macn 302 own notes

8/8/2019 MACN 302 Own Notes

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Contentsestions:................................................................................................................................................................

Course text Book:.............................................................................................................................................

OWN RESEARCH TO DO STILL..........................................................................................................................

TO SCAN IN/ DO STILL......................................................................................................................................

SPECIAL THINGS TO REMEMBER.......................................................................................................................

FORMULAS........................................................................................................................................................EVALUATING A PROPOSED CREDIT POLICY : how to calc NPV of SWITCHING POLICIES.................................. The EOQ=economic order qty formula :..........................................................................................................PV FV annuities etc formulas :.......................................................................................................................

ANNUITY:..............................................................................................................................................................oan: periodic payment of a loan..........................................................................................................................Perpetuity:...........................................................................................................................................................

Other extra formulas........................................................................................................................................

SHARES................................................................................................................................................................MARKET VALUE OF A COMPANY:..........................................................................................................................market Value of Convertible debentures or preference shares............................................................................TERMS:(vig ch 1+2)..............................................................................................................................................

TABLE OF ALTERNATIVE TERMINOLOGY /USA /UK............................................................................................CAPEX= capital expenditure ( eg buying PPE like land or machines)...............................................................the production point of indifference, :..............................................................................................................analysis of the companies cost structure:........................................................................................................Capital structure...............................................................................................................................................annuity:............................................................................................................................................................over-trading.....................................................................................................................................................

Cost Objects:........................................................................................................................................................Direct and Indirect Costs......................................................................................................................................

inventory valuation:(note)................................................................................................................................DIRECT COSTS :................................................................................................................................................INDIRECT COSTS :............................................................................................................................................Categories of manufacturing costs. with direct/indirect costs........................................................................DIRECT MATERIALS :.........................................................................................................................................

INDIRECT MATERIALS :.....................................................................................................................................DIRECT LABOUR :.............................................................................................................................................INDIRECT LABOUR............................................................................................................................................DIRECT EXPENSE :............................................................................................................................................PRIME COST......................................................................................................................................................MANUFACTURING OVERHEAD :.........................................................................................................................COST ALLOCATIONS :....................................................................................................................................... TOTAL MANUFATURING COST :.......................................................................................................................Period and Product Costs..................................................................................................................................PRODUCT COSTS :............................................................................................................................................PERIOD COSTS :...............................................................................................................................................

Relevant and Irrelevant Costs:.............................................................................................................................

RELEVANT COSTS AND REVENUES :.................................................................................................................IRRELEVANT COSTS AND REVENUES:...............................................................................................................Avoidable or Unavoidable costs:..........................................................................................................................

AVOIDABLE=....................................................................................................................................................UNAVOIDABLE..................................................................................................................................................

Opportunity Costs:...............................................................................................................................................-Incremental /or Differential- and Marginal Costs.................................................................................................

INCREMENTAL or DIFFERENTIAL COSTS :.........................................................................................................MARGINAL COSTS :...........................................................................................................................................

ob Costing and Process Costing systems:............................................................................................................

JOB COSTING SYSTEMS:..................................................................................................................................PROCESS COSTING SYSTEMS:..........................................................................................................................

1 MACN 302 :CORPORATE FINANCE Own Notes


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future value:........................................................................................................................................................Present value: (PV)...............................................................................................................................................APR AND EFF : EFFECTIVE ANNUAL RATE AND ANNUAL PERCENTAGE RATE........................................................ANNUITY:..............................................................................................................................................................oan: periodic payment of a loan..........................................................................................................................Perpetuity: (or consol in UK).................................................................................................................................AMORTISATION.....................................................................................................................................................PURE DISCOUNT LOANS.......................................................................................................................................

INTEREST ONLY LOANS.....................................................................................................................................AMORTISED LOANS...........................................................................................................................................

SHARES : PRESENT VALUE OF SHARES.................................................................................................................

Return on Shares- return on investment:.............................................................................................................Debt : Present value of debt:...............................................................................................................................Market value of debentures.................................................................................................................................MARKET VALUE OF A COMPANY:..........................................................................................................................ssue costs...........................................................................................................................................................How To Determine Growth Rate:..........................................................................................................................miller & Modigliani market value of company......................................................................................................CASH FLOW : Financial Statements, Taxes & Cash Flow Ch 2 fundamentals corporate textbook.........................

TABLE OF ALTERNATIVE TERMINOLOGY /USA /UK................................................................................................1-balance sheet:..................................................................................................................................................

NET WORKING CAPITAL....................................................................................................................................3 MOST IMPORTANT THINGS ON A BALANCE SHEET.........................................................................................

2-INCOME STATEMENT.........................................................................................................................................

NOTE: 3 THINGS TO KEEP IN MIND WHEN LOOK AT INCOME STATEMENT :......................................................

3-MARGINAL vs AVERAGE TAX RATE....................................................................................................................4-CASH FLOW statement......................................................................................................................................

FROM CORPORATE FINANCE BOOK- CHAPTER 3 WORKING WITH FIN STATS:................................................From MACN202 notes VIGGIO...........................................................................................................................WORKING OUT THE CASH FLOW STATEMENT BACKWARDS (corp fin book)......................................................

ALYSIS OF FIN STATS & RATIOS chapter3 fundamentals.txtbook........................................................................

CASH FLOW STATEMENT:(this chapters bit of extra info about cash flow stats etc).............................................STANDARDISED FINANCIAL STATEMENTS (common size)....................................................................................RATIOS:................................................................................................................................................................

Du Pont Identity:..............................................................................................................................................RATIOS.............................................................................................................................................................

margin of safety:..................................................................................................................................................key ratios for cvp.................................................................................................................................................

1) (PV ratio) Profit Volume ratio: ( or also called contribution RATIO or margin % )........................................2) profit ratio....................................................................................................................................................3) (B/E sales) break-even sales revenue:( not a ratio)......................................................................................4) break-even sales volume:( not a ratio).........................................................................................................5) margin of safety ratio...................................................................................................................................6) OTHER TYPES:..............................................................................................................................................

Business Risk assesment.....................................................................................................................................business risk ratios (there are 8 of ).....................................................................................................................business risk ratios (there are 3 of ).....................................................................................................................

Contribution : High Low method to get it from the income statement...........................................................OPERATING LEVERAGE: = CONTRIBUTION/EBIT (Earnings Before Interest and Tax) | =Decimal Answer |low=

high=3 |...........................................................................................................................................................(GP%) GROSS PROFIT Percentage % RATIO: = Gross Profit/TURNOVER | =% ANSWER |.................................return on operating assets: earnings before interest and tax/ Operating Assets *100/1 | = % answer..........net profit percentage % ratio= net profit after tax/turnover * 100/1 |%=answer|...........................................Roe : return on equity = earnings after tax/total shareholders funds *100/1 |% =answer|..............................increase in Turnover or sales growth as a ratio =new-old/old |=%answer |...................................................b/E point = fixed costs/pv ratio % (contribution margin) | =% answer |..........................................................debtor turnover...............................................................................................................................................Stock turnover..................................................................................................................................................

For financial ratios note that the ratio for debt-equity: you do USE debt=ONLY long term debt + bank overdrafcreditors at all!!!!!!!! in viggio book, but in other not sure...................................................................................

RRENT ASSET MANAGEMENT CH19.....................................................................................................................



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NTRODUCTION....................................................................................................................................................reasons for holding cash......................................................................................................................................FLOAT , CASH COLLECTION, AND CASH CONCENTRATION...................................................................................NVESTING IDLE CASH..........................................................................................................................................CREDIT & RECEIVABLES :.....................................................................................................................................credit POLICY.......................................................................................................................................................

