Notes, summaries, assignments, exams, and problems for University

Loan Types and Capital Cost Analysis

Understanding Loan Structures

American Loans Explained

In American loans, all intermediate payments only include interest expenses. The principal is paid back at maturity.

C − Fees = I = ∑T_i · C_o + C_o

_{o o j=1} (1+R_B)^j (1+R_B)^T

French Loans Explained

The loan is repaid with equal payments (P), which include both interest and partial repayment of the principal. The process requires three steps:

1. Calculate the constant payment per period ‘P’.
2. With the computed value ‘P’, calculate the cost of debt.
3. Compute the effective annual rate.

The Cost of Equity Capital

Firms with excess cash can either pay a dividend or make a capital investment. Because stockholders can reinvest the dividend in risky financial assets,... Continue reading "Financial Valuation: Loan Structures and Equity Cost Models" »

Financial Leverage and Cost of Capital

1. Financial Leverage: Effect on Risk and Return

The capital structure that produces the highest firm value is the one that maximizes shareholder wealth.

Example: Trans Am Corporation currently has no debt in its capital structure and is considering issuing debt to buy back some of its equity.

For an all-equity firm, assets equal equity, meaning Return on Assets (ROA) is equal to Return on Equity (ROE):

• ROA = EBIT / Assets
• ROE = (EBIT - Interest) / Equity

Earnings per share (EPS) is calculated as:

EPS = Earnings / Number of shares outstanding

ROA is identical across economic states because it is calculated before interest. The effect of financial leverage depends on the company’s earnings before interest (EBIT)... Continue reading "Financial Leverage and Cost of Capital Analysis" »

Dividends

• Unless a dividend is declared by the board of directors of a corporation, it is not a liability of the corporation (A corporation cannot default on an undeclared dividend)
• The payment of dividends by the corporation is not a business expense. (Therefore, they are not tax-deductible)
• Dividends received by individual shareholders are, for the most part, considered ordinary income by the IRS and are fully taxable (There is an intra-corporate dividend exclusion)

Preferred Stock

Preferred stock represents equity of a corporation, but is different from common stock because it has preference over common in the payments of dividends and in the assets of the corporation in the event of bankruptcy. They have a stated liquidating value (usually $... Continue reading "Understanding Dividends, Preferred Stock, Debt, and Equity in Corporate Finance" »

Understanding Common and Preferred Stock

Par Value Explained

Par Value: The stated value on a stock certificate.

• An accounting value, not market value.
• Represents the dedicated capital of a corporation, calculated as the total par value (number of shares * par value of each share).

Authorized vs. Issued Common Stock

• The articles of incorporation must state the number of shares of common stock the corporation is authorized to issue.
• The board of directors, after a vote of the shareholders, may amend the articles of incorporation to increase the number of shares.
• Authorizing a large number of shares may concern investors about dilution because authorized shares can be issued later with the approval of the board of directors but without a vote of the

Mercantile Companies

Classification of Companies

Companies can be classified as either civil or mercantile. Partnerships can be further categorized into the following types:

• Collective Company
• Limited Partnership (Comanditary Company)
• Limited Partnership by Shares
• Limited Liability Company
• Anonymous Company (Corporation)

Companies can also be classified based on whether they are person-based or stock-based.

Concept of Mercantile Company

Article 35 of the Civil Code (CC) states that legal persons include associations of private interest, whether civil, business, or industrial, to which the law grants legal personality independent of that of each member. According to Article 36 of the CC, these legal persons are governed by the provisions relating to the... Continue reading "Understanding Mercantile Companies: Types and Legal Framework" »

Current Assets

• Cash
• Marketable investments (short-term)
• Accounts receivable (acc. receiv.)
• Inventory (inv.)
• Prepaid assets (rent, insurance)

Non-Current Assets

• Long-term investments (LT investment)
• Property, plant, and equipment (PPE)
• Intangible assets (goodwill, patent)

Current Liabilities

• Accounts payable
• Accrued liabilities (taxes payable, wages payable, expenses that haven’t been paid yet)
• Short-term debt
• Deferred revenue
• Current maturities of long-term debt

Non-Current Liabilities

• Long-term debt (LT debt)
• Other long-term liabilities

Equity — Contributed Capital

• Common stock
• Additional paid-in capital (add. paid-in cap.)
• Treasury stock

Equity — Earned Capital

Retained earnings: beginning balance + net income − dividends = ending balance.

Profitability Ratios

• ROE

Reading into writing

Understanding Administrative Procedures

An administrative procedure is a group of steps taken in order to reach a final decision or resolution within the administration.

Parties and Rights in the Process

There are two main parties involved in this process:

• The Administration: This entity serves two functions, acting as both a judge and a party.
• The Citizen: This may refer to an individual or a collective of citizens.

The citizen has the right to be heard, either orally or in writing. In all countries, it is mandatory to exhaust the administrative procedure before challenging a matter in court.

Judicial Procedure

Within the judicial procedure, there is a specific order within the courts that must be followed for an appeal, starting with the appeal court.... Continue reading "Administrative Adjudication and Judicial Review Processes" »