Goal
Principal-Agent Problem
Mkts & Corp
FIN355 –
Corporate Finance
Chapter 1 Intro to Corporate Finance –
Corporate Ownership Structure and Agency
Issue
Siqi Wei, Ph.D.†
† Department of Finance, Financial Planning, and Insurance
David Nazarian College of Business and Economics
California State University, Northridge
[B Siqi.Wei@CSUN.edu]
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 1 / 35
Major Issues
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Mkts & Corp
The Big Picture: Where we are? Who we are? and how
we get there?
Personal Finance
Corporate Finance
Investments and Financial Markets
Financial Engineering & Quantitative Finance
Behavioral Finance
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 2 / 35
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Mkts & Corp
The Big Picture: Where we are? Who we are? and how
we get there? Cont’d
Corporate Finance
Firm financial planning
Coporate governance & Corporate Control
Executive comensation & managerial incentives
Mergers & Acquisitions
Capital Structure
Investments and Financial Markets
Financial Markets
Security analysis and valuation
Fixed income analysis
Portfolio management
Risk Management
Options, futures, and other derivatives
Financial intermediaries and institutions
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 3 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
The Big Picture: Where we are? Who we are? and how
we get there? Cont’d
Financial Engineering & Quantitative Finance
Complex derivative modeling
Portfolio formation
Hedge Fund
High frequency trading
Behavioral Finance
Behavioral Science + advanced statistics
Psychology + experimental studies
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 4 / 35
Major Issues
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Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Corporate Finance has three main areas of concern
Capital budgeting: What long-term investments should the firm take
on?
Capital structure: Where will we get the long-term financing to pay
for the investment?
How should we pay for our assets?
Should we use debt or equity?
Working capital management: How do we manage the day-to-day
finances of the firm?
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 5 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Financial Managers
What is a financial manager?
the owners (the stockholders) are usually not directly involved in making
business decisions, particularly on a day-to-day basis. Instead, the
corporation employs managers to represent the owners’ interests
and make decisions on their behalf (↩ in an ideal world; will be
discussed ).
Chief Financial Officer (CFO): The top financial manager within a
firm
Treasurer: Oversees cash management, credit management, capital
expenditures, and financial planning.
Controller: Oversees taxes, cost accounting, financial accounting
and data processing
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 6 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Orgnizational Chart
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 7 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Forms of Business Organization in the U.S.
a) Sole Proprietorship: A business owned by one person. This is the
simplest type of business to start and is the least regulated form of
organization.
Advantages:
Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
Disadvantages:
Limited to life of owner
Equity capital limited to owner’s personal wealth
Unlimited liability
Difficult to sell ownership interest
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 8 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Forms of Business: Partnership
b) Partnership: A business formed by two or more individuals or entities.
Advantages:
Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 9 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Forms of Business: Partnership, Cont’d
Disadvantages:
Unlimited liability: General partnership1 OR Limited partnership2
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
1In a general partnership, all the partners share in gains or losses, and all have
unlimited liability for all partnership debts, not just some particular share. The way
partnership gains (and losses) are divided is described in the partnership agreement.
This agreement can be an informal oral agreement or a lengthy, formal written
document
2In a limited partnership, one or more general partners will run the business and
have unlimited liability, but there will be one or more limited partners who will not
actively participate in the business. A limited partner’s liability for business debts is
limited to the amount that partner contributes to the partnership. This form of
organization is common in real estate ventures, for example.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 10 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Three areas
Managers
Org Structure
Forms of Business: Corporation
Corporation: The corporate form of organization are often called joint
stock companies, public limited companies, or limited liability companies,
depending on the specific nature of the firm and the country of origin.
Advantages:
Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
Disadvantages:
Separation of ownership and management
Double taxation (income taxed at the corporate rate and then
dividends taxed at the personal rate)
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 11 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Goal of Financial Management in Corporates
What should be the goal of a corporation?
Maximize profit?
Minimize costs?
Maximize sales?
Avoid financial distress and bankruptcy?
Maximize the Corporate Social Responsibility (CSR, ESG)?
Goal of financial management
The goal of financial management is to maximize the current value per
share of the existing stock.
The stockholders in a firm are residual owners. So, if the stockholders are
winning in the sense that the leftover, residual portion is growing, it must
be true that everyone else is winning also.
The total value of the stock in a corporation = value of the owners’ equity.
∴ a more general definition: MAXIMIZE THE MARKET VALUE OF THE
EXISTING OWNERS’ EQUITY.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 12 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
A separate note on CSR & ESG…
Two opposing views about the value for CSR policies – – stakeholder
value maximization view and shareholder expense view.
