Hybrid financing structure defining capital structure

• Evolution of the Field of Finance

• Modern Issues in Finance

• Sarbanes-Oxley Act

• Goals of Financial Management

• The Role of the Financial Markets

• Structure and Functions of the Financial Markets

PART 2: FINANCIAL ANALYSIS AND PLANNING

Review of Accounting (income statement, balance sheet, statement of cash flows)

Working Capital and Liquidity

Inventory Management (determining inventory levels, inventory turnover, safety stock, just-in-time inventory)

Capital Budgeting Techniques (payback period, net present value, internal rate of return, profitability index, advantages and disadvantages of each technique)

Capital Budgeting and Risk (risk analysis, sensitivity analysis, scenario analysis, Monte Carlo simulation)

PART 6: EXPANDING THE PERSPECTIVE OF CORPORATE FINANCE

Mergers and Acquisitions (types of mergers, motives for mergers, methods of financing mergers)

PART 1: INTRODUCTION

1. The Goals and Functions of Financial Management

• • Financial decision-making: choosing among alternative courses of action based on their financial implications.

  • Financial reporting: providing information to interested parties (e.g. shareholders, investors, creditors) about the financial performance and position of the organization.

3. Evolution of the Field of Finance

• The field of finance has evolved significantly over time, with early developments focusing on the principles of economics and mathematics.

• Some of the key issues facing finance today include:

  • The impact of technology: the rise of the internet and digital technologies has transformed the way financial transactions are conducted, and has created new opportunities and challenges for financial institutions.

• The rise of the internet has had a major impact on the field of finance, transforming the way financial transactions are conducted and opening up new opportunities and challenges for financial institutions.

• Some of the key ways in which the internet has impacted finance include:

6. Functions of Financial Management

• Financial management has several key functions, including:

• Advantages of a sole proprietorship include:

  • Easy to set up and operate

• • Unlimited personal liability for the owner

  • Limited access to financial resources

• Advantages of a partnership include:

  • Shared financial resources and decision-making
• • Potential for conflicts between partners

  • Potential difficulty in dissolving the partnership

• • Potential for unlimited growth and expansion

  • Ability to attract investment through the sale of stock
• • Potential for conflict between shareholders and management

11. Corporate Governance

• • Executive management: responsible for the day-to-day management of the corporation.

  • Shareholders: owners of the corporation who have the right to elect the board of directors and vote on major corporate decisions.

• Key provisions of SOX include:

  • Enhanced financial reporting requirements for public companies

• The goals of financial management are to:

  • Maximize shareholder wealth: financial management aims to maximize the value of the organization's stock, which is a key measure of shareholder wealth.

• A valuation approach is a method for determining the value of an asset or security.

15. Maximizing Shareholder Wealth

• • Increasing the market value of the organization's assets

  • Reducing the organization's debt

• • Making informed financial decisions: management must use financial analysis and forecasting to make informed decisions about how to allocate financial resources.

  • Managing financial risks: management must identify and mitigate financial risks in order to protect shareholder wealth.

• • Ensuring that financial reporting is accurate and transparent, in order to build trust with stakeholders.

  • Adhering to ethical standards and avoiding unethical behavior, such as fraud or insider trading.

• • Capital markets: financial markets that deal with long-term borrowing and lending, typically with maturities of more than one year.

  • Derivatives markets: financial markets that allow parties to speculate on or hedge against changes in the value of underlying assets.

• • Providing liquidity: financial markets enable individuals and organizations to buy and sell financial instruments easily, providing liquidity to the financial system.

  • Facilitating risk management: financial markets enable individuals and organizations to hedge against or speculate on changes in the value of financial instruments, helping to manage financial risks.

• • The supply of capital: the amount of capital available for investment.

  • The demand for capital: the amount of capital required by organizations for investment.

• The internationalization of financial markets refers to the increasing interconnectedness of financial markets around the world.

• The internationalization of financial markets has been facilitated by advances in technology and communication, as well as the liberalization of financial markets in many countries.

• • The rise of online trading: the internet has made it easier for individuals and organizations to buy and sell financial instruments online.

