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UNISEMINAR


Finance and  Accounting

Maastricht

2nd Edition

Academic Year  12/13


Introduction

Finance and  Accounting Table  of  Contents

1 Capital Markets  –  Risk  &  Return 2  Capital  Structure 3  Payout  Policy

4  Capital Budgeting  and  Valuation   5  Options

           003  –  012              013  –  032              033  –  065              066  –  093              094  –  119              120  –  163


1 Organizations

2  Financial Statements

3  Transaction Analysis  

Finance and  Accounting

Table of  Contents

4  Accrual Accounting  

5  Short-­‐Term/Trading Investments   6  Receivables

7  Inventory &  Cost  of  Goods  Sold 8  Plant  Assets  and  intangibles 9  Current  Liabilities

10 The Cash  Flow  Statement

11 Financial Statement  Analysis Notes,  Feedback,  Contact

           164  –  170

           171  –  184              185  –  196              197  –  205              206  –  210              211  –  220              221  –  236              237  –  251              252  –  267              268  –  278              279  –  298


Finance and  Accounting

Finance: Chapter  1  –  Risk  &  Return

Name the  two  different  types  of  risk -­‐  2  Points  -­‐

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Risk &  Return

P. 1

Two types  of  risk

  Firm-­‐-­‐sspeci�ic  risk  (also:  idiosyncratic,  unsystematic,   unique  or  diversi�iable  risk)   Systematic  risk  (also:  undiversi�iable  or  market-­‐ risk)

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Finance and  Accounting

Finance: Chapter  1  –  Risk  &  Return

The eexcess    rreturn    is  the  difference  between  the   average  return  for  the  investment  and  the   average  return  for  corporate  bonds,  which  are   generally  considered  to  be  a  risk-­‐free   investment.

-­‐ True  /  False  -­‐

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Risk &  Return

P. 1

De�inition Excess  Return

False. The excess  return  is  the  difference  between  the   average  return  for  the  investment  and  the  average   return  for  T Treasury    b bills,  which  are  generally   considered  to  be  a  rrisk-­‐-­‐ffree  investment Uniseminar


Finance and  Accounting

Finance: Chapter  1  –  Risk  &  Return

What is  the  b beta? -­‐  De�inition-­‐

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Risk &  Return De�inition  of  Beta

P. 2

The b beta  is  the  expected  percent  change  in  the  excess   return  of  a  security  for  a  1%  change  in  the  excess  of   the  market  portfolio.

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Finance and  Accounting

Finance: Chapter  1  –  Risk  &  Return

What is  the  formula  for  the  ccovariance? -­‐  Formula  -­‐

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Risk &  Return

Formula Covariance

P. 3

1 Cov(Ri , R j )historical = (Ri,t − R )⋅ (R j,t − R j ) ∑ i 1− T T = number of observations, R = return, R = expected return

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Finance and  Accounting

Finance: Chapter  1  –  Risk  &  Return

What is  the  name  of  the  line  with  the  question  mark? -­‐  Graph-­‐

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Risk &  Return Graph

P. 5

Capital  M Market    L Line: The  line  from  the  risk-­‐free  investment  through  the   market  portfolio,  represents  the  highest  expected   return  available  for  any  level  of  volatility. Uniseminar


Finance and  Accounting

Finance: Chapter  2  -­‐  Capital  Structure

What is  the  formula  for  ccost    o of    ccapital    o of    llevered   equity  (when  cost  of  unlevered  equity  is   known)? -­‐  Formula  -­‐

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Capital Structure

Formula for  Cost  of  Capital  of  Levered  Equity

P. 11

D rE = rU + (rU − rd ) E

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Finance and  Accounting

Finance: Chapter  2  -­‐  Capital  Structure

Firm X  has  the  following  capital  structure:  Debt   =  300,  Equity  =  600.  Imagine  that  the  �irm  has  a   levered  cost  of  equity  of  15%  and  its  cost  of   debt  is  6%.  What  is  its  unlevered  cost  of  equity? -­‐  Calculation  -­‐