1) TERMS OF SALE............................................................................................................................................

2) credit analysis..................................................................................................................................................

Analyzing Credit Policy.....................................................................................................................................CREDIT ANALYSIS:deciding whether to give a specific customer credit or not:................................................

OPTIMAL CREDIT POLICY..................................................................................................................................3) Collection policy...............................................................................................................................................-eoq : DETERMINING THE ECONOMIC ORDER QUANTITY:.....................................................................................

TABULATION METHOD :.....................................................................................................................................GRAPHICAL METHOD:.......................................................................................................................................FORMULA METHOD:..........................................................................................................................................MORE NOTES ON EOQ Model............................................................................................................................

TERNATIONAL CORPORATE FINANCE CH20..........................................................................................................

Definitions:...........................................................................................................................................................Foreign exchange markets & exchange rates......................................................................................................

Exchange rate quotations:...............................................................................................................................Web sites for exchange rates:..........................................................................................................................Types of transaction:..........................................................................................................................................

Purchasing power Parity.......................................................................................................................................

TEREST RATES AND BOND VALUATION CH7.........................................................................................................

1) bond CALCULATIONS:......................................................................................................................................

BOND FEATURES..............................................................................................................................................CALCULATIONS FOR BONDS.............................................................................................................................

NTERST RATE RISK:.............................................................................................................................................GENERAL NOTES on BONDS.................................................................................................................................

DIFFERENCE BETWEEN DEBT & EQUITY............................................................................................................CLSSIFYING IT AS DEBT OR EQUITY?.................................................................................................................HOW BONDS WORK..........................................................................................................................................

fisher effect:.........................................................................................................................................................

her effect:



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Questions:

1. What headings nust we use in the the cash flow stat. same as acc or same as pg 35 txtbook2.



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A. Course text Book:



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B. OWN RESEARCH TO DO STILL



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C. TO SCAN IN/ DO STILL1. Chapter 2 time value of money see spreadsheet calc. of time value of money ALSO ch 3 all the annuitie

other stuff, check out all the spreadsheet methods2. Check formulas for APR and EFF in textbook pg 164 cannot get them to work and what is formula for AP



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A. SPECIAL THINGS TO REMEMBER



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B. FORMULAS

EVALUATING A PROPOSED CREDIT POLICY : how to calc NPV of SWITCHING POLICIES

a. NPV of Switching Policies:

i. FORMULA :here :

The EOQ=economic order qty formula :

PV FV annuities etc formulas :

Future Value FORMULA : FV= PV(1+i)

n

a) Where FV= future valueb) PV= present valuec) I = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periods

Present Value Formula : PV = FV/(1+i)n

ANNUITY:

Future Value FORMULA for ORDINARY/DEFERRED/REGULAR ANNUITY. : FVa = I x [ (1+i1 / i] (1+i)a) I = Constant Amount invested each year

b) FVa = future value of the annuity.c) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periods

Future Value FORMULA for ANNUITY DUE : FVa= I x [ {(1+i)n 1 }/ i] (1+i)a) I = Constant Amount invested each year




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Present Value FORMULA for Regular ANNUITY : PVa= I x [ {1 1/ (1+i)n } / i] A SCAN)a) I = Constant Amount invested each year

b) PVa = present value of the annuity.c) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periods

e) This is where the payments are at the end of the year.

Present Value FORMULA for ANNUITY DUE : PVa= I x [ ({1 1/ (1+i)n } / i) + 1DO A SCAN)a) I = Constant Amount invested each year

b) FVa = future value of the annuity.c) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periodse) This one is where payments are at the beginning of the year.-annuity due.

LOAN: PERIODIC PAYMENT OF A LOAN

CHANGING the Present Value FORMULA for Regular ANNUITY to MAKE I THE SUBJECT bea) PVa= I x [ {1 1/ (1+i)n } / i]

i) Becomes : I = PVa/ [ {1 1/ (1+i)n } / i]ii) Or: I = PVa X i / [ {1 1/ (1+i)n } / i] :this formula is easier to use than the one ab

for manual calculations the /I is just changed mathematicaly to go on top as X PVa

iii) Where:(1) I = Constant Amount invested each year

(2) PVa = present value of the annuity.(3) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%(4) n= number of years/periods

PERPETUITY:A Perpetuity is a normal Annuity but with an infinite life.You only work it out by using a special formula:

PRESENT VALUE of a PERPETUITY FORMULA : PVp= I/ia) PVp = Present Value of a Perpetuity.b) I = Constant Amount invested each yearc) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) This one is where payments are at the end of the year.- I think- it does not say in the book what it is. Als

does not say what the formula for at begin of year (annuity due) is.

PRESENT VALUE of a -growing- PERPETUITY FORMULA : PVp= I/i-g where g= growin decimals eg 0.08

Other extra formulas

PV of DEBT Formulas :There are 2 possible situations & formulas herea) For Perpetuity Type Loan :PRESENT VALUE (PV) formula of Debt

PV= Cash-Flow/Kd this is where the loan is indefinite/infinite with no repayment date specified. The answer is nfixed- it changes if looked at from a PV or FV.

b) For Repayment Time Specified Loan : (PV) formula of Debt : PV=Cash-Flow/(1+Kd)n here you must work out the PV with this formula for every year of the loan individuallythen add up all the answers to get the total.- but you still only use the current market interest rate for Kd

c) Where



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i) Cash-Flow = the FV ie money that is to flow in the future- the Future Value =this is the interest inRands OR/AND the capital repayments that will be paid back in the future.

ii) Kd = the interest rate charged for debt- if tax is deductable then first deduct the tax % from the rbefore you use it. Interest After Tax =interest rate X [100% - tax rate% ]%.This Kd is the curremarket value of debt , not at the actual interest rate actually being paid back by company, but at thelowest you could get today instead- even if it is.

HARES

a) STATIC DIVIDENDS FORMULA(no growth )i) There are 2 Ways this can get calculated: depending on if the shares are to be held for ever or to be

sold after a specific time. The difference is for the for ever one it works similar to the perpetuityformula = [ Do/Ke ] and the second works similar to the Present Value formula [ like =FV/(1+i) ](1) PERPETUITY Type FORMULA: where the share is to held for an indefinite period ie: in perpetuity.

(a) Ex-Dividend formula: Value = Do/Ke X Number of shares : meanthe shareholder receives a dividend today that dividend is EXCLUDED

(b) Cum-Dividend formula: Value = Dividend + (Do/Ke X TOTALnumber of shares.) means if the shareholder receives a dividend today then thatdividend is INCLUDED in the calculation of value of share (you just add the dividendanswer-simple)

(c) Remember: you can ALSO get the PV of an ANSWER from this formula if it only willoccour in eg 3 yrs time. : say that for the next 2 years the share price will fluctuate ( or groetc) but in 3 years time it will start to remain the same from there on- static. If you are lookingthe value of the share today, you must first calculate the PV of the next 2 years separately usinanother method ( directly or using growth formula below etc.) THEN you can calculate the valuthe 3rd year onwards using the above formula and bring this to PV by substituting your FV you the for it to bring it to PV. : ie: [Do/Ke] = FV , so PV today = [D0/Ke ] / (1+i)n where we would usKe for i here.!

(2) TO BE SOLD Type PRESENT VALUE FORMULA : where the shares are to be sold after a specificperiod of time :now its a PV calculation.

(a) Ex-Dividend formula: Value = Do/(1+Ke)n X Number of shares :means if the shareholder receives a dividend today that dividend is EXCLUDED You this formula once for each separate year to come, so for 3 years you must do the calc. 3 timesadd the answers up to get the total.

