Ratio Analysis (cont.) • Liquidity Ratios • Activity Ratios • Leverage Ratios • Profitability Ratios – Return on Total Assets (ROA)
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Major Areas & Opportunities in Finance: Managerial Finance (cont.) • Increasing globalization has complicated the financial management function by requiring them to be proficient in managing cash flows in different currencies and protecting against the risks inherent in international transactions. • Changing economic and regulatory conditi...
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Translation Exposure -- Relates to the change in accounting income and balance sheet statements caused by changes in exchange rates. Transactions Exposure -- Relates to settling a particular transaction at one exchange rate when the obligation was originally recorded at another. Economic Exposure -- Involves changes in expected future cash flow...
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The shareholders of Company A will experience a decrease in earnings per share because of the acquisition [$3.90 post-merger EPS versus $4.00 pre-merger EPS]. The shareholders of Company B will experience an increase in earnings per share because of the acquisition [.703125 x $4.10 = $2.88 post-merger EPS versus $2.50 pre-merger EPS].
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Company C has a convertible debenture outstanding that provides an 8% coupon (interest is paid semiannually) and continues exactly 20 years until final maturity. A similar nonconvertible bond will currently provide a 5% semiannual yield to maturity. What is the straight bond value of Company C’s convertible bond? V = $40 (PVIFA5%, 20x2) + $1,000 ...
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These term loans usually have final maturities in excess of seven years. These companies do not have compensating balances to generate additional revenue and usually have a prepayment penalty. Loans must yield a return commensurate with the risks and costs involved in making the loan. As such, the rate is typically higher than what a bank would ...
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Volatility in interest rates or a decline in the credit quality of the firm could lower the market price of the bond and enhance the value to the firm of having this option. Bondholders may benefit from the orderly retirement of debt (amortization effect), which reduces the default risk of the firm and adds liquidity to bonds outstanding.
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The issuing company selects an investment banking firm and works directly with the firm to determine the essential features of the issue. Together they discuss and negotiate a price for the security and the timing of the issue. Depending on the size of the issue, the investment banker may invite other firms to join in sharing the risk and selling...
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Tax Effect Dividends are taxed more heavily than capital gains, so before-tax returns should be higher for high-dividend-paying firms. Empirical results are mixed -- recently the evidence is largely consistent with dividend neutrality. Financial Signaling Expect that increases (decreases) in dividends lead to positive (negative) excess stock re...
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The cost of capital is dependent on the capital structure of the firm. Initially, low-cost debt is not rising and replaces more expensive equity financing and ko declines. Then, increasing financial leverage and the associated increase in ke and ki more than offsets the benefits of lower cost debt financing. Thus, there is one optimal capital st...
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