财经英语

o Part I. Introduction
o Capital finance has three areas of concern:
▪Capital budgeting
▪The process of planning and managing a firm's long-term
investments
▪What long-term investments should we take?
▪Capital structure
▪The mixture of debt and equity maintained by a firm.
▪Where will the company get the long-term capital for its
investments?
▪Working capital (management)
▪ A firm's short-term assets and liabilities.
▪How should we manage our day to day financial activities?
o There are three basic forms of business organization
o Sole proprietorship
▪ A business owned by a single individual.
o Partnership
▪ A business formed by two or more individuals or entities.
o Corporation
▪ A business created as a distinct legal entity composed of one or more individuals or entities.
▪Advantages
▪easy to raise capital
▪easy to transfer ownership
▪limited liability for the owners
▪Disadvantages
▪double taxation
▪more difficult to start than other types of businesses
▪Bylaws
▪The rules describing how the corporation regulates its own
existence.
o Financial manager
▪ A person who acts in the shareholders' best interests by making decisions that increase the value of the stock.
▪The goal of financial management
▪Maximize the current value per share of the existing stock.
▪Increase the market value of shareholder equity.
o Agency problem
▪The possibility of conflict of interest between the stockholders and
management of a firm.
o Proxy fight
▪When stockholders act to replace existing management.
o Proxy
▪Someone who has the authority to vote someone else's stock.
o Stakeholder
▪Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
o Financial market
▪Where debt and equity securities are bought and sold.
▪Advantages of corporate form of business are enhanced by the existence of financial markets.
▪Financial markets can be categorized as:
▪Primary market
▪Refers to the original sale of securities by governments and
corporations.
▪Secondary market
▪Those in which securities already sold on the primary
market are bought and sold after the original sale.
▪Secondary markets can either be:
▪Dealer market
▪ A type of secondary market
called-over-the counter markets (OTC)
where stocks and long-term debt are
bought and sold and transactions are
handled by a dealer.
▪Auction market
▪ A type of secondary market that has a
physical location, like Wall Street, and
the market itself brings buyers and
sellers together with little role of a dealer. o How does this decision affect the future and current value of the stock?
o Part II Statements - Taxes and Cash Flow
▪Balance sheet
▪Financial statement showing a firm's accounting value on a
particular date.
▪Example Balance Sheet
▪Balance Sheet Model Diagram
▪Fixed asset
▪An asset with a relatively long life that is either tangible or intangible.
▪Buildings and equipment are some example of long term
assets.
▪Tangible asset
▪An asset that has physical shape and
form like a truck or a computer.
▪Intangible asset
▪An asset that has no physical shape and
form like a trademark or patent.
▪Current asset
▪An asset that has a life of less than one year.
▪Cash, accounts receivable and inventory are usually listed
as a current asset.
▪Current assets are more liquid than long term assets and
are listed first on the balance sheet.
▪Account recievable
▪ A current asset, which is money owed to
the firm by customers who purchased on
credit.
▪Long term liabilities
▪Liabilities or debt with a relatively long life.
▪Current liabilities
▪ A liability or debt with a life less than one year. They must be paid within the year.
▪Accounts payable and short term bonds or interest
payments on bonds are such current liabilities.
▪Account payable
▪ A current liability, which is money the firm
owes to its supplier.
▪Bond
▪ A type of long-term debt.
▪Bonds are issued by corporations to raise additional capital
on top of the capital raised from the sale of stock usually for
different purposes and for a fixed time period with a
relatively fixed interest rate.
▪Bondholder
▪ A type of long term creditor.
▪People buy bonds from the corporation because they
expect the corporation to pay the promised interest rate
each year.
▪Shareholder's equity (Common Equity, Owners' Equity)
▪The difference between the total value of current and fixed assets and the total value of current and long-term liabilities.
▪Balance Sheet Identity or Equation
▪Assets = Liabilities + Shareholders' Equity
▪Net working capital
▪Current assets less current liabilities.
