ADMS 3530 Midterm: 6th 3530 midterm notes

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mag0sea

10 Feb 2017

School

York University

Department

Administrative Studies

Course

ADMS 3530

Professor

King Lois

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Document Summary

Financial management can be broken down into (1) the investment, or capital budgeting, decision and (2) the financing decision. The firm has to decide (1) how much to invest and which real assets to invest in and (2) how to raise the necessary cash. Real assets include all assets used in the production or sale of the firms" products or services. Real assets can be tangible (plant and equipment, for example) or intangible (patents or trademarks, for example). Financial assets are securities (such as shares) sold by the firm to raise money, and represent claims on the firm"s real assets and the cash generated by those assets. Businesses may be organized as sole proprietorships, partnerships, or corporations. A corporation is legally distinct from its owners. Therefore, the shareholders who own a corporation enjoy limited liability for its obligations. Ownership and management of corporations are usually separate, which means that the firm"s operations need not be disrupted by changes in ownership.

Related Questions

Krogh Lumber's 2016 financial statements are shown here.

Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars)
Cash	$1,800	Accounts payable	$7,200
Receivables	10,800	Notes payable	3,472
Inventories	12,600	Accrued liabilities	2,520
Total current assets	$25,200	Total current liabilities	$13,192
		Mortgage bonds	5,000
Net fixed assets	21,600	Common stock	2,000
		Retained earnings	26,608
Total assets	$46,800	Total liabilities and equity	$46,800

Now suppose 2017 sales increase by 25% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 82% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11.5%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.

Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars)

2016

2017

Cash

$1,800

Accounts receivable

10,800

Inventories

12,600

Fixed assets

21,600

Total assets

$46,800

Payables + accruals

$9,720

Short-term bank loans

3,472

Total current liabilities

$13,192

Long-term bonds

5,000

Total debt

$18,192

Common stock

2,000

Retained earnings

26,608

Total common equity

$28,608

Total liab. and equity

$46,800

Many businesses find it generally more efficient to enlist the services of a financial institution when it comes time to raise capital: IE. Investment Banks: An organization that underwrites and distributes new investment securities and helps business obtain financing. Commercial Banks: The traditional department store type of financing serving a variety of savers and borrowers. Financial Service Corporations: A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. Credit Unions: Cooperative association whose members have a common bond such as employees of the same firm. Pension Funds: Retirement plans funded by corporations or government agencies. Life Insurance Companies: Take annual premium payments and invest these funds in stocks, bonds, or real estate and make payments to beneficiaries of the insured parties. Mutual Funds: Corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt issued by business or government. They typically pool funds to reduce risk by diversification. Exchange Traded Funds (ETFs): Buy a portfolio of stocks of a certain type of business sector. IE. media companies, oil companies, Chinese companies, etc. and then sell their own shares to the public. Hedge Funds: Not regulated by the Securities and Exchange Commission (SEC). Typically have large minimum investments of over $1 million and marketed to individuals an institutions with high net worth. Private Equity Companies: Target, buy, and then manage entire firms. Most of the money used to buy these companies is borrowed. Why are the various financial instruments considered claims against a company's future cash flows ?

A variety of interested parties-including existing and prospective creditors (such as lenders and suppliers), employees and managers, shareholders, regulators, security anaysts, and competitors-conduct the analysis of a businesses financial condition and performance. All parties tend to be interested, to some extent, in the same aspects pf cpmpany performance, but their particular emphasis on a specfic facet of the business's condition or performance may vary.

The following parties are either currently affiliated with Global Products Inc. (GPI) or are considering becoming so. Based on the following description, (1) answer the question "Who am I?" and (2) identify the class of financial ratios that they might be interested in.

I work for another organization that is considered with its own profitability and risk exposures. This means that my ratio analysis of GPI should focus on the following.

1. GPI's _(liquidy and profitability, liquidy and debt management, asset management and market value)_ratios are important because they provide insights into its capacity to repay its loans using readily available cash in accordance with the terms of our lending agreements.

2. However, because GPI's capacity to meet this obligation is also a function of (a) its ability to generate earnings and (b) its ability to raise funds in the financial funds in the financial markets,then I must also pay close attention to its _(market value and debt management, asset management and market value, profitability and market value)__ratios, respectively.

3. GPI's ability to raise additional capital in the financial markets is strongly influenced by GPI mangement's ability to operate their organizations assets efficiently and effectively. This implies the need to monitor GPI's _(liquidty, asset management or efficiency)____ ratios.

Who am I?
I am _(an existing shareholder, an existing bank lendor or creditor, an existing supplier, an existing industry regulator)___

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ADMS 3530 Midterm: 6th 3530 midterm notes

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