(b) Cum-Dividend formula: Value = Dividend + (Do

/(1+Ke)n

XTOTAL number of shares.) means if the shareholder receives a dividend today tthat dividend is INCLUDED in the calculation of value of share (you just add the dividend to ansimple)

(c) Remember you could do the above calc. for years 3 & 4 but do years 1&2 with another formueg.growth and just add the answers up to get the total.( say there was growth for first 2 yrs tno growth for 2 yrs.)

b) GROWTH / FALLING DIVIDENDS (growth or getting less)i) PERPETUITY Type FORMULA: where the share is to held for an indefinite period ie: in perpetuity. Do not use yea

dividends, only end year 1

(a) Ex-Dividend formula: Value = D1/Ke - g X Number of shares : mif the shareholder receives a dividend today that dividend is EXCLUDED

(b) Cum-Dividend formula: if they ask for cum-dividend then (probably) just add the dividend yare receiving to the answer per share.

ii) TO BE SOLD Type PRESENT VALUE FORMULA : where the shares are to be sold after a specific period oftime :now its a PV calculation.

(a) Ex-Dividend Formula : Value = D1/(1+Ke )n X Number of shares(ie cash flow/for this one you MUST work each year out separately using the PV formula givenhere. To accommodate the growth (g) in dividends each year you cannot do it with the formulamust manually increase the dividends each year, then work out the Present Value for each sepyear using the above formula .THE SELLING PRICE AT THE END OF THE PERIOD MUST BE INCLUIN THE final year PV calculation.(ie just add it to the final year dividends and get the PV of the tno need to do a separate calculation!)Then add all the years up to get the present value of theshareholding.



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(b) Cum-Dividend Formula: Cum-Dividend: probably just add the dividend you are receiving tanswer

(c) Remember: you might have to work out the PV for only 2 years using this formula, thswitch to another formula if question says there will be no more growth from the 3rdyear onward : that new answer then gets in

n brought to P.V.

)Debt : Present value of debt:1. There are 2 possible situations & formulas here:

a. For Perpetuity Type Loan :PRESENT VALUE (PV) formula o

Debt : PV= Cash-Flow/Kd this is where the loan is indefinite/infinite with no repayment datespecified. The answer is not fixed- it changes if looked at from a PV or FV.

b. For Repayment Time Specified Loan : (PV) formula of Debt PV= Cash-Flow/(1+Kd)n here you must work out the PV with this formula for every year of thloan individually, and then add up all the answers to get the total.- but you still only use the currmarket interest rate for Kd.

MARKET VALUE OF A COMPANY:

The Market Value of a Company : there are 2 formuals :Formula 1: V0 = MVe +MVd

a) The Market Value of a Company Formula : is simply the Market Value of Equity ( ie the PV valuation oshares) PLUS the Market Value OF all Debt (ie PV valuation of debt) ,these valuations of debt and equity amust be done using the FV of cash flows at current market rates to get the Present Value of all futureflows.

The Market Value of a Company : there are 2 formulas :Formula 2 : V0 = Y/W= Dividends(Do) + DebtInterest Paid in Cash/WACC (AFTER TAX)

MARKET VALUE OF CONVERTIBLE DEBENTURES OR PREFERENCE SHARES.

The Valuation of Convertibles is carried out in 2 steps:a) At the option date, compare the value of each option and choose the option with the highest value.

b) Calculate the value of future cash flows and the terminal value of the option chosen, back to year 0. (datewhich the you want to know the value not date of option but date today)If You Convert From One Type Of Security To Another, (Eg: Debentures To Shares, Or Pref. ShareDebentures). Use The Current Types Ke Or Kd To Bring The Future Market Value Fv At Date OConversion To Todays Present value- NOT the Kd or Ke of what it will be when its converted. So: if you aregoing to choose to convert to ordinary shares at the date of the option in say 3 years , from debentures , thethere is one complication : TO GET THE Present Value OF THE MARKET VALUE OF THE NEW ORDINARY SHARtoday in order to add it to the PV of any cash flows up to the date of conversion = Market Value ofDEBENTUTOU MUST USE THE DEBENTURE Kd (LESS TAX), AND NOT THE ORDINARY SHARE Ke at which the FV marketvalue of the shares were worked out



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annuity:

e Receipt or Payment of a fixed amount over a number of years or periods.NNUITY DUE: if payment is made at the beginning of each period, it is called thisGULAR /ORDINARY /DEFERRED ANNUITY: if payment is made at the end of the period.

over-trading

ans the company is selling too mush on credit and debtors are taking too long to pay- too many debtors and tg to pay. This means it is taking chances with its selling on credit policy and over doing it.

COST OBJECTS:

1. COST OBJECT :Definition: ANY ACTIVITYfor which a SEPARATE MEASUREMENT ofCOSTS is dea) Eg; cost of a product , of rendering a service to a bank customer ,of operating a particular sales territodept.

The Cost Collection System works as such ; it accumulates costs-by assign into categories-eg labour,material,overheads.( or by fixed & variable).THEN assigns these costs to cost objects.

DIRECT AND INDIRECT COSTS

inventory valuation:(note)

IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock work

completed but unsold- (??? What About inventories & work in progress???) must be valued at the lowecost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs direrelated to the units of production,such as direct labour.They also include a systematic allocation of fixvariable overheads that are incurred in converting material into finished goods.Fixed production overhare those indirect costs of production that remain relatively constant regardless of the volume ofproduction, such as depreciation ,maintenance of factory buildings and equipment,and the cost of facmanagement and administration.However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seor periods under normal circumstances,taking into account the loss of activity relating to plannedmaintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. CapacLevels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to eachproduct unit is decreased so inventories are not valued at below cost.

As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted avebasis.LIFO is strictly prohibited.

DIRECT COSTS :

sts that can be specifically and exclusively identified with a particular cost object. . .. Eg:wooesk, maintenance labour in -(cost object maintenance dept)-but NOT Maint.Labour in a (cost objesk produced).The more direct cost and less indirect costs =the more accurate the estimate.

INDIRECT COSTS :

osts that cannot be identified specifically and exclusively with a particular cost object, but can only be identifie

h a a number of depts.. /cost objects.

Categories of manufacturing costs. with direct/indirect costs.

Direct Materials XxDirect Labour XxPrime Cost XxManufacturing Overhead XxTotal Manufacturing Cost Xx

i) In manufacturing organisations traditional product costs accumulated as follows ( developed espfrom/for ext. accounting requirements.

DIRECT MATERIALS :



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Cost of all materials that can be identified with a specific product.eg wood for desk is, but maintenancmaterials on machine to produce with is not,that is an indirect materials cost.

INDIRECT MATERIALS :

cannot be identified with any one product, eg:because used for all.eg maintenance materials spares.

DIRECT LABOUR :

can be specifically traced to or identified with product eg:labour assemble product

INDIRECT LABOUR

can not be specifically traced to or identified with product eg:labour maintenance of many differentproduct lines machines.

DIRECT EXPENSE :

NOT labour/materials/overheads/ can be specifically traced to or identified with product eg hiring ofmachine to produce a specific quantity of a product is a direct expense. (other than /not labour/materin this context) anything else in this category would be classed as 'OVERHEADS' see below.

PRIME COST

= Direct materials+Direct Labour +Direct Expenses.

MANUFACTURING OVERHEAD :

All manufacturing costs exept : Direct materials+Direct Labour +Direct Expenses eg:rent of factory.

COST ALLOCATIONS :

process of assigning indirect costs(overheads) to products- using surrogate ,not direct measures.ALSOthe assigning of eg: rent between mnftring and / non-mnftring depts.

TOTAL MANUFATURING COST :

Direct materials+Direct Labour +Direct Expenses+Mnfctring overheads

Period and Product Costs.