▪Liquidity
▪The speed and ease with which an asset can be converted to cash. ▪Shareholder's equity
▪Shareholders' equity = Assets - Liabilities
▪Financial leverage
▪The use of debt in a firm's capital structure. The more debt a firm has as a percentage of assets, the greater is its degree of financial
leverage.
▪Generally Accepted Accounting Principles (GAAP)
▪The common set of standards and procedures by which audited financial statements are prepared.
▪Book value
▪The value of assets according to cost of assets and may not be what the assets are actually worth.
▪Market value
▪The value of assets according to the market price of the assets if sold today.
▪The goal of the financial manager is to maximize the
market value of the stock.
▪It's important not to confuse book value and market value. ▪Income statement
▪Financial statement summarizing a firm's performance over a period of time.
▪Income statement equation
▪Revenues - Expenses = Income
▪Example Income Statement
▪Noncash items
▪Expenses charged against revenues that do not directly affect cash flow, such as depreciation.
▪Average tax rate
▪Total taxes paid divided by total taxable income.
▪Marginal tax rate
▪Amount of tax payable on the next dollar earned.
▪It's the marginal tax rate that is relevant for most financial
decisions because it's that new marginal rate that will apply
to new future cash flows.
▪The marginal tax rate paid by corporations with the largest
incomes is 35 percent in the United States.
▪Tax Table Example
▪Tax Calculation Example
▪Cash flow
▪The difference between the number of dollars that came in and the number that went out.
▪Net income computed on the balance sheet is not cash flow
because depreciation which is a noncash expense is
deducted when net income is computed.
▪It's important not to confuse accounting net income and
cash flow.
▪Cash flow from assets
▪ A cash flow identity saying that the cash flow from assets is the total cash flow to creditors and cash flow to stockholders, consisting of:
operating cash flow, capital spending, and change in net working
capital.
▪Example Image
▪Operating cash flow (OCF)
▪Cash generated from a firm's normal business activities.
▪Example Image
▪Net capital spending
▪Money spent on fixed assets less money received from the sale of
fixed assets.
▪Example Image
▪Cash flow to creditors
▪ A firm's interest payments to creditors less net new borrowings.
▪Cash flow to stockholders
▪Dividends paid out by a firm less net new equity raised.
▪Costs
▪It's important not to confuse operating costs with financing costs.
Accountants and financial managers may tend to have different
views and we should therefore pay close attention to things like how
noncash items such as deprectiation are calculated on the income
statements and how cash expenses such as taxes are calculated.
▪summary image
▪Change in NWC
o Part III. Working W/ Financial Statements
▪Sources of cash
▪ A firm's activities that generate cash.
▪ A decrease in an asset account, the firm sold some assets. (left
side)
▪An increase in a liability or equity account, the firm obtained cash.
(right side)
▪Selling a product
▪Selling an asset
▪Selling a security
▪Borring - bonds
▪Selling an equity interest - stock
▪Uses of cash
▪ A firm's activities in which cash is spent. Also called applications of cash.
▪An incease in an asset account the firm bought some assets. (left side)
▪ A decrease in a liability account, the firm made a payment. (right side)
▪Paying for labor
▪Paying for materials for production
▪Buying an asset
▪Buying a fixed asset
▪Buying a current asset
▪ie. inventory
▪Payments to creditors
▪Payments to shareholders
▪Statement of cash flows
▪ A firm's financial statement that summarizes its sources and uses of cash over a specified period.
▪Net addition to cash
▪The difference between the sources and uses of cash.
▪Sources and uses of cash statement
▪Similar to the statement of cash flows except it's arranged by souces of cash and uses of cash.
▪Common-size statement
▪ A standardized financial statement presenting all items in
percentage terms. Balance sheet items are shown as a percentage
of assets and income statement items as a percentage of sales.
▪Common-base year statement
▪ A standardized financial statement presenting all items relative to a certain base-year amount.
