasi dan mana yang merupakan

keputusan pendanaan?

1. Menerbitkan obligasi

Quiz

1. Menerbitkan obligasi

2. Membeli saham BUMN yang go public

3. Membuka jaringan distribusi baru

4. Mengganti mesin lama dengan mesin baru

5. Menjual piutang yang dimiliki.

1) Quantum Technology

Retained earnings, December 31, 2001............. $640,000

Less: Retained earnings, December 31, 2000.... 500,000

Change in retained earnings............................... 140,000

Add: Common stock dividends.......................... 30,000

Solution

Add: Common stock dividends.......................... 30,000

Earnings available to common shareholders...... $170,000

EPS = $170,000/40,000 = $ 4.25

2) There are many elements that contribute to a decision to invest

in a particular company. One investor may be looking for a

growth company with the potential for capital gain, while another

may be seeking a stable income-producing investment. Others

may want to invest in a particular industry or with a company

which is run with a specific management style. A stockbroker

often provides information in some or all of these areas, but a

Solutions

often provides information in some or all of these areas, but a

company’s annual report will provide a potential investor with a

detailed picture of what the company has done and what it

intends to accomplish in the future.

3) Coastal Pipeline Corp.

• Cash flow from operating activities $8.00 million

• - Capital expenditures 1.50

• - Common share dividends 0.60

• - Preferred share dividends 0.25

Solutions

• - Preferred share dividends 0.25

Free cash flow $5.65 million

• Free cash flow represents the funds that are available

for special financial activities, such as an acquisition

of another firm.

4) Kordell’s EVA

= $170,000 x (1-0.4) – $800,000 x (0.11625)

= $9000

Solutions

lecture 1 Introduction and Review of Accounting.pdf

Documents

Transcript of lecture 1 Introduction and Review of Accounting.pdf