2) Because of external fin acc rules in most countries that require that for inventory evaluation ONLY

MANUFACTURING COSTS /or RETAILER = PURCHASE COSTS + FREIGHT IN -should be included in the calculatproduct costs AS WELL AS ONLY costs related directly to the units of production- accountants therefore classcosts as product costs and period costs.

a) BECAUSE OF THIS ONLY the FIFO or weidghted average methods may be used to calc. inventory- NOTL.I.F.O.-ie. Costs must relate directly to units of production.

EASONS CITED FOR THIS:b) Inventories represent a future probable inflow of revenue , period costs(overheads) do notc) Many non-manufacturing costs are NOT incurred when the product is being stored-thus inappropriate include them in inventory valuation.

TERNATIONAL STATEMENT ON INVENTORIES states that :Inventories are valued at : all costs incurred in bringinrrent state ????ONLY manufacturing direct and indirect costs- ie:COSTS OF CONVERSION ???????YES OR NO.ludes systematic allocation of fixed & variable overheads.

wever FIXED OVERHEADS are only allocated at the normal production capacity.If idle plant /low productionventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high productiomount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below co

PRODUCT COSTS :

sts identified with goods purchased or produced for resale.-in mnftring is costs attached to product for inventouation of finished goods ,work in progress, matched against sales for recording profits. ONLY MANUFACTURINERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock.Variable costing wat it as a period cost and write it off in period it occoured.(IFRS/etc) =recorded as an ASSET until sold ,then aspense.(when you 'write out' last inventory count and write in new inventory in the profit & loss statement at yd I THINK? ) ! Product costs= TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses

Mnftring overheads( from last section) NOT eg: distribution+telephone for telesales .as per book exactly: Admierheads or selling overheads may never be assosiated with production.



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PERIOD COSTS :

costs treated as expenses in the period in which they occoured, BUT NOT included in the cost calc. of inventvaluation.(or /sales/work in progress.)recorded as an expense ONLY,never as an asset! Period costs= eg: saleexpenses+ admin +distribution expenses.

RELEVANT AND IRRELEVANT COSTS:

RELEVANT COSTS AND REVENUES :

Those Future costs and Revenues that will be changed by any specific decision relating to production volumeselling volume.eg: material costs change if choose to produce more

IRRELEVANT COSTS AND REVENUES:

Those Future costs and Revenues that will NOT be changed by any specific decision relating to production voor selling volume.. Eg: rent for factory will not change if higher production or selling volume.

AVOIDABLE OR UNAVOIDABLE COSTS:

AVOIDABLE=

relevant costs (sometimes used in place of other name)

UNAVOIDABLE

irrelevant costs (sometimes used in place of other name)

OPPORTUNITY COSTS:

3) OPPORTUNITY COST =The cost of a foregone opportunity in favour of having chosen another one :eg . if tcost of selling a new product is to stop selling another one , the opportunity cost is the rvenue one used to refrom the old one.

-INCREMENTAL /OR DIFFERENTIAL- AND MARGINAL COSTS

INCREMENTAL or DIFFERENTIAL COSTS :

ccountants use this : means the different in total costs for ALL THE EXTRA PRODUCTS WHEREBY the PRODUCTS BEEN INCREASED.

MARGINAL COSTS :

onomists use this : means difference in costs for ONLY ONE extra product ie. For each separate new produereby production has been increased.

JOB COSTING AND PROCESS COSTING SYSTEMS:

JOB COSTING SYSTEMS:

Relates to a costing system where all the costs associated with each job could be different for eacompleted and , so direct materials and labour are allocated at actual cost and fixed overheads are allocatedpre-determined cost rate for each separate job.This is also known as a fully integrated absorption costing sy

eg. In constructiion industry where each house could be unique and have a completely different set of co

other ho

PROCESS COSTING SYSTEMS:

The method used to value stock in mnftring where at end of period some of the closing stock is partiallymanufactured-not all finished yet.

ABSORPTION COSTING AND VARIABLE COSTING:AND STANDARD COSTING.

inventory valuation:(note)IAS 2 on INVENTORIES States the Following.:

IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock workcompleted but unsold- (??? What About inventories & work in progress???) must be valued at the lowe



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cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs direrelated to the units of production,such as direct labour.They also include a systematic allocation of fixvariable overheads that are incurred in converting material into finished goods.Fixed production overhare those indirect costs of production that remain relatively constant regardless of the volume ofproduction, such as depreciation ,maintenance of factory buildings and equipment,and the cost of facmanagement and administration.However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seor periods under normal circumstances,taking into account the loss of activity relating to plannedmaintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. CapacLevels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each

product unit is decreased so inventories are not valued at below cost.

Variable Production overheads are those indirect costs of production that vary directly,or nearlydirectly,with the volume of production,such as indirect materials and indirect labour.

As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted avebasis.LIFO is strictly prohibited.

Cost accounting grew out of the need that financial accountants have for financial information ,and gaand analyses costs for the purposes of :product costing,job costing,stock valuation.

Absorbtion costing :

EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USISORBTION COSTING, ONE MUST QUICKLY CALCULATE THE SAME FIGURES USING VARIABLE COSTIN

R YOU WILL NOT BE ABLE TO DO PROPER COMPARISONS AND WORK THINGS OUT! Due to fixed cosing in there- always take them out and convert to CONTRIBUTION ..

Method used to VALUE CLOSING STOCK that includes ALL MANUFACTURING COSTS-VARIABLE AND FIXED-NOany NON-MNFTRING COSTS AT ALL!!!!!! ((WHICH DOES/can INCL. RENT AND MAINTENANCE per book) The fixed cost element can be determined by budget or by actual,and is added to all variable mnftring costs(direct material) to get the total per unit product cost for inventory valuation per the IAS definition ( which sayMNFTRING COSTS must be included in Inventory Valuation incl. fixed mnftring costs eg: Maintenance etc.) Financial Accounting uses it. NOTE: every time production volume changes ,the cost per unit will changebecause fixed costs get divided by a larger /or smaller number now.So it is an inconvenient method requiringconstant raising of under/over recovery charges to balance the figures.The 2 reasons for this is:

1-Actual volume is different to budget volume.

2-Actual manufacturing overhead being different to budget overhead.That is why Management Accounting uses a different method : called "Variable Costing".

FOR ABSORBTION COSTING THRE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2-ACTUALVARIABLE PLUS FIXED COST OF PRODUCTION. But for variable costing ther are also theseways , exept there it is only VARIABLE COSTS OF PRODUCTION, not fixed and variable in the stocvaluation(per book vigario pg14-concl.ALSO, FOR ABSORBTION COSTING THERE ARE 3 POSSIBLE WAYS OF PRESENTING THE INFORMATIIN THE FINANCIAL STATEMENTS.1-FULLY INTEGRATED ABSORBTION COSTING (BUDGET COST)2-NON-INTEGRATED ABSORBTION COSTING (BUDGET COST)3-ACTUAL COST ABSORBTION COSTING. (all exactly per vig. Pg 14 book!)IS ABSORBTION COSTING ACCEPTABLE:?

NO, because it will distort true company profits due to showing fixed costs as closing inventocosts you cannot compare 2 periods properly,or budget properly if you use include rent at a determined rate eh R300 per product it will not be accurate if production rises or falls.- it wshow excessive profits when stock holding is rising ? per book vig pg14.