CSR activities focus on interests of all stakeholders (i.e. customers,
employees, debtholders) and thereby increase their willingness to
participate in a firm’s operation, which further increases
shareholders’ wealth as well as accomplishing societal goals
Milton Friedman holds that the sole “social responsibility of business
is to increase its profits,” wherein CSR can be regarded as a
manifestation of managerial agency problems in a sense that firm
managers engaging CSR activities that benefits themselves at the
expense of outside shareholders. (Firm managers engaged in CSR
activities can possibly be distracted from their main focus of their
responsibilities, and thereby make decisions that could be
sub-optimal to the outside shareholders.)
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 13 / 35
Major Issues
Goal
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Mkts & Corp
Agency-induced incentive plan? Employee Well-being v.s.
Land of Profit???
Free employee food service at Google…
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 14 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Retail investor attention on Environmental, Social, and
Governance (ESG)
Retail investor attention on Environmental, Social, and Governance
(ESG) over the term 2004 to Sep 8 2022
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 15 / 35
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Mkts & Corp
ESG in the news (Barron’s, 09.08.2022)
In the news: how does the market intereprete ESG???
an article from a mainstream investments media – BARRON’S
(https://www.barrons.com/articles/
esg-sector-etfs-volatile-51662588284?mod=hp_LEAD_7)
“ESG Sector ETFs Could Be Volatile. What to Do Instead.”
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 16 / 35
https://www.barrons.com/articles/esg-sector-etfs-volatile-51662588284?mod=hp_LEAD_7
https://www.barrons.com/articles/esg-sector-etfs-volatile-51662588284?mod=hp_LEAD_7
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Agency Problem – The HEART of corporate finance
Separation of ownership and control
Agency relationship: Principal hires an agent to represent his/her
interests3
Agency problem: Conflict of interest between principal and agent4
*Direct agency costs come in two forms. The first type is a corporate
expenditure that benefits management but costs the stockholders. The
second type of direct agency cost is an expense that arises from the need
to monitor management actions. Paying outside auditors to assess the
accuracy of financial statement information could be one example.
a simple generic illustration:
3Stockholders (principals) hire managers (agents) to run the company
4Management goals and agency costs (these costs can be direct or indirect)
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 17 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Agency Problem – The HEART of corporate finance
Separation of ownership and control
Agency relationship: Principal hires an agent to represent his/her
interests3
Agency problem: Conflict of interest between principal and agent4
*Direct agency costs come in two forms. The first type is a corporate
expenditure that benefits management but costs the stockholders. The
second type of direct agency cost is an expense that arises from the need
to monitor management actions. Paying outside auditors to assess the
accuracy of financial statement information could be one example.
a simple generic illustration:
3Stockholders (principals) hire managers (agents) to run the company
4Management goals and agency costs (these costs can be direct or indirect)
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 17 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Agency Problem, Cont’d
Some ways to manage agency conflicts:
Managerial compensation
Incentives can be used to align management and stockholder
interests
The incentives need to be structured carefully to make sure that they
achieve their goal
Corporate control
The threat of a takeover may result in better management
Proxy fights could be used to replace existing management
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 18 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
An Example of Agency Problem Outcome
One example of agency problem (Separation of ownership and control) –
Share Pledging
It involves executives or directors borrowing capital from lenders and
providing personally owned shares of firm equity as collateral for the
loan.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 19 / 35
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Principal-Agent Problem
Mkts & Corp
Example of Agency Problem Outcome, Cont’d
Three Example Cases of Share Pledging
(a) WorldCom (b) Chesapeake Energy
Corporation
(c) Keurig Green
Mountain Inc.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 20 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
WorldCom
The former CEO of WorldCom, Bernard J. Ebbers, borrowed more
than 400 million dollars pledging his beneficial shares of WorldCom
as collateral Ô⇒ ranches, timberlands, a yacht-building company,
etc.
In 2000, share price of WorldCom started dropping drastically due to
the dot-com bubble in the US
Mr. Ebbers, got margin calls from banks requiring him to supply
more capital (put up additional stocks) as collateral or pay off a
portion of the loan.
Mr. Ebbers was trying to “indirectly” manipulate firm’s earnings to
maintain the share price of WorldCom
implemented “tracker stock” on a well-performing subsidiary (MCI)
to prop up the share price
*The case of WorldCom, Inc. led the SEC to require firms’ disclosure of
relevant information on share pledging in 2006.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 21 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Chesapeake Energy Corporation
Aubrey K. McClendon, CEO of Chesapeake, has been a steady aggressive
buyer of Chesapeake Energy shares.