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Capital Structure

Calculation unlevered  cost  of  equity

D rE = rU + (rU − rd ) E

0.15 =  x  +  (300/600)  *  (x  –  0.06) 0.15  +  (300/600)  *  0.06  =  x  +  (300/600)  x 0.18  =  1.5x x  =  0.12 The  unlevered  cost  of  equity  is  12%

P. 11

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Finance and  Accounting

Finance: Chapter  2  -­‐  Capital  Structure

Caterpillar has  the  following  properties:

Rd =  0.06;  Re  =  0.10;  Rwacc  =  0.0797;  Cash-­‐�low  =  $4.25  million;   perpetual  growth  rate  =  0.04;  D/E  ratio=  0.5;  τc  =  0.35

What is  the  value  of  its  interest  tax  shield? -­‐  Calculation  -­‐

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Capital Structure

WACC and  tax  shield  calculation

P. 12

Caterpillar has  the  following  pre-­‐tax  WACC: rWACC = E rE + D rD ⋅ (1− τ C ) = 1 0.10 + 0.5 0.06 = 0.0867 E+D E+D 1+ 0.5 1+ 0.5 4.25 U = 91 Value  without  the  tax  shield  is: V = 0.0867 − 0.04 4.25 L Value  with  the  tax  shield  is: V = = 107 0.0797 − 0.04 Value  of  the  tax  shield  is:  107  –  91  =  $16  million

Uniseminar


Finance and  Accounting

Finance: Chapter  2  -­‐  Capital  Structure

40%

la 30% ti p a C f  o ts 20% o C 10%

Fill in  the  blanks  for  A,  B,  C,  D,  E A   A   B   B   D   C   40% 30%

Cost o f  Equity  (rE)

20%

Pre-­‐tax WACC(rWACC=rU=rA)

Cost o f  Debt  (r D)

0%

50%

Cost o f  Equity  (rE)

100%

Pre-­‐tax WACC

10%

C

0%

-­‐ Graph  -­‐

Debt-­‐to-­‐Value Ratio  (D/(D+E))

E

Due to  interest   tax  shield

Cost o f  Debt  (r D) 50%

Debt-­‐to-­‐Value Ratio  (D/(D+E))

100%

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Capital Structure

Graph illustrating  the  change  in  WACC  with  and  without  taxes la 30% ti p a C  f o  t 20% s o C

30%

Cost o f  Equity  (rE)

20%

Pre-­‐tax WACC(rWACC=rU=rA)

10%

Cost o f  Equity  (rE)

Pre-­‐tax WACC

10%

Cost o f  Debt  (r D) 0%

50%

Debt-­‐to-­‐Value Ratio  (D/(D+E))

100%

0%

Due to  interest   tax  shield

Cost o f  Debt  (r D) 50%

P. 13

Debt-­‐to-­‐Value Ratio  (D/(D+E))

100%

A =  Cost  of  Equity B  =  Pre-­‐tax  WACC   C=  Cost  of  Debt D  =  WACC  with  taxes   E  =  Change  in  WACC  due  to  interest  tax-­‐shield

Uniseminar


Finance and  Accounting

Finance: Chapter  3  –  Payout  Policy

The following  �igure  shows  the  alternatives  a  �irm  has  to   distribute    iits    ffree    ccash    ��low.  Fill  in  the  boxes. Free  Cash  Flow Retain A

Invest in   New  Projects

C

Increase Cash   D Reserves

B

Pay Out

Repurchase Shares

-­‐ Figure  -­‐

E

Pay Dividends

F

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Payout Policy

Uses of  Free  Cash  Flow Free  Cash  Flow

Retain

Invest in   New  Projects

Increase Cash   Reserves

P. 16

Pay Out

Repurchase Shares

Pay Dividends Uniseminar


Finance and  Accounting

Accounting: Chapter  2  –  Financial  Statements

What items  does  the  b balance    ssheet   report? -­‐  3  Points  -­‐

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Financial Statements Balance  Sheet  Items