HOW DO YOU MAKE IT ACCEPTABLE:u explain on any budget that the Per Unit cost can vary by the TOTAL FIXED COSTS AMOUNT incluthe costing eg R500 at any level above or below the no. of units that the budget was calculated

However ,for calculating costs of products in a Job Costing environment, where the costs are used to quote ofuture jobs eg: Printers , when using absorbtion costing, one must remember that one company allocates fixecosts differently to another one,and there is no right or wrong method to allocate fixed costs really, ie someallocate all overheads, some only admin + management , some only maintenance and depreciation etc.



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Cost Absorbtion Rate :

the cost rate at which a group of costs or fixed costs or overheads are charged to a specific product eg: machours divided between no. of products.(it is used by fin . accountants to calculate absorbtion costing system.

Fully Integrated Absorbtion costing System ( or full absorb. costing system)

If the fixed element is pre-determined .So when fixed elements eg: rent+maintenance ,are pre-calculated in previous years as a per unit cost, from per average normal production levels,so eg R1000 rent /500productsmade per mnth= R2 rent per product ;and these amounts are added to normal vriable costseg direct materiaget a (estimated/ avg)total cost per product unit . (NOTE: not all fixed costs need to be allocated as such ONLmnftring costs MUST BE(WHICH DOES INCL. RENT AND MAINTENANCE per book), other fixed costs eg admin

computer,marketing costs(more 'sales costs' types get left out)can be left out and the system would still be cFully Integrated absorbtion Costing) ONLY where the fixed cost element is pre-determined though and not baon actual fixed costs ,which is another type of absorbtion costing.The actual amount will differ from the allocaamount though and OVER or UNDER recovery of fixed overhead will occour, which must be balanced by aBALANCING AMOUNT known as the over/under recovered fixed overhead.This amount is included by 'raisincharge' (possibly it's very own ledger account-CRJ/CPjournal) and including it in the Cost of sales breakdown Income statement for Gross Profit calc.Do NOT ASSUME every company uses fully integrated abs.cost. to allocate costs in order to arrive at the costproduct.Only companies that have a JOB COSTING environment , require a pre-determined FIXED COST to allto FUTURE production.Very few companies will allocate costs to production and service depts. , followed by reallocation from service depts. to production depts. However , when using absorbtion costing, one must rememthat one comapny allocates fixed costs differently to another one,and there is no right or wrong method toallocate fixed costs really, ie some allocate all overheads, some only admin + management , some only

maintenance and depreciation etc.

Variable Costing (or Marginal or Direct Costing)

EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USISORBTION COSTING, ONE MUST QUICKLY CACULATE THE SAME FIGURES USING VARIABLE COSTING

R YOU WILL NOT BE ABLE TO DO PRPER COMPARISONS AND WORK THINGS OUT! Due to fixed costsing in there- always take them out and convert to CONTRIBUTION ..e method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off ariod costs.(as per book- fixed mnfrtring costs are charged to the Income statement as an expense for the periosing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all mnfring fixed costs.Thstem is representative of managerial accounting for decision making.

ariable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly)

OR VARIABLE COSTING ,THERE ARE 2 WAYS OF VALUING STOCK 1-BUDGET OR 2-ACTUAL.Direct Costing.Marginal Costing.Standard Costing:

Another method of VALUEING CLOSING STOCK but at a pre-determined rate for BOTH VARIABLE AND FIXEDCOSTS.

Standard Variable Costing:

(a) when only pre-determined variable costs are used.

Standard Fixed Costing:

(b) when only pre-determined fixed costs are used.

SUNK COSTS:

SUNK COSTS :

ese are COSTS created by a decision in the PAST that cannot be changed by any future decision or which haro value when making future decision: eg:depreciation,or money spent on material that is no longer required/ lable.-OR buy a car for 10000, when you sell it the 10000 is sunk cost because selling price depends on what tyer will pay it can be above or below 10000 .

RESPONSIBILITY ACCOUNTING :



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RESPONSIBILITY ACCOUNTING :

accounting for a RESPONSIBILITY UNIT -an organisation unit or part of a business for which a manager isreponsible.Revenues & Costs so deviations from performance budget can be attributed to resposible individu

PROFIT CENTRE :

same as above :Accountability for profitability of assets placed under a managers control.

COST CENTRE:

SAME AS above but AREA or DEPT. for which a manager is responsible.

INVESTMENT CENTRE:

term defines accountability for profit generation AS WELL AS choices in what will or will not be purchased by of capital expenditure in running a business.

MAINTAINING A COST DATABASE:

1) Database to be maintained so relevant cost info can be extracted easily.2) Need eg: By products, responsibility centres,depts.,distribution channels, + categ. of expense eg direct la+ categ. of cost behaviour eg fixed and variable.3) For cost control and performance measurement:

a) Reports by resposibility centre per week/ etcb) Future reports for eg: possible price changes.c) Standards costs stored & used to evaluate

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR OF

a) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ?reduce price to sell more?,or units produced ,guests booked etc)

VARIABLE COSTS :

ry directly or very nearly directly according to incr./decr. in volume(eg:of production).See chart below : totalriable costs are linear/direct and Unit var. cost is constant.

UNITS vs VARIABLE COSTS GRAPH

VARIABLE COSTS : (a) TOTAL

01000

20003000

400050

010002000300040005000

0 100 200 300 400 500

Activity Level

TOTALVariable

Cost

PROFIT vs VARIABLE COSTS GRAPH.



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FIXED PRODUCTION COSTS :

sicaly stay constant regardless of volume of production OVER a specific period of time- (before inflation pushput prices etc),but also called long term variable costs because over the long term ALL costs are seen a variae to inflation etc. eg:rent, municipal rates

UNITS vs FIXED COSTS GRAPH

PROFIT vs FIXED COSTS GRAPH



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SEMI-FIXED (or STEP-FIXED COSTS) :

ey are fixed in (Relevant Ranges )at specific activity levels :eg at 100 5000 products ,-within a specific timeriod (same as fixed to exclude inflation etc)- but if production goes above that they change to the next level eually in steps-

SEMI-VARIABLE (or MIXED COSTS) :

ese include both a FIXED and a VARIABLE component eg:maintenance = fixed cost + a variable cost accordinmount of activity ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross rev

RELEVANT RANGE

Relevant Range:

mited level of activity under which costs are analysed as either fixed or variable,eg for production of 1-1000 uer that another costing structure is used,or another range.

SELLING COSTS

Selling Costs :

late to sales, written off in period incurred. Eg :commission costs,etc.

CONVERSION COSTS:

Conversion Costs :

l costs other than Direct Material costs that are incurred in manufacturing a product.The word conversion is

rmally associated with process costing and refers to all costs exept direct material directly related to theanufacturing process.MINISTRATION Costs:ministration Costs: treated as a manufacturing overhead only if relate to work being carried out in mnftring prut in most instances they are written off as a period cost- not mnftr. Cost. Eg: cost of accountant= period costst of person who records all manufacturing processes number produced, materials used etc only in mnftring =anftring admin cost .

HIGH-LOW COST ANALYSIS:

FERS TO ANALYSIS OF SEMI-VARIABLE COSTS where the var. & fixed. Elements are calc. by analysing incr. in comparison to incr. in prod. Volume.

contribution:



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NTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Managementcountants to describe the incremental profit that a company will make as the company sells one more unit ofoduction.(DOES NOT include FIXED COSTS, ONLY SELLING PRICE VARIABLE COSTS = contribution, then afterat ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Variable costs would includeling,marketing,distribution costs etc,so ALLl variable costs,none are left out. Mngmn acc only concerned withntribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contribward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but productioume does, so once all fixed costs have been paid by current production volume, any increase in production voove this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for ,

ART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUes toward profit.

SALES

Variable Costs(incl.marketing,selling,distribution ie: ALL.CONTRIBUTION

Fixed Costs

PROFIT

budget:

A budget is a quantitative analysis of a plan or corporate action.It is intended that production/sales etc be coordinated by various depts. to achieve expectations about future income/cash flows/fin pos , fin perf and supplans.