On Oct 10, 2008, Chesapeake released the news that it would further
reduce its capital spending by some $1.5 billion in 2009 and 2010.
The news caused the share price to drop on 10.13.2008 by 43%.
30,217,232 shares (94%) of his stake were involuntarily sold to
meet margin loan requirements from investment bank Goldman
Sachs Group Inc.
The forced sale of Mr.McClendon’s shares pushed sinking stock prices
down even more quickly afterwards.
From July 2, to Oct 10, 2008, Chesapeake’s share price dropped from
$69.40 to $16.52 (76% in total).
*Hurt firm’s stock performance and jeopardize a company’s long-term
goals.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 22 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Keurig Green Mountain Inc.
The founder of Keurig Green Mountain, Robert P. Stiller, lost almost half
of his wealth in May 2012.
On May 2nd 2012, the company says that “its K-cup sales were lower
than expected in the second quarter, leaving it with extra inventory and
contributing to more than four percentage points of margin contraction”.
Around that time, the CEO, Robert P. Stiller, pledged 12,548,933 shares
out of his total 15,997,209 personal holdings of beneficial shares as
collateral (78%)
Mr.Stiller was immediately forced to sell more than 5,000,000 shares to
cover the margin call, which further exacerbated the decline of Green
Moutain’s share price.
Overall, the stock price from May to the end of July declined from $49.74
to $17.91, a drop of 63.99%
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 23 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
An Example from Keurig Green Mountain Inc. (May
2012)
(a) Daily Stock Price of Green
Mountain
(b) Return on Green Mountain
Stock
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 24 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Agency-induced pledging outcomes
To alleviate the margin call risk, pledgers tend to adopt conservative
policies which are value-reducing to the shareholders.
Pledged holdings could lead incentive-weakened executives to take
conservative investment and financial policies, which in turn,
translates to the reduction of firm performance and the overall
shareholder wealth
Pledgers may level up the use of the earnings management to
support the stock price temporarily in the hope to alleviate the
margin call pressure.
Institutional investors may take the monitoring role to discipline the
practice of the share pledging to protect shareholder value.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 25 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Possible Solutions to Agency Issue?
Internal Governance (e.g. CEO Incentive design)
External Governance (e.g. Litigation lawsuits)
Role of institutional investors – especially long-tern institutional
investors
Hedge Fund Activism
Analyst Coverage
Disclosure
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 26 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Possible Solutions to Agency Issue? Institutional Monitors
– “Voice” and “Exit” Channel
Long-term institutional investors can influence and monitor firms’
behavior through many ways
Long-term investors communicate directly with managers to
influence managerial decisions. (“Voice”)
McCahery et al (2016): The most common engagement channels are
behind-the-scenes discussions with managemnt and boards of
directors
Long-term investors use the threat of selling their shares together
with their information about corporate acrivities to influence
managerial decision making (“Exit”)
Short-term: less likely to remain long enough to reap the
corresponding benefits
Monitroing-relevant information is high ⇒ Speculative
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 27 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Possible Solutions to Agency Issue? Institutional Monitors
Chen et al. (2007) argue that more stable institutional investors have
better knowledge of the firm and larger influence on management
and, thus, are more likely to engage in monitoring efforts
Gaspar et al (2005): investment horizon of shareholders affects
managerial behavior in corporate control transactions, and weak
monitoring by short-term investors allows managers to trade off
shareholder interests for personal benefits, including job security and
empire building, at the expense of shareholder returns.
Bushee (1998) documents that firms dominated by institutional
investors with high portfolio turnover and engaging in momentum
trading are more likely to cut long-term R&D projects to meet
short-term earnings targets.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 28 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Possible Solutions to Agency Issue? Institutional Monitors
Harford et al. (2016) emphasize the monitoring role of long-term
investors by showing that they strengthen corporate governance,
restrain managerial misbehavior, discourage financing and
investment, and encourage dividend payout as well as innovation
outputs.
Cremers, Pareek, and Sautner (2016) document that firm value and
investment outcomes are also influenced and pressured by short-term
institutional investors.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 29 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Stakeholders
Stakeholders: A stakeholder is someone other than a stockholder or
creditor who potentially has a claim on the cash flows of the firm. Such
groups will also attempt to exert control over the firm, perhaps to the
detriment of the owners.
eg. Employees, suppliers, customers, goverments…
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 30 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Financial Markets and the Corporation:
A financial market brings buyers and sellers of financial instruments
together. In financial markets, it is debt and equity securities that are
bought and sold. The most important differences between financial
markets concern the types of securities that are traded, how trading is
conducted, and who the buyers and sellers are.