▪Financial ratios
▪Relationships determined from a firm's financial information and used for comparison purposes.
▪ 5 Groups of ratios
▪ 1. Short-term solvency, or liquidity measures
▪Measures intended to provide information about a firm's liquidity, and these ratios are sometimes called liquidity measures.
▪These ratios tell you about how well the company can pay it's bills over a short run. They focus on current assets and current liabilities
mostly.
▪Short term lenders, creditors including suppliers and banks are interested in such short term ratios.
▪Advantage: Current assets market prices and book prices are often more similar than longer term ratios.
▪Disadvantage: Current assets and liabilities change rapidly so the value today may not be the same tomorrow.
▪Current ratio
▪Current assets divided by
Current liabilities.
▪It tells you how many dollars of
assets for each dollar of
liabilities or we could say the
value is how many times
liabilities are covered.
▪ A high current ratio implies
liquidity however it might also
indicate an inefficient use of
cash and other short term
assets.
▪We assume to see a current
ratio of at least 1 because a
current ratio would imply a
negative net working capital
which is not usual for a healthy
firm.
▪ A low current ratio doesn't
necessarily imply a bad
company if the company is not
borrowing a lot presently.
▪It's important to see how the
various transaction could
increase or decrease the
current ratio. For example, if the
firm issued long term debt notes
or bonds, the long term
liabilities would be affected and
would not affect the short term
liabilities while affecting the
short term assets which would
cause the current ratio to rise.
▪Quick Ratio (Acid Test)
▪The acid test ratio is Current
assets minus inventory divided
by current liabilities.
▪Another liquidity measure with
only the most liquid items. For
most firms inventory moves
slower than other items listed in
current assets such as accounts
payable and or course cash
itself.
▪Basically this is the current ratio
without the inventory included
because sometimes inventory
may be slow moving, obsolete,
or damaged. In some cases we
want to see how the rest of the
current side is doing because
sometimes firms have a great
deal of capital tied up in
inventory.
▪Cash ratio
▪The Cash ratio is Cash divided
by Current liabilities.
▪Very short term creditors are
most often interested in the
cash ratio.
▪This will give you a 'times' factor
for cash and liabilities to see
how they compare. A firm with
too little available cash
compared to it's current
liabilities may not be able to
take further short term loans for
example.
▪Net working capital (NWC)
▪The amount of short-term
liquidity a firm has
▪Net working capital to total
assets
▪Net working capital to
total assets is Net
Working Capital
divided by Total assets.
This shows us how
much short-term
liquidity a firm has.
▪ A relatively low level
might indicate a low
liquidity level as a
percent
▪Internal measure
▪Internal measure is Current assets divided by
Average daily operating costs. This can show us
how long the business can keep running from
today with cash inflow instability.
▪Average daily costs are (total costs -
depreciation - interest) divided by 365
days.
▪Interval measure when calculated will give you a
number in 'days' that the firm could operate on
current assets without any addition to current
assets, sales, or other means of income.
▪ 2. Long-term Solvency Measures
▪Are intended to address the firm's long-run ability to meet its
obligations, or, more generally, it's financial leverage.
▪Total debt ratio
▪Total debt ratio is Total assets minis Total equity
divided by Total assets. A long-term solvency
measure.
▪This will give you a percentage of debt. You can
think of it for example as a percentage, like 30%
debt. Or you can think of it as compared to $1.00
so $0.30 for every dollar of assets. Or you can
think of it terms of the remaineder where you have
$0.70 (1.00 - 0.30) equity for every $0.30 of debt.
▪What percent of long term debt is the firm
currently operating under? How much debt does
the firm have compared to assets?
▪Debt equity ratio
▪Debt equity ratio is Total debt divided by Total
equity. A long-term solvency measure.
▪ A variation on the total debt ratio
▪Equity multiplier
▪Equity multiplier is Total assets divided by Total
equity. A long-term solvency measure.