P. 42

The b balance    ssheet  shows  the  �inancial  position  of  a   company  at  a  speci�ic  point  of  time.  It  reports  3 3    iitems:   Assets   Liabilities   (Stockholders’)    E Equity Uniseminar


Finance and  Accounting

Accounting: Chapter  3  –  Transaction  Analysis

Illustrate the  rules  of  debit  and  credit  by  putting   the  arrows  (                )  in  the  right  direction  and   choosing  between  +/-­‐  for  the  three  types  of   balance  sheet  items: Assets

Debit  ((+/-­‐-­‐))

Credit  ((+/-­‐-­‐))

=

Credit  ((+/-­‐-­‐))

Liabilities

Debit  ((+/-­‐-­‐))

-­‐ Graph  -­‐

+

Shareholder´s  E Equity Debit    ((+/-­‐-­‐))

Credit  ((+/-­‐-­‐))

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Transaction Analysis

The Rules  of  Debit  and  Credit

P. 46

The rules  of  debit  and  credit  are  illustrated  in  the   following  exhibit: = L i abilities + S hareholder´s  Equity A ssets C r edit  (+) C r edit  (+) D e bit  (+) C r edit  (-­‐) D e bit  (-­‐) D e bit  (-­‐)

Uniseminar


Finance and  Accounting

Accounting: Chapter  7  –  Inventory  &  Cost  of  Goods  Sold

The following  exhibit  illustrates  FIFO  and  LIFO  under   increasing  and  decreasing  costs.  Fill  in  the  blanks. C.  FIFO/LIFO D.  FIFO/LIFO FIFO

A. Increasing/ A)  Increasing   Cost Decreasing  Costs

B. Increasing/ B)  Decreasing   Cost Decreasing  Costs

Cost €

Cost €

Time Time

-­‐ Graph  -­‐

LIFO

Cost €

Time Cost €

Time

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Inventory &  Cost  of  Goods  Sold

Graph -­‐  FIFO  vs.  LIFO  with  Increasing/Decreasing  Costs

P. 62

The following  graph  illustrates  the  COGS  and  Ending  inventory  under   FIFO  or  LIFO  with  increasing  or  decreasing  costs. FIFO LIFO Cost  € Cost  € A)  Increasing   Cost Time Time Cost  € Cost  € B)  Decreasing   Cost Time Time

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Finance and  Accounting

Accounting: Chapter  8  –  Plant  Assets  and  Intangibles

Fill in  the  correct  terminology  for  X  (e.g.  depreciation).

Asset  A Account    ((Balance    SSheet)     Plant    A Assets    

Related  E Expense    A Account    ((Income    sstatement)    

Free Hold  Land   Leasehold  Land

Buildings, Machinery,  and  Equipment   Furniture  and  Fixtures   Land  Improvements   Natural  Resources  

Intangibles  with  �inite  useful  lives

Intangibles  with  inde�inite  useful  lives

X X   X   X   X   X   X  

X -­‐ Table  -­‐

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Plant Assets  and  Intangibles Plant  Assets  Terminology

P. 64

The correct  terminology  per  asset  is: Asset    AAccount    ((Balance    SSheet)     Related    E Expense    A Account    ((Income    sstatement)     Plant    AAssets     None Free  Hold  Land   Depreciation Leasehold  Land Depreciation Buildings,  Machinery,  and  Equipment   Depreciation Furniture  and  Fixtures   Depreciation Land  Improvements   Depletion Natural  Resources   Amortization Intangibles    with  �inite  useful  lives None Intangibles    with  inde�inite  useful  lives

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Finance and  Accounting

Accounting: Chapter  11  –  Financial  Statement  Analysis

What are  the  formulas  for  h horizontal    and   vertical    aanalysis? -­‐  2  Formulas  -­‐

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Financial Statement  Analysis

Formula –  Horizontal  and  Vertical  Analysis

P. 73

Horizontal analysis:

Percentage Change =

Vertical analysis:

Dollar amount of change Base year amount

Vertical analysis income statement =

Financial statement item (e.g. income statement item) Base value (e.g. total revenue)

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Finance & Accounting Sample  

Sample Finance & Accounting Cards

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