* Primary versus Secondary markets: Primary market refers to the
original sale of securities by governments and corporations. The
secondary markets are those in which these securities are bought and sold
after the original sale.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 31 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
Cashflows between the firm and the financial markets
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 32 / 35
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
An Internet Example
The Internet provides a wealth of information about individual
companies
One simple site is https://finance.yahoo.com/
Click on the web surfer to go to the site, choose the company that
you are interested and see what corporate information you can find!
Apple (AAPL)
Amazon (AMZN)
Facebook (FB)
Other sources include: Wall street jounal, Bloomberg, Seeking
alpha, etc.
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 33 / 35
https://finance.yahoo.com/
Major Issues
Goal
Principal-Agent Problem
Mkts & Corp
End-chapter questions for you to think about
What is Capital bugeting decistion? What is capital stucture? What
is working capital management?
IN GENERAL, what is the GOAL of financial management?
What is Agency Problem? Why there is an agency problem?
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 34 / 35
Major Issues
Goal
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Mkts & Corp
Q & A
Any Questions?
Siqi Wei, Ph.D (CSUN) FIN355 Chapter 1: Into to Corporate Fin 35 / 35
-
Major Issues
- Discussion of Agency Issues
Three areas
Agents – Financial Managers
Orgnizational Structure
Goal of Financial Management in Corporates
Financial Markets and the Corporation
FIN355-Corporate Finance
Chapter 2
Financial Statements, Taxes, and Cash Flow
Siqi Wei, Ph.D.†
† Department of Finance, Financial Planning, and Insurance
David Nazarian College of Business and Economics
California State University, Northridge
[B Siqi.Wei@CSUN.edu]
Siqi Wei, Ph.D (CSUN) Corporate Finance 1 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Chapter Overview
1 Balance Sheet
Net Working Capital (NWC)
Liquidity
Balance Sheet Structure
Market Value vs Book Value
2 Income Statement
Income statement structure
Taxes &
Tax Brackets
Tax Example
3 Cash Flow
Cash Flow Identity
Cash flow Example
4 Excercies
Siqi Wei, Ph.D (CSUN) Corporate Finance 2 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Focus
Review of Some Important Accounting Concepts
The Balance Sheet
The Income Statement
Taxes
Cash Flow
Our emphasis here is not preparing financial statements. Instead, we
recognize that financial statements are frequently a key source of
information for financial decisions, so our goal is to briefly examine
such statements and point out some of their relevent features.
Siqi Wei, Ph.D (CSUN) Corporate Finance 3 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
The Framework of Financial Analysis
Accounting
The language of finance
Basic concepts should be familiar to you by now
STOCK variables (not equities) vs. FLOW variables
Balance Sheet and Income Statement Perspectives
Balance sheet: snapshot of financial status quo (stock)
Income statement: rate of change of the status quo (flow)
Financial status⇔ balance sheet
Financial decisions⇔ income statement
Siqi Wei, Ph.D (CSUN) Corporate Finance 4 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
The Balance Sheet
Balance Sheet Identity
Total Assets = Total Liabilities + Stockholders’ Equity
* Balance sheet is a financial statement showing a firm’s accounting
value on a particular date.
Asset: The Left Hand Side
Current asset (Asset that has a life less than one year)
Fixed asset (Asset that has a relatively longer life)
tangible
intangible
Liabilities and Owners’ Equity: The Right Hand Side
Current liabilities (eg: Account payable)
Long-term debt (eg: Long-term bond)
Shareholders’ equity (eg: Stock)
Siqi Wei, Ph.D (CSUN) Corporate Finance 5 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
The Balance Sheet
Net Working Capital (NWC)
Net Working Capital = Current Asset – Current Liabilities
* NWC: the cash that will become available over the next 12 months
exceeds the cash that must be paid over the same period.