▪ a variation on the total debt ratio
▪ 1 plus the debt equity ratio
▪Long-term debt ratio
▪Long-term debt ratio is Long-term debt divided by
Long-term debt plus Total equity. A long-term
solvency measure.
▪Frequently a financial analyst might be interested
more in the firms long term debt as opposed to
current liabilities because the current liabilites is
always changing.
▪Times interest earned ratio (TIE)
▪Times interest earned ratio is EBIT divided by
interest. This ratio measures how well a company
has its interest obligations covered, and it is often
called the interest coverage ratio.
▪Cash coverage ratio
▪Cash coverage ratio is EBIT + Depreciation
divided by interest. The numerator is often
abbreviated as EBDIT (earnings before
depreciation, interest, and taxes) It is a basic
measure of the firm's ability to generate cash from
operations, and it is frequently used as a measure
of cash flow available to meet financial
obligations.
▪ 3. Asset utilization ratios
▪The specific ratios can be interpreted as measures of turnover. They are intended to describe how efficiently or intensively a firm uses its
assets to generate sales.
▪Inventory turnover
▪Inventory turnover equals Costs of goods sold
divided by Inventory. The higher this ratio the
more efficiently we are managing inventory.
▪This tells how many times we sold our inventory
for the period.
▪Days' sales in inventory
▪Days' sales in inventory is 365 divided by
Inventory turnover. This tells us how many days it
will take to sell our inventory and how fast we sell
our inventory.
▪Receivables turnover
▪Receivables turnover is Sales divided by Accounts
receivable. This shows how fast we collect on our
sales.
▪Days' sales in receivables
▪Days' sales in receivables is 365 days divided by
Receivables turnover. This tells us how often we
collect on our credit sales.
▪Asset Turnover Ratios
▪Asset turnover ratios are big picture ratios.
▪NWC Turnover
▪NWC Turnover is Sales divided by NWC. This
ratio measures how much 'work' we get out of our
working capital.
▪Fixed asset turnover
▪Fixed asset turnover is sales divided by net fixed
assets. For every dollar in fixed assets.
▪This tells us for every dollar in fixed assets, we are
making x amount of money.
▪Total asset turnover
▪Total asset turnover is sales divided by total
assets. For every dollar in assets.
▪This tells us overall for every dollar in assets, we
are making x amount of money.
▪Total asset time
▪If we want to know how long it takes to turn over
our total assets we can just use the number from
total asset turnover and divide into 1. (1/x = y)
▪Example: we are making 0.40 for every dollar in
assets. 1/.40 = 2.5. Therefore it would take us 2.5
years to completely turn over our assets.
▪ 4. Profitability measures
▪Are intended to measure how efficiently the firm uses its assets and how efficiently the firm manages its operations.
▪Profit Margin
▪Profit margin is net income divided by sales. This
can be thought of as how much money per dollar
in sales or in a full percent overall. Relatively high
profit margin and low expense ratios relative to
sales is desirable however as margins go down
volume goes up so you could make up the
difference that way as well.
▪Return on Assets (ROA)
▪Is a measure of profit per dollar of assets. It is
most commonly defined as Return on Assets
equals Net income divided by Total assets.
▪It can be listed as a percent, or as cents.
▪Return on Equity (ROE)
▪Is a measure of how stockholders did during the
year. Because benefiting shareholders is our goal,
ROE is, in an accounting sense, the true
bottom-line measure of performance. ROE is
usually Return on Equity equals Net income
divided by Total equity. For every dollar in equity,
a certain percent, or cents was earned in
accounting terms.
▪It can be listed as % or $0.01 (cents)
▪ 5. Market value measures
▪Market value measures are based in part on information not
necessarily contained in financial statements - the market price per
share of the stock.
▪Earnings per shares (EPS)
▪Earnings per share is Net income divided by
Shares outstanding.
▪Price Earnings Ratio (PE)
▪Is Price per share divided by Earnings per share.
