CFA-Corporate finance

• the capital budgeting process

  • Decisions are based on cash flows, not accounting income
    
    • Externalities are the effects the acceptance of a project may have on other firm cash flows.

• Businesss risk refers to the risk associated with a firm’s operating income and is the result of uncertainty about a firm’s revenues and the expenditures necessary to produce those revenues.

  • sales risk: uncertainty with respect to the price and quantity of goods and services
  • operating risk: the risk attributed to the operating cost structure

• Financial risk is the risk associated with how a company finances its operations

• Stock dividends are dividends paid out in new shares of stock rather than cash. On the firm’s balance sheet, issuing a stock dividend decreases retained earnings and increases contributed capital by the same amount. Total shareholders’ equity remains unchanged.

• The bottom line for stock splits and stock dividends is that they increase the total number of shares outstanding, but because the stock price and earnings per share are adjusted proportionally, the value of a shareholder’s total shares is unchanged.
• Primary sources if liquidity are the sources of cash it uses in its normal day-to-day operations.
• Secondary sources of liquidity include liquidating short-term or long-lived assets, negotiating debt agreements (i.e., renegotiating), or filing for bankruptcy and reorganizing the company
• Drag on liquidity delay or reduce cash flows, or increase costs.
• Pulls on liquidity accelerate cash outflows.
• receivables turnover= credit sales/average receivables
• inventory turnover=cost of goods sold/average inventory

• payables turnover=purchases/avearage trade payables

• Operating cycle : the average of days that it takes to turn raw materials into cash proceeds from sales

• cash conversion cycle or net operating cycle is the length of time it takes to turen the firm’s cash investment ininventory back into cash, in the form of collections from the sales of that inventory.

• The objective of cash management is to earn a market return without taking on much risk, either liquidity risk or default risk.

• Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders’ equity on the balance sheet. The formula calculates retained earnings by adding net income to, or subtracting any net losses from, beginning retained earnings, and subtracting any dividends paid to shareholders.

• Retained Earnings (RE) = Beginning RE + Net Income - Dividends, also known as the “retention ratio” or “retained surplus.”

• Large firms with good credit have access to the commercial paper market and can get lower financing costs with commercial paper than they can with bank borrowing. Bankers’ acceptances are used by companies involved in international trade. Factoring of receivebles is a higher-cost of funds and is used more by smaller firms that do not have particularly strong credit.

• The primary motivation of activist shareholders is to increase shareholder value. If they feel management or the board has failed to act in the best interests of shareholders, they may attempt to force changes by gaining control of the board.

• Shareholders’ and creditors’ interests are considered to be better protected in countries with a common-law system under which judges’ rulings become law in come instances. In a civil law system, judges are bound to rule based only on specifically enacted laws.
• In good corporate governance practices the chair of the board and CEO roles are independent. If the chair of the board is a chief executive of the company, it may hamper efforts to undo the mistakes made by him or her as chief executive. There is a general trend in governance toward reduced influence for executive directors, as exemplified by the decreasing incidence of CEO duality.
• The CEO and board chair roles should be separated to prevent too much executive power.
• Sovereign yield spread=difference between the yields of government bonds in the developing country and Treasury bonds of similar maturities
• earnings yield=EPS/price
• current yield=coupon/bond price