Siqi Wei, Ph.D (CSUN) Corporate Finance 6 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
The Balance Sheet
Liquidity
Liquidity refers to the speed and ease with which an Asset can be
converted to Cash
A high liquid asset can be quikly sold without significant loss of value
Liquidity is valuable, but there is a trade-off
forgone potential profits
Assets are listed on the balance sheet in order of decreasing liquidity,
most liquid asset listed first
Siqi Wei, Ph.D (CSUN) Corporate Finance 7 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
The Balance Sheet
Siqi Wei, Ph.D (CSUN) Corporate Finance 8 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
Sources of Accounting Statements
Siqi Wei, Ph.D (CSUN) Corporate Finance 9 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
Real Example
U.S. Securities and Exchange Commission – Edgar
https://www.sec.gov/edgar/searchedgar/companysearch.html
Siqi Wei, Ph.D (CSUN) Corporate Finance 10 / 31
https://www.sec.gov/edgar/searchedgar/companysearch.html
Balance Sheet
Income Statement
Cash Flow
Excercies
NWC
Liquidity
BS Structure
MV vs BV
Market Value vs Book Value
Historical Cost
Under Gernally Accepted Accounting Principles (GAAP), audited
financial statements in US mostly show assets at historical cost. Assets
are carried on the books at what the firm paid for them, no matter how
long ago they were purchased or how much they are worth today
current asset: Market value and book value might be similar
Fixed asset: Different
Siqi Wei, Ph.D (CSUN) Corporate Finance 11 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement
Income Statement Equation
Revenues – Expenses = Income
* Income statement summarizes a company’s performance over some
period of time, usually a quarter or a year. (contrast Income statement
to Balance sheet?)
* Inflow vs Outflow
“flow” concept
Expense vs Cost
Non-cash Items
Depreciation (Page 27)
Siqi Wei, Ph.D (CSUN) Corporate Finance 12 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement
Siqi Wei, Ph.D (CSUN) Corporate Finance 13 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement: An Example Problem
Papa Roach Exterminators, Inc., has sales of $624,000, costs of
$335,000, depreciation expense of $43,000, interest expense of $20,000,
and a tax rate of 40 percent. What is the net income for firm?
Structure
Sales → EBIT → EBT → NI
Siqi Wei, Ph.D (CSUN) Corporate Finance 14 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement: An Example Problem
Papa Roach Exterminators, Inc., has sales of $624,000, costs of
$335,000, depreciation expense of $43,000, interest expense of $20,000,
and a tax rate of 40 percent. What is the net income for firm?
Structure
Sales → EBIT → EBT → NI
Siqi Wei, Ph.D (CSUN) Corporate Finance 14 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement: An Excercise
Billy’s Exterminators, Inc., has sales of $655,000, costs of $304,000,
depreciation expense of $56,000, interest expense of $38,000, a tax rate
of 35 percent, and paid out $88,000 in cash dividends. The firm has
100,000 shares of common stock outstanding.
What are the earnings per share?
What are the dividends per share?
Siqi Wei, Ph.D (CSUN) Corporate Finance 15 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement: An Excercise
Billy’s Exterminators, Inc., has sales of $655,000, costs of $304,000,
depreciation expense of $56,000, interest expense of $38,000, a tax rate
of 35 percent, and paid out $88,000 in cash dividends. The firm has
100,000 shares of common stock outstanding.
What are the earnings per share?
What are the dividends per share?
Siqi Wei, Ph.D (CSUN) Corporate Finance 15 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
The Income Statement: An Excercise, Cont’d
Billy’s Exterminators, Inc., has sales of $655,000, costs of $304,000,
depreciation expense of $56,000, interest expense of $38,000, a tax rate
of 35 percent, and paid out $88,000 in cash dividends. The firm has
100,000 shares of common stock outstanding.
What are the earnings per share?
What are the dividends per share?
EPS =NI/Shares = 167050/100000 = $1.67per share
DPS =Dividend/Shares = 88000/100000 = $0.88per share
Siqi Wei, Ph.D (CSUN) Corporate Finance 16 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
Taxes
Taxes can be on of the largest cash outflow a firm experiences
One thing we can rely on with taxes is that they are always changing!
Corporate Tax Rates – Tax Bracket
Siqi Wei, Ph.D (CSUN) Corporate Finance 17 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
Taxes
Tax Brackets
Two concepts need to be distinguished:
Average tax rate: Tax bill
Taxable income
Marginal tax rate: Rate of the extra tax you would pay if you earned
one more dollar
Siqi Wei, Ph.D (CSUN) Corporate Finance 18 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
Taxes: An Example
An Example: Calculate the corporate tax bill, ATR, and MTR
Algernon, Inc., has a taxable income of $85,000. What is its tax bill?
Average tax rate? Marginal tax rate?
Siqi Wei, Ph.D (CSUN) Corporate Finance 19 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
Taxes: An Example, Cont’d
the tax rate applied to the first $50,000 is 15%; the rate applied to
the next $25,000 is 25%; and the rate applied after that up to
$100,000 is 34%
0.15∗$50,000 = $7,500 (1)
0.25∗($75,000−50,000) = $6,250 (2)
0.34∗($85,000−75,000) = $3,400 (3)
$7,500+6,250+3,400 = $17,150 (4)
Siqi Wei, Ph.D (CSUN) Corporate Finance 20 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
IS structure
Taxes & Tax Brackets
Tax Example
Taxes: An Example, Cont’d
Average tax rate =Tax bill/Taxable income =
$17,150/85,000=20.18%
The Marginal tax rate is 34% because the company’s tax would rise
by 34 cents if it had another dollar in taxable income.