This gives us a number. The number tells us how
many times higher than earnings the shares sell
for. The PE ratio measures how much investors
are willing to pay per dollar of current earnings,
higher PEs are often taken to mean the firm has
significant prospects for future growth. Of course,
if a firm had no or almost no earnings, its PE
would probably be quite large as well.
▪Market-To-Book Ratio
▪Is Market value per share divided by Book value
per share. Because book value per share is an
accounting number, it reflects historical costs. The
market-to-book ratio sort of compares the market
value of the firm's investments to their cost. A
value less than 1 could mean that the firm has not
been successful overall in creating value for its
stockholders. A number above 1 can be seen as 1
times.. 2 times.. etc.
▪EBIT
▪Earnings before interest and tax
▪Dupont Identity
▪Popular expression breaking ROE into three parts: operating
efficiency, asset use efficiency, and financial leverage.
▪ 1. Operating efficiency (as measured by profit margin)
▪ 2. Asset use efficiency (as measured by total asset
turnover)
▪ 3. Financial leverage (as measured by the equity multiplier)
▪Weakness in either operating or asset use
efficiency, or both, will show up in a diminished
return on assets, which will translate into a lower
ROE.
▪ROE = Profit Margin X Total Asset Turnover X Equity
Multiplyer
▪Uses of financial statement information
▪Internal company uses
▪performance evaluation
▪for management compensation
▪profit margin
▪return on equity
▪projection planning
▪External company uses
▪external long-term creditors
▪external short-term creditors
▪investors
▪supplier evaluation
▪evaluation by suppliers for credit terms
▪credit rating agencies
▪competitor evaluation
▪acquisitions
▪Benchmarking for comparison
▪Time-trend analysis
▪historical changes in the firm based on financial ratios ▪Peer group evaluation
▪SIC Code based peers
▪
▪ex: comparing current ratios or other ratios across all SIC
based peers.
▪Problems with benchmarking and comparison
▪mixed operation firms - conglomerates
▪if the firm is a conglomerate it's difficult for find the right
peer.
▪global operations
▪since operations exist around the globe they may or may
not have the same accounting standards.
▪They operate under different rules and regulations
▪If they a monopoly in their region they don't really compete with the
peer counterpart.
▪Firms with seasonal business are often difficult to compare
▪Firms the end their fiscal year at different times might be difficult to
compare.
▪Unusual events such as selling assets one time may change the
comparison outcome.
o Part IV Long Term Financial Planning / Growth
▪Why evaluate financial statements?
▪Internal
▪Performance evaluation
▪Future planning
▪External
▪Short-term and long-term creditors use the information to
evaluate for loans
▪Potential investors use the information to evaluate whether
or not it's a good investment.
▪We use the information to evaluate suppliers.
▪Suppliers use statements before deciding to extend credit.
▪Large customers use the statements to decide if we are
likely to be around in the future.
▪Credit rating agencies rely on financial statements in
assessing a firm's overall creditworthiness.
▪Financial statements are a prime source of information
about a firm's financial health.
▪Standard Industrial Classification (SIC) code.
▪ A U.S. Government code used to classify a firm by its type of
business operations.
▪Planning horizon
▪The long-range time period on which the financial planning process focuses, usually the next two to five years.
▪Aggregation
▪The process by which smaller investment proposals of each of a firm's operational units are added up and treated as one big project. ▪What can planning accomplish?
▪Examining Interactions
▪Exploring options
▪Avoiding Surprises
▪Ensuring feasibility and internal consistency
▪General elements of a financial plan
▪ 1. The firm’s needed investment in new assets. This will arise from the investment opportunities the firm chooses to undertake, and it is
the result of the firm’s capital budgeting decisions.
▪ 2. The degree of financial leverage the firm chooses to employ. This will determine the amount of borrowing the firm will use to finance its
investments in real as sets. This is the firm’s capital structure policy.
▪ 3. The amount of cash the firm thinks is necessary and appropriate to pay shareholders. This is the firm’s dividend policy.
