EBIT

(earnings before interest and taxes)

sales

(sales discounts + sales returns)

net sales

(cost of goods sold)

gross profit

(operating expenses)

EBIT

(interest)

EBT

(taxes)

net profit

forecast

pro forma

projected

forward looking

accounting is concerned with the historical transactions the company has made

finance is concerned with future cash flow

the science of capitalism.

It is a social sciencce has three aspects, valuation, financing, and risk management.

find the present value of the asset's expected future cash flows

future (pro forma, forward looking) -  means predicted

expected means a weighted average of differrent possible outcomes

1) identify asset's potential cashflow (how do you get cash out of it)

2) project the amount and timing of the asset's cash flows

3) take the present value of the projected cash flows

4) compare the theoretical value with the market value

fairly valued - has a value equal to the market value

undervalued - has a value under the market value

overvalued - has a value greater than the market value

buy when things are uindervalued

sell when things are overvalued

obtaining capital

a company can obtain capital in two ways, debt securities and equity securities (stocks)

debt securities are bonds and money market instruments

bonds - maturity over a year (for this course) 

money market instruments - under a year

uncertainty

possibility of loss

possiblity of an undesirable outcome 

a financial instrument where the value is based on the value of something else

example - stock options - employees can buy (or are granted options) that the must vest (otherwise worthless) they get them at a discount off the market value of the stock - if the market value falls below the discounted price the options are worthless,  but if the stocks rise in value they are not worthless

between owners and managers

(this is agency confilt - management decides to act in their own best interest)

between owners and lenders

owners and workers (exploiting workers)

1. pay interest to debtholders, keeping in mind that the net cost to the company is after tax interest expense
2. repay debtholders, or pay off some of the debt
3. pay dividends
4. repurchase stock from shareholders
5. buy more short term investments or other nonoperation assets

net operating profit after taxes

N = net

OP = operating profit

AT = after taxes

EBIT / net interest expense

in 11.5x format

net income - preferred dividends

/ common shares outstanding (weighted average)

in dollars

dividends / net income

in %

debt ratio

(percent of company paid for with debt or liabilities)

total liabilities / total assets

in %

net income / average common equity

in %

with the common shareholders' money the company earned 19.23%

retained earnings

common stock

additional paid in capital

a = l + oe

ROA is return on both

ROE is return on just equity

when you have no debt, A = OE

gross profit /  net sales

in %

gross profit = sales - cgs

net sales / average total assets

in .000 notation

principal (interest rate)(fractional period)

period is usually annual

1. ratio maintenance - usually debt and current ratio must be between certain levels or higher than a certain level
2. periodic delivery of financial records (quarterly)
3. limits on executuve compensation
4. restrictions on capital expenditures
5. rest period provision
1. applies to lines of credit
2. rest means balance = 0 for a certain period of time

1. large firms may have divisions in different industries, so their ratios won't relate to industry averages
2. to set goals for high performance, benchmark the industry leaders
3. inflation can badly distort the balance sheets - reported values may be substantially difference from true values
4. seasonailty plays a roll, inventory turn over could be radically different if balance sheet numbers were used prior to a major shopping season like xmas
5. window dressing
6. company choices of accounting techniques can significantly alter numbers and thus comparisons

lump sum = number of compounding periods

annuities = number of payments

1. amortizing - borrow pays a fixed amount of P & I and the ending balance is $0
2. non-amortizing - borrow pays interest only and the ending balance is the principal
3. negative amortizartion - borrow pays less than the interest and at the end owes principal and any unpaid interest

1. calculate PMT using PVA
2. calculate interest portion of the payment using simple interest
3. calculate the principal portion by taking the difference between PMT and interest
4. update the principal balance 

basis points

1bp = .01%