Standard Hours Produced:

is the time it takes to produce one product ,used as a common denominator to divide up costs into differentoducts.

Standard PROFIT STATEMENT:

s is an income statement , using pre-determined standard cost rates , showing what profit we can expect from

ven sales volume.The volume is usually estimated from known sales and production capacity, but could also juean the volume for the flexed budget, when using standard costing.

STATIC BUDGET

e plain original realistic budget for the year drawn up at beginning of year.

FLEXED BUDGET

Standard Budget : The budget the is drawn up using the ACTUAL sales VOLUME, but with the original costs frthe Original Budget, not the Actual Costs. This can then be compared to the actual Income statement to see the difference in each cost was once converted to the actual sales level.

BILL OF MATERIALSA list of all the actual materials needed to manufacture a specific product. Does not include labour/overheadslike the Standard Cost Card.

STANDARD COST CARD

rd with the costs of all the Inputs used to make 1 output product.(That should (actual) be used to produce aoduct.)1 card is kept for each different product made. (-historical cost -not a goal type cost).Nowdays on comp

more definitions

1.1. Indirect (common) fixed cost : applies to all products eg rent1.2. Direct (avoidable) fixed costs : applies only to single 1 of many products.1.3. Sales mix: the ratio to each other of the different products which are made eg 1: 5: 8



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AGENCY RELATIONSHIP: definition : it is the relationship between owners and shareholdersAGENCY PROBLEM or COST definition : The possibility of conflict of interest between owners and mngmnt called the. Eg mngrs see short terms goals not long term goals , like maximize profit for bonuss etc. Or if secar for someone for a flat fee, then you wont go for a higher price for him.- so commission could be better op3.1. DIRECT AGENCY COST: 2 types : 1 - like mngmnt buy a corporate jet / 2- need for hiring auditors to aud

firm each yr3.2. INDIRECT AGENCY COSTS: like mngmnt does not invest in a new venture because it is riskt and some of

jobs might be lost, even though it will increase the share value a lot for shareholders /Corporate finance : DEFINITION: IS THE MANAGEMENT OF capital budgeting/long tyerm investment decisioand capital structure/long term financing as well as everyday financial activities of a company.CAPITAL BUDGETING DEFINITION: deciding on whether to aquire and seeking and evaluating any long te

investments.CAPITAL STRUCTURE definition : it is the mix used ofequity vs debt vs (or use own profits) decision,.WORKING CAPITAL definition: Refers to short term assets eg inventory and short term liabilities eg supplicreditorsTHE GOAL OF FINANCIAL MANAGEMENT Definition : is Officially defined as : TO MAXIMIZE THE CURRVALUE OF OWNERS EQUITY / VALUE PER SHARE FOR EXISTING SHARES.8.1.



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1) INTRODUCTION TO CORPORATEFINANCE ch1 textbook

DEFINITIONS:

1. AGENCY RELATIONSHIP: definition : it is the relationship between owners and shareholders

2. AGENCY PROBLEM or COST definition : The possibility of conflict of interest between owners and mngmcalled the. Eg mngrs see short terms goals not long term goals , like maximize profit for bonuss etc. Or ia car for someone for a flat fee, then you wont go for a higher price for him.- so commission could be bettoption.

a. DIRECT AGENCY COST: 2 types : 1 - like mngmnt buy a corporate jet / 2- need for hiring auditors audit the firm each yr

b. INDIRECT AGENCY COSTS: like mngmnt does not invest in a new venture because it is riskt and soof their jobs might be lost, even though it will increase the share value a lot for shareholders /

3. Corporate finance : DEFINITION: IS THE MANAGEMENT OF capital budgeting/long tyerm investment decand capital structure/long term financing as well as everyday financial activities of a company.

4. CAPITAL BUDGETING DEFINITION: deciding on whether to aquire and seeking and evaluating any lonterm investments.

5. CAPITAL STRUCTURE definition : it is the mix used ofequity vs debt vs (or use own profits) decisio

6. WORKING CAPITAL definition: Refers to short term assets eg inventory and short term liabilities eg sucreditors7. THE GOAL OF FINANCIAL MANAGEMENT Definition : is Officially defined as : TO MAXIMIZE THE

CURRENT VALUE OF OWNERS EQUITY / VALUE PER SHARE FOR EXISTING SHARES.8. Securites : the various types of debt or equity that can be issued by the firm.9.

WHAT IS CORPORATE FINANCE:

1. Corporate finance is broadly speaking, the study of ways to do the following 3 questions:a. LONG TERM INVESTMENTS : WHAT LONG TERM INVESTMENTS SHOULD YOU TAKE ON :

buildings,machinery,equipment for your line of business.b. LONG TERM FINANCING : WHERE WILL YOU GET THE LONG TERM FINANCING TO PAY FOR

INVESTMENTS : 1-retain profits you make to use for this or 2- bring in other owners 3-borrowc. EVERDAY FINANCIAL ACTIVITIES MANAGEMENT : how will you manage your everyday financi

activities, such as collecting from customers & paying suppliers2. Corporate finance : DEFINITION: IS THE MANAGEMENT OF capital budgeting/long tyerm investment dec

and capital structure/long term financing as well as everyday financial activities of a company.

ETHICS

1. In order to provide a more stable firm which is less like ly to get into financial diffucties and thus has a lowpossibility of cheating on quality etc, and a high possibility of being strong so they can say to customers can trust us so that customers are prepared to pay a higher price and come back again(provide a moreassured stream of future income for the firm) the firm must be safe. This means ;

a. Lower leverage, fewer leases, engageing in more hedging to be a safer company and a more qual

company.

THE FINANCIAL MANAGER

1. Company appoints mangaers to represent owners and make decisions on their behalf- striking feature of companies.

2. 2 MAJOR FUNCTIONS of the Financial Manager .a. CAPITAL STRUCTURE :/ Financial Planningb. CAPITAL BUDGETING :/Capital Expenditures/: long term investments planning & managing . - -.

3. Subsidiary Objectives/activitesa. Maximizing shareholders return on investment :

i. Value added: in 2 ways1. Dividends2. Share price ( if you sell)



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b. Cash controlc. Credit controld. Financial record keeping

i. Management information systemse. Share price : Ensure market price of shares remains high as possiblef. Expansion & growth targetsg. Diversification -Reduce risk of company by diversificationh. Financial gearing is used effectivelyi. Attract loan capital , ensure interest paid & investment protectedj. Social responsibility so ensure long term future of company .

CAPITAL BUDGETING1. CAPITAL BUDGETING DEFINITION: deciding on whether to aquire and seeking and evaluating any lon

term investments.2. FINANCIAL MANAGERS MAJOR/ONLY CONSIDERATION : the TIMING , SIZE and RISK of future c

flows coming in..3. How much you expect to receive, when, how risky/(close to like discount rate)4. Seeking investment opportunites5. Depends a bit on type of business , eg:generally :buy new IT system , or Pep Stores. open a new store. ,

Oracle/Microsoft : develop new computer .program6. Use of forecasting techniques to estimate future markets+ evaluate risk of failure before investing

CAPITAL STRUCTURE

1. CAPITAL STRUCTURE definition : it is the mix used ofequity vs debt vs (or use own profits) decisi2. Risk impacts on return expected and cost of funds obtained.3. Principle is seek money at lowest possible costs and apply such funds to investments that yield the highe

possible returns.4. What slice of pie of profits goes to lenders, what slice to shareholders(dividends) eventually.5. Choosing amoung lenders and loan types is another job of fin mngr. there are many exotic types of lendin

debentures, pref shares etc.6. In order to provide a more stable firm which is less like ly to get into financial diffucties and thus has a low

possibility of cheating on quality etc, and a high possibility of being strong so they can say to customers can trust us so that customers are prepared to pay a higher price and come back again(provide a moreassured stream of future income for the firm) the firm must be safe. This means ;

a. Lower leverage, fewer leases, engageing in more hedging to be a safer company and a more qualcompany.

