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Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe - ebit to interest expense ratio


Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe-ebit to interest expense ratio

Study notes By Zhipeng Yan
Corporate Finance
Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe
Chapter 1 Introduction to Corporate Finance ..................................................................... 2
Chapter 2 Accounting Statements and Cash Flow.............................................................. 3
Chapter 3 Financial Markets and NPV: First Principles of Finance................................... 6
Chapter 4 Net Present Value............................................................................................... 6
Chapter 5 How to Value Bonds and Stocks........................................................................ 7
Chapter 6 Some Alternative Investment Rules................................................................... 8
Chapter 7 NPV and Capital Budgeting............................................................................... 9
Chapter 8 Strategy and Analysis in Using NPV ............................................................... 10
Chapter 9 Capital Market Theory ..................................................................................... 10
Chapter 10 Return and Risk: CAPM ................................................................................ 10
Chapter 11 An Alternative View of Risk and Return: APT ............................................. 11
Chapter 12 Risk, cost of Capital, and Capital Budget ...................................................... 13
Chapter 13 Corporate-financing Decisions and Efficient Capital Market........................ 15
Chapter 14 Long-Term Financing: An Introduction......................................................... 18
Chapter 15 Capital Structure: Basic Concepts.................................................................. 20
Chapter 16 Capital Structure: Limits to the Use of Debt.................................................. 21
Chapter 17 Valuation and Capital Budgeting for the Levered Firm................................. 26
Chapter 18 Dividend policy: Why Does it Matter? .......................................................... 27
Chapter 19 Issuing Securities to the Public ...................................................................... 31
Chapter 20 Long-Term Debt............................................................................................. 37
Chapter 21 Leasing ........................................................................................................... 41
Chapter 22 Options and Corporate Finance: Basic Concepts........................................... 45
Chapter 23 Options and Corporate Finance: Extensions and Applications...................... 47
Chapter 24 Warrants and Convertibles ............................................................................. 49
Chapter 25 Derivatives and Hedging Risk....................................................................... 51
Chapter 30 Mergers and acquisitions................................................................................ 53
Chapter 31 Financial Distress ........................................................................................... 57
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Study notes By Zhipeng Yan
Chapter 1 Introduction to Corporate Finance
1. Balance-sheet model of the firm:
I. left-hand side of the sheet: in what long-lived assets should the firm
invest? - capital budget.
II. Right-hand side: how can the firm raise cash for required capital
expenditures? - capital structure.
III. Net working capital = current asset - current liabilities: how should
short-term operating cash flows be managed?
2. a firm sold gold for $10 and has yet to collect from the customer. The cost is $9:
Income statement:
Accounting view: profit = 10-9=1
Corporate finance view: cash inflow = 0; cash outflow = -9.
3. the sole proprietorship\
I. it is the cheapest business to form.
II. It pays no corporate income taxes. All profits of the business are taxed
as individual income.
III. It has unlimited liability for business debts and obligations. No
distinction is made b/w personal and business assets.
4. the partnership:
I. Partnerships are usually inexpensive and easy to form.
II. General partners have unlimited liability for all debts. The general
partnership is terminated when a general partner dies or withdraws. It
is difficult for a partnership to transfer ownership without dissolving.
The advantage is the cost of getting started. The disadvantages are: 1) unlimited
liability, 2) limited life of the enterprise, and 3) difficulty of transferring ownership.
These three disadvantages lead to 4) the difficulty of raising cash.
5. the corporation: limited liability, ease of ownership transfer, and perpetual
succession are the major advantages; Disadvantage: government taxes corporate
income.
6. agency costs: the cost of resolving the conflicts of interest b/w managers and
shareholders are special types of costs.
Residual losses are the lost wealth of the shareholders due to divergent behavior
of the managers.
7. G. Donaldson concluded that managers are influenced by two basic motivations:
I. survival.
II. Independence and self-sufficiency: this is the freedom to make
decisions without encountering external parties or depending on
outside financial markets. The Donaldson interviews suggested that
managers do not like to issue new shares of stock. Instead, they like
to be able to rely on internally generated cash flow.
III. Therefore, the basic financial objective of managers: the
maximization of corporate wealth. Corporate wealth is that wealth
over which management has effective control. Corporate wealth is not
necessarily shareholder wealth.
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Study notes By Zhipeng Yan
8. several control devices used by shareholders bond management to the self-interest
of shareholders:
I. shareholders control the directors, who in turn select the
management team;
II. contracts with management and arrangements for compensation,
such as stock option plans, can be made so that management has an
incentive to pursue the goal of the shareholders.
III. Fear of a takeover gives managers an incentive to take actions that
will maximize stock prices.
IV. Competition in the managerial labor market may force managers to
perform in the best interest of stockholders.
The available evidence and theory are consistent with the ideas of shareholder
control and shareholder value maximization.
9. Secondary markets:
I. Auction market: the equity securities of most large US firms trade in
organized auction markets. E.g. NYSE
II. Most debt securities are traded in dealer markets. Some stocks are
traded in the dealer markets. When they are, it is referred to as the
OTC market. E.g. NASDAQ
Chapter 2 Accounting Statements and Cash Flow
1. Balance sheet:
I. The assets in the balance sheet are listed in order by the length of
time it normally would take an ongoing firm to convert them to cash.
II. The liabilities and the stockholders' equity are listed in the order in
which they must be paid.
Assets Liabilities and Stockholders' equity
Current assets Current liabilities
cash and equivalents account payable
accounts receivable notes payable
inventories and other accrued expenses
Total current assets Total current liabilities
Fixed assets Long-term liabilities
property, plant and equipment deferred taxes
Less accumulated depreciation Long-term debt
Net property, plant and equipment Total Long-term liabilities
intangible assets and others Stockholders' equity
Total fixed assets preferred stock
common stock
capital surplus
accumulated retained earnings
Less treasury stock
Total equity
Total assets Total Liabilities and Stockholders'
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Is EBIT equal to operating profit margin? It is synonymous with operating profit as it doesn’t take into consideration the taxes and interest expenses. EBIT is an indicator used for calculating a company’s profitability, and we can measure it by reducing the operating expenses from revenue.