Siqi Wei, Ph.D (CSUN) Corporate Finance 21 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Cash Flow Identity
Cash Flow
Cash Flow Identity
Cash flow from assets = Cash flow to creditors + Cash flow to
stockholders
By cash flow, we mean the difference between the number of dollars
that came in and the number that went out
how cash is generated from utilizing assets and how it is paid to
those that finance the purchase of the assets
Siqi Wei, Ph.D (CSUN) Corporate Finance 22 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Cash Flow Identity
Cash Flow
Cash flow from Asset (Free Cash Flow, FCF)
Operating Cash Flow (OCF): It tells us whether a firm’s cash inflows
from its business operations are sufficient to cover its everyday cash
outflows. (Headsup, be careful with non-cash item, depreciation)
Capital Spending: Money spent on fixed assets less than money
recieved from the sale of fixed assets
Change in Net Working Capital: Net change in CA and CL
Siqi Wei, Ph.D (CSUN) Corporate Finance 23 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Cash Flow Identity
Cash Flow
Cash Flow to Creditors and Stockholders
Net payments to creditors and owners during the year
CF to Creditors = Interest Paid – Net New Borrowing
CF to Stockholders = Dividend Paid – Net New Equity Raised
Siqi Wei, Ph.D (CSUN) Corporate Finance 24 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Cash Flow Identity
Cash Flow
Cash Flow Summary *
Siqi Wei, Ph.D (CSUN) Corporate Finance 25 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Selected Example problems
Example: Practice problem on Connect
During 2014, Raines Umbrella Corp. had sales of $700,000. Cost of
goods sold, administrative and selling expenses, and depreciation
expenses were $500,000, $90,000, and $95,000, respectively. In addition,
the company had an interest expense of $94,000 and a tax rate of 35
percent. (Ignore any tax loss carryback or carryforward provisions.)
Suppose Raines Umbrella Corp. paid out $58,000 in cash dividends. Is
this possible? If spending on net fixed assets and net working capital was
zero, and if no new stock was issued during the year, what is the net new
long-term debt?
Siqi Wei, Ph.D (CSUN) Corporate Finance 26 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Selected Example problem, Cont’d
Siqi Wei, Ph.D (CSUN) Corporate Finance 27 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Selected Example problem, Cont’d
Siqi Wei, Ph.D (CSUN) Corporate Finance 28 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Summary
This Chapter reviewed spme fundamental accounting concepts
Balance sheet is a financial statement showing a firm’s accounting
value on a particular date
Income statement summarizes a company’s performance over some
period of time
Tax bracket. Marginal tax rate and Average tax rate
Cash flow identity
Siqi Wei, Ph.D (CSUN) Corporate Finance 29 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
End-chapter questions for you to think about
What is liquidity?
What is balance sheet identity
what is market value and book value? From a view of financial
manager, which one is more important
What is marginal tax rate and avg tax rate? whish one is relevant
for financial decision making?
Siqi Wei, Ph.D (CSUN) Corporate Finance 30 / 31
Balance Sheet
Income Statement
Cash Flow
Excercies
Q & A
Any Questions?
Siqi Wei, Ph.D (CSUN) Corporate Finance 31 / 31
-
Balance Sheet
Net Working Capital (NWC)
Liquidity
Balance Sheet Structure
Market Value vs Book Value
Income Statement
Income statement structure
Taxes & Tax Brackets
Tax Example
Cash Flow
Cash Flow Identity
Cash flow Example
Excercies
FIN355-Corporate Finance
Chapter 3
Working with Financial Statements
Siqi Wei, Ph.D.†
† Department of Finance, Financial Planning, and Insurance
David Nazarian College of Business and Economics
California State University, Northridge
[B Siqi.Wei@CSUN.edu]
Siqi Wei, Ph.D (CSUN) Corporate Finance 1 / 33
Learning Objectives
Key Concepts
Understand sources and uses of cash, and the Statement of Cash
Flows.
Know how to standardize financial statements for comparison
purposes. — Common size stmnts
Know how to compute and interpret important financial ratios
Understand the limitations of ratio analysis.