7.

Working capital management

1. WORKING CAPITAL definition: Refers to short term assets eg inventory and short term liabilities eg sucreditors

2. NET Working capital : would be one minus the other = difference ie whats left.3. So not run out of cash/ into trouble4. Eg how much inventory keep on hand , shall we sell on credit / terms to offer on credit / who to allow cred

Do we purchase on credit or borrow short term and pay cash.?

FORMS OF BUSINESS ORGANISATION

SOLE PROPRIETOR

a. 3 major disadvantages =i. Unlimited liabilityii.Limited Lifespan (= owners lifespan)iii.Selling /transfer difficult (= sell whole business)

b. Equity raising extra = difficu;lt, limit to owners equity Simplest to startc. Least regulatedd. Keep all profite.

PARTNERSHIP

f. 2-20



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g. Partnership agreementh. 3 major disadvantages = same as the sole proprietor

i. Unlimited liabilityii.Limited Lifespan (= owners lifespan)iii.Selling /transfer difficult (= sell whole business)

i. tax each individual separately2. COMPANY:

COMPANIES

.1. Identity in eyes of law separate from owner.

.2. Least risky form because liability usually limited to value of shares owned.

.3. Attract better financing through eg: shares ,bonds,bank credit.

.4. MEMORANDUM OF ASSOCIATION: lifespan, name,no shares can be issued, business purpose etc

.5. ARTICLES OF ASSOCIATION : rules made themselves about how to run company- whats allowed/not allowetc

.6. Separation of owner /mangement can create problems.

.7. Specialists can be employed to manage firm.

.8. Can be sometimes abused by unscrupulous people.

.9. Significant red tape to establish.1.9.1.TWO TYPES: PRIVATE company:

a. Max 50 membersb. Right to transfer shares restrictedc. Only must have 1 memberd. (Pty)Ltd in RSA:Proprietry limited.e. eg:Alusaf (Pty Ltd),Clicks stores(Pty Ltd),Johnson tiles(Pty Ltd)

1.9.2.PUBLIC company.a. Not fewer than 50 shareholders(new act isnt it 7 or something????)b. Any max shareholdersc. Company that wishes to raise finance through the issuing of shares thus shares easily transferd. Shares easily transferablee. Many listed on JSEf. eg:Anglo american,Remgro,Old Mutual,Sappi

.10. many foreign owned or multinational companies operate in RSA eg:siemens,microsoft,shell,ibm.

Close Corporations.

.11. Since 1985 RSA new type.

.12. Founding statement document

.13. Display cc after name ,must by law.

.14. Easier to establish than private or public companies.

.15. max 10 min 1 members.

.16. Each member "% Specified interest in close corporation."

.17. Can only dispose of interest with permission of other members.

.18. Created to afford advantages of companies without having to register as a fully fledged company under companies act.

.19. By 1990 more CC's than companies in RSA

Other forms of Business enterprise :

.20. Co-operatives(eg agriculture)

.21. Trusts

.22. Public enterprise (Gov.eg eskom,sabc)

.23. Informal sector:spaza,hawker,shebeen,subsistence farmers.

THE GOAL OF FINANCIAL MANAGEMENT

1. THE GOAL OF FINANCIAL MANAGEMENT Definition : is Officially defined as : TO MAXIMIZE THECURRENT VALUE OF OWNERS EQUITY / VALUE PER SHARE FOR EXISTING SHARES.

2. (one could have defined corporate finance as the relationship between business decisions and value of thshares, from Official goal of financial management definition : is officially defined as : to maximize thecurrent value of owners equity / value per share for existing shares .)

THE AGENCY PROBLEM



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1. AGENCY RELATIONSHIP: definition : it is the relationship between owners and shareholders2. AGENCY PROBLEM or COST definition : The possibility of conflict of interest between owners and mngm

called the. Eg mngrs see short terms goals not long term goals , like maximize profit for bonuss etc. Or ia car for someone for a flat fee, then you wont go for a higher price for him.- so commission could be bettoption.

a. DIRECT AGENCY COST: 2 types : 1 - like mngmnt buy a corporate jet / 2- need for hiring auditors audit the firm each yr

b. INDIRECT AGENCY COSTS: like mngmnt does not invest in a new venture because it is riskt and soof their jobs might be lost, even though it will increase the share value a lot for shareholders /

3. Problems with mngmnta. Organisational survival : loose jobs

b. Corporate power : overpay for a take-over to be biggerc. Dislike interference so independence & corporate self sufficiency.

4. Management of mangers: good reasons to act in shareholders interesta. Share options for managersb. Promotion for better performersc. Salary tied to share performance/ profit etc

5. Mechanisms to Replace Management :a. Shareholders appoint/fire BoD who in turn hire/fire managementb. Proxy Fight : a group of shareholders seek permission from other shareholders to use their votes

proxies (authority to vote someone elses shares) due to bad management vote them out.c. Takeover by another firm : badly run companies are cheaper shares, so you can jack them up eas

get a profit.

FINANCIAL MARKETS ,FINANCIAL INSTITUTIONS,

CASH FLOWS TO / FROM THE FIRM

1. Securites : the various types of debt or equity that can be issued by the firm.

MONEY VS CAPITAL MARKETS

1. FINANCIAL MARKETS: definition: different market which bring seller & buyers together.debt & equitysecurities are bought and sold. There are only 2 different types 1-Money markets , 2- capital markets

2. MONEY MARKETS:a. Short term debt securities of many types are bought or sold here. These are called money market

instruments and are essentially IOUs.



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b. Eg ;i. bankers acceptances : short term borrowing by large firmsii.Treasury bills : IOU by the gov.iii.Main participants are Banks, other financial institutions &large companies . they are conne

electronicly so there is no real pyysical location of this money market.3. CAPITAL MARKETS : raising & trading of securities of a long term nature.

a. STOCK EXCHANGE:eg JSE shares are tradedb. BOND MARKET: eg BOND exchange of SA. Gov and other bonds are traded , eg eskom customers

include banks, public investment commissioners, insurance companies, pension,unit tructs etc.

PRIMARY VS SECONDARY MARKETS

1. PRIMARY : companies themselves offer shares or debt to others , not via the stock exchange.a. This is not on the JSE or anything at all, it is private.b. Usually done by a merchant bank, who underwrites the offering which guarantess the take-up by t

bank itsef of any shares not sold by them.By law a prospectus registered with the registrar ofcompanies must accompany any issue to the public like this . the costs and the info to be discloseconsiderable so many companies just offer it straight to large insurance companies etc to avoid thcosts of a pblic offering through a merchant bank.

2. SECONDARY : the JSE or Bond Exchange.

FINANCIAL INSTITUTIONS

trust funds, insurance, pension, banks, unit trusts etc.

ENVIRONMENTAL FACTORS1. Dynamic Enviromment : past performance is a good indicator to judge future performance. And also

understand vairiables in enviromnment as follows : ega. INTERNATIONAL ENVIRONMENT :

i. World economyii.Trading partners economyiii.Sentiment towards SAiv.Sources of offshore borrowing

b. NATIONAL ENVIRONMENT :i. Interst ratesii.Exchange ratesiii.Gold priceiv.Money supply

v.GNPvi.Inflationvii.Politicsviii.Potential marketsix.Sources of finance available

c. COMPANY ENVIRONMENT:i. Growth prospectsii.If diversify neeccessaryiii.Other seeking to takeover your companyiv.Competitive forcesv.Shareholder sentimentvi.Public perception



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CHAPTER 2 TIME VALUE OF MONEYPRESENT & FUTURE VALUE OF MONEYINTRODUCTION:

Time value of Money is an essential concept in the understanding of finance.

