Citibank: basic of corporate finance
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Basics of
Corporate Finance
May 1994
Basics of Corporate Finance
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Table of Contents
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TABLE OF CONTENTS
Introduction: Basics of Corporate Finance
Course Overview........................................................................................xi
Course Objectives...................................................................................xiv
The Workbook...........................................................................................xv
Unit 1: Financial Statement Analysis
Introduction...............................................................................................1-1
Unit Objectives........................................................................................1-1
Balance Sheet.........................................................................................1-2
Assets..........................................................................................1-2
Short-term Assets ..........................................................1-3
Long-term Assets............................................................1-3
Liabilities (Debt) and Equity......................................................1-4
Debt vs. Equity................................................................1-4
Liability / Equity Accounts..............................................1-5
Assets Equal Liabilities Plus Equity.........................................1-6
Summary......................................................................................1-8
Progress Check 1.1................................................................................1-9
Income Statement.................................................................................1-13
Shareholder Return on Investment..........................................1-15
Depreciation..............................................................................1-16
Summary....................................................................................1-17
Progress Check 1.2..............................................................................1-19
Cash Flow Statement...........................................................................1-21
Operating Activities..................................................................1-23
Sources..........................................................................1-23
Uses...............................................................................1-24
Financing Activities...................................................................1-25
Summary....................................................................................1-27
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Unit 1: Financial Statement Analysis (Continued)
Progress Check 1.3.............................................................................1-29
Financial Ratios...................................................................................1-33
Liquidity Ratios.........................................................................1-35
Current Ratio................................................................1-35
Quick (Acid-Test) Ratio...............................................1-36
Asset Management Ratios.....................................................1-36
Inventory Turnover Ratio..............................................1-36
Average Collection Period..........................................1-37
Fixed Assets Turnover Ratio......................................1-38
Total Assets Turnover Ratio........................................1-38
Debt Management Ratios.......................................................1-39
Total Debt to Total Assets Ratio (Debt Ratio)..........1-40
Times Interest Earned (TIE) Ratio..............................1-41
Fixed Charge Coverage Ratio...................................1-41
Profitability Ratios....................................................................1-42
Profit Margin Ratio.......................................................1-42
Basic Earnings Power Ratio......................................1-42
Return on Total Assets Ratio......................................1-43
Return on Common Equity Ratio................................1-43
Market Value Ratios................................................................1-44
Price / Earnings Ratio.................................................1-44
Market / Book Ratio.....................................................1-45
Using Ratios.............................................................................1-45
Unit Summary.......................................................................................1-46
Progress Check 1.4.............................................................................1-49
Unit 2: Financial Markets and Interest Rates
Introduction...............................................................................................2-1
Unit Objectives........................................................................................2-1
Overview of Financial Markets..............................................................2-2
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Unit 2: Financial Markets and Interest Rates (Continued)
Market Players............................................................................2-2
Types of Financial Markets........................................................2-2
Money Markets................................................................2-3
Capital Markets...............................................................2-3
Interest Rates...........................................................................................2-5
Calculating Interest Rates..........................................................2-6
Pure Interest Rate ...........................................................2-7
Inflation.............................................................................2-7
Risk...................................................................................2-8
Term Structure of Interest Rates..............................................2-10
Yield Curve.....................................................................2-10
Normal Yield Curve Theories.......................................2-12
Effect on Stock Prices..............................................................2-14
Unit Summary........................................................................................2-14
Progress Check 2.................................................................................2-17
Unit 3: Time Value of Money
Introduction...............................................................................................3-1
Unit Objectives........................................................................................3-1
Future Value ............................................................................................3-2
Calculating Interest Payments...................................................3-2
Simple Interest.............................................................................3-3
Practice Exercise 3.1.............................................................................3-5
Compound Interest......................................................................3-9
Discrete Compounding for Annual Periods.................3-9
Discrete Compounding for Nonannual Periods.........3-11
Continuous Compounding ...........................................3-12
Summary....................................................................................3-16
Practice Exercise 3.2...........................................................................3-17
Present Value........................................................................................3-21