ADMS 3530 Chapter 1-15: 3530 7th All 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. Real assets = 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). 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. On the other hand, corporations are subject to double taxation. Almost all managers are involved to some degree in investment decisions, but some managers specialize in finance, for example, the treasurer, controller, and cfo.

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 ?

Here is your first question:

Explain what current assets and fixed assets are and give as many examples as you can for each. What is the difference between tangible and intangible assets?

Liabilities and owner's equity are listed on the right-hand side respectively. Liabilities are also classified as current liabilities and long-term liabilities.

Here is your second question:

Explain what current liabilities differ from long-term liabilities and give as many examples as you can for each.

Owner's equity (also known as shareholders' equity, common equity) is the difference between total value of assets and total value of liabilities. That is, if you were to use your assets to pay off the debts, whatever is left over (the residual) would belong to shareholders. That is why they are known as residual claimants. Hence we have the identity;

Assets = Liabilities + Shareholders' equity

Net working capital is simply equal to current assets minus current liabilities. When net working capital is positive, it means cash that will be available over the next 12 months exceeds what must be paid. It is important for a healthy firm to have positive net working capital.

Here is your third question:

A firm has current assets of $100, net fixed assets of $500, short-term debt of $70 and long-term debt of $200. What is shareholders' equity. Construct a balance sheet

for this company. Is net working capital positive or negative? If so by how much? (Hint: You may utilize Example 2.1 on page 24 of the textbook).

ADMS 3530 Chapter 1-15: 3530 7th All notes

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