  • The growth of crowdfunding platforms: the internet has enabled the growth of crowdfunding platforms, which allow individuals and organizations to raise capital from a large number of investors.

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1. Review of Accounting

• Financial analysis and planning relies on accurate and reliable financial information, which is provided by accounting.

• Ratio analysis is a tool used in financial analysis to compare financial information from different periods or to compare an organization's financial information to that of other organizations.

• Ratios are typically classified into four categories: profitability ratios, asset utilization ratios, liquidity ratios, and debt utilization ratios.

3. Trend Analysis

• Trend analysis is a tool used in financial analysis to examine changes in financial information over time.

• When analyzing financial information, it is important to consider the impact of inflation on the data in order to obtain an accurate picture of an organization's financial performance.

• Disinflation is a decrease in the rate of inflation, while deflation is a decrease in the general price level.

• • Cost of goods sold: cost of goods sold may be recorded on the income statement based on the inventory method being used (e.g. FIFO, LIFO).

  • Extraordinary gains/losses: extraordinary gains or losses may be recorded on the income statement, but may not have a corresponding impact on the balance sheet or statement of cash flows.

• Funds flow is a measure of the net change in a company's cash position over a specific period of time.

• Funds flow can be calculated by subtracting cash outflows from cash inflows.

8. Income Tax Considerations

• Financial analysis and planning must consider the impact of income taxes on a company's financial performance.

• Financial forecasting is the process of predicting future financial performance based on past performance and other relevant information.

• Financial forecasting is an important tool for financial management, as it helps organizations to plan for the future and make informed financial decisions.

11. Pro Forma Income Statement

• The pro forma income statement is a projection of an organization's future revenues, expenses, and profits.

• The cash budget can be used to identify potential cash shortages and to plan for the use of cash.

13. Pro Forma Balance Sheet

• Operating leverage refers to the use of fixed costs in a business, which can affect the sensitivity of profits to changes in sales.

• Break-even analysis is a tool used to determine the level of sales at which a business will break even, or recover its costs.

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PART 3: WORKING CAPITAL MANAGEMENT

15. Working Capital Management

• Liquidity refers to an organization's ability to convert its assets into cash quickly and efficiently.

17. Inventory Management

• Just-in-time (JIT) inventory is an inventory management strategy that involves minimizing inventory levels and relying on timely deliveries of goods and materials.

18. Receivables Management

• The allowance for doubtful accounts is an estimate of the amount of accounts receivable that will not be collected.

19. Payables Management

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Introduction to Financial Management Study Notes - Part 4

PART 4: THE CAPITAL BUDGETING PROCESS

• Capital budgeting is necessary because capital expenditures involve significant amounts of money and have long-term impacts on an organization.

2. Capital Budgeting Techniques

• • Profitability index (PI): PI is the ratio of the NPV of an investment to the initial investment.

• Each capital budgeting technique has advantages and disadvantages, and it is important to consider which technique is most appropriate for a specific investment proposal.

• Scenario analysis is a tool used to evaluate the potential outcomes of different scenarios.

• Monte Carlo simulation is a statistical technique that uses computer modeling to evaluate the impact of risk on an investment.

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2. Types of Long-Term Financing

• There are several types of long-term financing, including:

• Capital structure refers to the mix of debt and equity financing that an organization uses to fund its operations and investments.

• The optimal capital structure is the mix of debt and equity financing that maximizes an organization's value.

• • The pecking order theory: the pecking order theory suggests that organizations prefer to use internal sources of financing, such as retained earnings, before turning to external sources of financing, such as debt or equity.

  • The market timing theory: the market timing theory suggests that organizations consider the state of the capital markets when deciding on their capital structure.

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2. Mergers and Acquisitions

• Mergers and acquisitions (M&A) refer to the process of combining two or more companies, or acquiring the assets or equity of another company.

• Corporate restructuring refers to the process of reorganizing a company's operations, assets, or debts to improve its financial performance.

• Reasons for corporate restructuring can include the need to improve efficiency, respond to changes in the market, or address financial distress.

• Foreign exchange risk refers to the risk of changes in exchange rates affecting the value of an organization's assets or liabilities.

• Political risk refers to the risk of changes in government policies or actions affecting an organization's operations or investments.

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