Siqi Wei, Ph.D (CSUN) Corporate Finance 2 / 33
Cash Flows and Financial Statements: A Closer Look
Sources of cash
Cash inflow – occurs when we “sell” something and we add to the
cash account
Decrease in asset account
Accounts receivable, inventory, and net fixed assets (-)
Increase in liability or equity account
Accounts payable, other current liabilities, and common stock (+)
Uses of cash
Cash outflow – occurs when we “buy” something
Increase in asset account
Cash and other current assets
Decrease in liability or equity account
Notes payable and long-term debt
Siqi Wei, Ph.D (CSUN) Corporate Finance 3 / 33
Statement of Cash Flows
Changes divided into three major categories:
Operating Activity – includes net income and changes in most
current accounts
Investment Activity – includes changes in fixed assets
Financing Activity – includes changes in notes payable, long-term
debt, and equity accounts, as well as dividends
Siqi Wei, Ph.D (CSUN) Corporate Finance 4 / 33
Sample Statement of Cash Flows
Siqi Wei, Ph.D (CSUN) Corporate Finance 5 / 33
Standardized Financial Statements
Standardized statements make it easier to compare financial
information, particularly as the company grows
They are also useful for comparing companies of different sizes,
particularly within the same industry
Common-Size Balance Sheets
Compute all accounts as a percent of total assets
Common-Size Income Statements
Compute all line items as a percent of sales
Siqi Wei, Ph.D (CSUN) Corporate Finance 6 / 33
Example: Common Size Balance Sheet
Siqi Wei, Ph.D (CSUN) Corporate Finance 7 / 33
Example: Common Size Income Statement
Siqi Wei, Ph.D (CSUN) Corporate Finance 8 / 33
Ratio Analysis
Goal
The goal of ratio analysis is to take the numerous lines from both the
income statement and balance sheet and to interpret this information in
a meaningful way. There is simply too much information to grasp at one
time.
Ratio
Ratios are simply the construction of a Numerator and a Denominator
using data from a balance sheet and/or an income statement.
Ratio = Numerator
Denominator
Siqi Wei, Ph.D (CSUN) Corporate Finance 9 / 33
Categories of Financial Ratios
Short-term solvency or liquidity ratios
Long-term solvency or financial leverage ratios
Asset management or turnover ratios
Profitability ratios
Market value ratios
Ratios allow for better comparison through time or between companies
Siqi Wei, Ph.D (CSUN) Corporate Finance 10 / 33
Sample Balance Sheet
Siqi Wei, Ph.D (CSUN) Corporate Finance 11 / 33
Computing Liquidity Ratios
Current Ratio = CA/CL = 2,256/1,995 = 1.13 times (1)
Quick Ratio = (CA− Inventory)/CL = (2,256−301)/1,995 = .98 times (2)
Cash Ratio = Cash/CL = 696/1,995 = .35 times (3)
Siqi Wei, Ph.D (CSUN) Corporate Finance 12 / 33
Sample Income Statement
Siqi Wei, Ph.D (CSUN) Corporate Finance 13 / 33
Computing Liquidity Ratios
NWC to Total Assets =NWC/TA = (2,256−1,995)/5,394 = .05 (4)
Interval Measure =
CA
average daily operating costs
= 2,256/((2,006+1,740)/365) = 219.8days
Siqi Wei, Ph.D (CSUN) Corporate Finance 14 / 33
Sample Balance Sheet
Siqi Wei, Ph.D (CSUN) Corporate Finance 15 / 33
Computing Long-term Solvency Ratios
Total Debt Ratio = (TA−TE)/TA = (5,394−2,556)/5,394 = 52.6% (5)
Debt/Equity =TD/TE = (5,394−2,556)/2,556 = 1.11 times (6)
Siqi Wei, Ph.D (CSUN) Corporate Finance 16 / 33
Sample Balance Sheet
Siqi Wei, Ph.D (CSUN) Corporate Finance 17 / 33
Computing Long-term Solvency Ratios
Equity Multiplier = EM =TA/TE = 1+D/E = 1+1.11 = 2.11 (7)
Long − term debt ratio = LTD/(LTD+TE) = 843/(843+2,556) = 24.80%
(8)
Siqi Wei, Ph.D (CSUN) Corporate Finance 18 / 33
Sample Income Statement
Siqi Wei, Ph.D (CSUN) Corporate Finance 19 / 33
Computing Coverage Ratios
Times Interest Earned = EBIT /Interest = 1,138/7 = 162.57 times (9)
Cash Coverage = (EBIT + Depreciation) / Interest =(1,138 + 116) / 7
= 179.14 times
Siqi Wei, Ph.D (CSUN) Corporate Finance 20 / 33
Computing Inventory Ratios
Inventory Turnover = Cost of Goods Sold / Inventory =2,006 / 301 =
6.66 times
Days’ Sales in Inventory = 365 / Inventory Turnover= 365 / 6.66 = 55
days