▪ 4. The amount of liquidity and working capital the firm needs on an ongoing bas is. This is the firm’s net working capital decision.
▪Usually 3 alternative financial plans are created for the following 3 to 5 years
▪ 1. A worst case.
▪This plan would require making relatively pessimistic
assumptions about the company’s products and th e state
of the economy. This kind of disaster planning would
emphasize a division’s ability to withstand significant
economic adversity, and it would require details concerning
cost cutting, and even divestiture and liquidation.
▪ 2. A normal case.
▪This plan would require making the most likely assumptions
about the company and the economy.
▪ 3. A best case.
▪Each division would be required to work out a case based
on optimistic assumptions. It could involve new products
and expansion and would then detail the financing needed
to fund the expansion.
▪Sales Forecast Model
▪The sales forecast is the 'driver', meaning that the user of the
planning model will supply this value, and most other values will be
calculated on it. Planning focuses on projected future sales and the
assets and financing needed to support those sales. Frequently the
sales forecast will be given as the growth rate in sales rather than
explicit sales figures. Perfect sales forecasts are not possible, of
course, because sales depend on the uncertain future state of the
economy.
▪Pro Forma Statement
▪ A forecasted (future predicted) balance sheet, income statement, and statement of cash flows. These are used to summarize the
different events projected for the future.
▪Percentage of sales approach
▪ A financial planning method in which accounts varied depending on
a firm's predicted sales level. Each applicable item is calculated as a
percentage of sales. For example, we take the percentage of items
on the income statement and compare it directly as a percentage of
sales, then if sales were to increase in our pro forma for the next
year we would increase the sales but keep the proportional relation
the same between the items. Some things that do not vary with sales,
like long term debt, or retained earnings may not be increased using
this method so they would stay the same until we calculated the rest
of the balance sheet and income statement and statement of cash
flow.
▪The Plug
▪The plug is the designated source or sources of external financing needed to deal with any shortfall (or surplus) in financing and
thereby bring the balance sheet into balance. If we were to forcast
based on the percentage of sales and left short term and long term
debt as it was previously we would have an unbalanced balance
sheet because increases in short term liabilites and current assets
would cause the balance sheet to unbalance. We can use the plug
to determine how we will finance our activities and bring the balance
sheet back into balance.
▪Dividend payout ratio
▪The amount of cash paid out to shareholders (cash dividend) divided by net income.
▪Example image
▪Retention ratio
▪The addition to retained earnings divided by net income. Also called the plowback ratio.
▪Also 'retention ratio' or 'plowback ratio', and it is equal to 1 minus the dividend payout ratio because everything not paid out is retained.
▪labeled 'b' in our equations
▪Example image
▪Capital intensity ratio
▪ A firm's total assets divided by its sales, or the amount of assets needed to generate $1 in sales. If the answer is 4 for example, it
means you need $4 in assets to generate $1 in sales, or it means if
you want to increase sales to $2 you'll require 2 * 4 = 8 in assets. 4 is
for example only and is quite 'capital intense'.
▪Example image
▪Capacity
▪In regards to forecasting and assets required please be sure to calculate full capacity sales if not running at full capacity. If unknown
then take it as a full capacity calculation.
▪Example image
▪Not on financing choices
▪If current assets are lower than current liabilites you may want to include current liabilites (short term notes) before considering long
term debt, or using long term debt to make up the difference.
▪Example image
▪Projection notes concerning EFN
▪When we calculate pro forma statements we will have a need for 'new assets' and a 'projected addition to retained earnings'. So we
would subtract 'new assets needed' from 'projected addition to
retained earnings' and get the EFN. After calculating the proforma
balance sheet you can see the assets and liabilities sides do not
balance. Just subtract the 2 and get EFN.
▪Example image
▪Internal growth rate
▪Is ROA times b (plowback ratio) divided by 1 minus ROA times b and is the maximum growth rate a firm can achieve without external
financing of any kind.
▪Example image
▪Sustainable growth rate。