Siqi Wei, Ph.D (CSUN) Corporate Finance 21 / 33
Computing Receivables Ratios
Receivables Turnover = Sales/AR = 5,000/956 = 5.23times (10)
Days’ Sales in Receivables (Average collection period) = 365 /
Receivables Turnover= 365 / 5.23 = 70 days
Siqi Wei, Ph.D (CSUN) Corporate Finance 22 / 33
Computing Total Asset Turnover
Total Asset Turnover =TAT = Sales/Total Assets = 5,000/5,394 = .93
(11)
NWC Turnover = Sales/NWC = 5,000/(2,256−1,995) = 19.16times (12)
Fixed Asset Turnover = Sales/NFA = 5,000/3,138 = 1.59times (13)
Siqi Wei, Ph.D (CSUN) Corporate Finance 23 / 33
Computing Profitability Measures
Profit Margin = PM =Net Income/Sales = 689/5,000 = 13.78% (14)
Return on Assets (ROA)=Net Income/Total Assets = 689/5,394= 12.77%
(15)
Return on Equity (ROE)=Net Income/Total Equity =689/2,556=26.96%
(16)
Siqi Wei, Ph.D (CSUN) Corporate Finance 24 / 33
Computing Market Value Measures
Market − to−bookratio = Market value per share
book value per share
(17)
Ecample: If the Market Price = $87.65 per share and If the number of
shares of common stock outstanding is: 190.9 million, and the book
value of the equity is $2,556, Then the Market-to-book ratio = 87.65 /
3.61 = 24.28 times
*“does a market-to-book ratio below one indicate a good investment?” It
may be an indication of undervaluation; however, such a ratio may also
indicate negative consensus regarding the future viability of the firm.
Siqi Wei, Ph.D (CSUN) Corporate Finance 25 / 33
Computing Market Value Measures, cont’d
The Enterprise Value
The Enterprise Value: An estimation of the market value of the
company’s operating asset
Enterprise Value = Market value of the stock + Book value of all
liabilities – Cash
Siqi Wei, Ph.D (CSUN) Corporate Finance 26 / 33
Computing Market Value Measures, cont’d
The Price/Earnings (P/E) ratio focuses on the market price of a
share of stock and compares it to the Net Earnings of a company
The EBITDA ratio compares the market value of all the operating
assets (the enterprise value) to the operating cash flow generated by
those assets (EBITDA).
EBITDA ratio = the Enterprise Value
EBITDA
(18)
Siqi Wei, Ph.D (CSUN) Corporate Finance 27 / 33
Du Pont Identity
THE DU PONT IDENTITY
ROE=[
NI
Sales
]×
[
Sales
TA
]× [
TA
TE
] = PM ×TAT ×EM where
[
NI
Sales
]× [
Sales
TA
] = ROA
Profit margin (PM) is a measure of the firm’s operating efficiency –
how well it controls costs.
Total asset turnover (TAT) is a measure of the firm’s asset use
efficiency – how well it manages its assets.
Equity multiplier (EM) is a measure of the firm’s financial leverage.
Siqi Wei, Ph.D (CSUN) Corporate Finance 28 / 33
Extended Du Pont Chart (Figure 3.1 on Text p.p.71)
Siqi Wei, Ph.D (CSUN) Corporate Finance 29 / 33
Using Financial Statements
Time Trend Analysis
Used to see how the firm’s performance is changing through time
Peer Group Analysis
How does our firm compare to other firms in the same industry?
Peer firms often identified using SIC (Standard Industrial
Classification) codes.
Siqi Wei, Ph.D (CSUN) Corporate Finance 30 / 33
Potential Problems
There is no underlying theory, so there is no way to know which
ratios are most relevant.
Benchmarking is difficult for diversified firms.
Globalization and international competition makes comparison more
difficult because of differences in accounting regulations.
Firms use varying accounting procedures.
Firms have different fiscal years.
Extraordinary, or one-time events.
Siqi Wei, Ph.D (CSUN) Corporate Finance 31 / 33
End-chapter Questions
Try to think about…
How do you standardize balance sheets and income statements and
why is standardization useful?
Use of fund v.s. Source of fund
What are the major categories of ratios and how do you compute
specific ratios within each category?
What is Dupont? -The DuPont identity puts ratios into an
organizational format to demonstrate the relationship of some of the
key ratios
Siqi Wei, Ph.D (CSUN) Corporate Finance 32 / 33
Q & A
Questions ?
* Read the Textbook
Siqi Wei, Ph.D (CSUN) Corporate Finance 33 / 33
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