BANK OVERDRAFT : is not seen as debt unless a part of it IS ACTUALLY being used as a form of long termfinancing/debt THEN that part used as such should be accounted for as debt in the debt: equity ratio.DEFERRED TAXATION: DEFERRED TAX IS NOT included as tax when calculating the capital structure of acompany, because the timing of tax payments is accounted for when evaluating the project investment decisYou just ignore it outright. This will only really apply when calculating the WACC at book value method- so igit always when you do this.THE CURRENT MARKET VALUE TO USE AS THE K e OF K d WHEN DOING ALL THE CALCULATIONS:where actual todays market values instead of the interest rate being paid today due to previous years deais as follows:a) First Choice: if the same type of securitys current interest rates are given.Use that one, even if it is high

than other securities in same class eg if you have got debentures and loans are cheaper than debenturcurrent rates, you still only use debentures rates.

b) Second Choice: if only a similar and not the same type of securitys market rates are given , then use t

one: eg if you got debentures and only current rates for loans are given then use the loans rates as yourcurrent market rates for debentures.

FUTURE VALUE:

Future Value FORMULA : FV= PV(1+i)na) Where FV= future valueb) PV= present valuec) I = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periodsCOMPOUND INTEREST : The future value of an investment over 3 years FV=PV(1+i) (1+i) 1+i) = PV(1+i) X(1+i) X (1+i), that is what PV(1+i)n means : to the power of n means all this. So it basicly is the interest gaine

year 1 and 2 etc reinvested and this is called compound interest.FUTURE VALUE TABLES : the future value table can be used instead of using a calculator.It basicly works lthis : it gives you a Factor for each year from 1 ,2,3,4 etc. upwards in a column for each percentage rate. S10% interest you go to the 10% column , go down it to the year number you want, take the Factor from theand multiply it by the Present Value to get the answer you want. (the factor =(1+i)n )SOLVING FOR i . (INTEREST RATE). : if a question asks you to find the interest rate if given the ONLY the & FV & n : 3 ways :a) what happens is you get stuck at the point of FV/PV = (1+i)n after algebra : so you say FV/PV1/n = 1+

i = FV/PV1/n - 1 .b) A back of Envelope method : RULE OF 72 = for reasonable rates of return, the time it takes to double your mo

given Approximately by : 72 / r% .

c) (ANOTHER way to do this so after working out the formula backwards is to start trying to substitute different values for i in the formFV/PV = (1+i)n until you hit on the right one OR one can use the Future Values Table and look across, (not down), the 3 year row

get the FV/PV . To use the calculator all you have to remember is to put the PV as a and FV as + (or visa versa-works same) ocalculator will not do it-it says error.)

SOLVING FOR n (NO. OF YEARS) : if a question asks you to find the number of years if given only { i & PFV } OR ANOTHER WAY IS go as far as you can with the formula, then either try different values till you hit tright one or use the FV table. The calculator also just needs a PV as + or FV as -Using MONTHS, WEEKS OR QUARTERLY instead of YEARS in the FORMULA : if the interest is compounded montweekly or quarterly then you have to simply have more periods for n in the formula and divide up the interest rate to a figure by :

a) Interest rate : divide the yearly interest rate by the number of periods in the year eg : for months by 12, or for quaby 4 : this will give you the interest rate per period to put in the formula above.

b) Number of Periods: here you multiply the number of years by the number of periods in each year to get the (highefigure to put in the formula. So for months X 12 , or for quarters X 4 etc.

PRESENT VALUE: (PV)



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Present Value Formula : PV = FV/(1+i)nPresent Value calculations are the inverse of future value calculations.Remember that in all finance calculations the value of a project or company or Investment is always the Presvalue of Future Cash Flows.

)The present value factors are the inverse of the future value factors, so on the future value table, the PV Facwill simply be 1/FV factor , and the other way around too the inverse of the PV table value for PV FACTOR1/PV factor is ALSO = to the FV Factor : so it works both ways,and back again,and again, etc.

)To CREATE A PV TABLE easy way :To solve for some problems eg solve for i or n, you should create a PV to make it easier. The easy way to create one is:a) Eg for the 10% column

i) for row 1 : 1/ (1+0.1) = 1/1.1 = 0.909 .

ii) for row 2 :just leave the previous answer on the calculator and then divide it by 1.1 again to get next2 answer :

iii) for row 3 = year 3 : just leave the previous answer on the calculator and then divide it by 1.1 again tonext row 3 answer :

iv) continue as for last one.) MULTIPLE FUTURE PAYMENTS:a) To calculate the PV of multiple future payments you must do each one individually, then add them up. Wa

out for begin of first year receipts with zero interest .Remember to evaluate multiple future payments indifferent years against each other one can convert them with these formulas to any common year ie year6 or 7 etc, but very often it is most convenient to convert them all to PV present value. even if the firstpayment for some of them is only in 3 or 4 years from now you can still convert it to PV to compare it to oinvestment options.

)Solving for n or I : works same as for PV above.

APR AND EFF : EFFECTIVE ANNUAL RATE AND ANNUAL PERCENTAGE RATE

1. Effective rate: EFF = (1+ APRin decimalsQUOTED monthly RATE /M)M - 1a. WHERE M= months or periods, Eff = effective rate and APR= annual rate

2. Annual rate : APR = just fill in the Eff rate and periods you have got already into the equation above, tsolve for APRin decimalsQUOTED monthly RATE

a. WHERE M= months or periods, Eff = effective rate and APR= annual rate3. Just use the formula below to work out any of these 2 rates from the other.

ANNUITY:

An annuity refers to a stream of EQUAL payments of a fixed amount over a number of years or periods. Eg 10

invested every year for 10 years is called a 10 year annuity investment.BEGINNING / or END OF THE YEAR : the timing of the investment can take place at begin or end of year. Eachhas a different formulaa) ANNUITY DUE : for the FV at beginning of year (.: For the FV , the only difference between the 2 is th

beginning of year annuity due all you have to do is multiply the Ordinary Annuity-end year- by (1+i) (ie tfactor) to get the -begin year- annuity due, for PV you must * it by the 1/(1+i) which is the future valuefactor.

b) ORDINARY or REGULAR or DEFERRED ANNUITY : at end of year.

Future Value FORMULA for ORDINARY/DEFERRED/REGULAR ANNUITY. : FVa = I x [ (1+i1 / i] (1+i)a) I = Constant Amount invested each year ie PMT




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e) Doing the above formula manually :

Future Value FORMULA for ANNUITY DUE : FVa= I x [ {(1+i)n 1 }/ i] (1+i)a) I = Constant Amount invested each year


e) Doing the above formula manually :

Present Value FORMULA for Regular ANNUITY : PVa= I x [ {1 1/ (1+i)n } / i] A SCAN)a) I = Constant Amount invested each year

b) PVa = present value of the annuity.c) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periods

e) This is where the payments are at the end of the year.

Present Value FORMULA for ANNUITY DUE : PVa= I x [ ( {1 1/ (1+i)n } +1 ) / iDO A SCAN)a) I = Constant Amount invested each year

b) FVa = future value of the annuity.c) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) n= number of years/periodse) This one is where payments are at the beginning of the year.-annuity due.

LOAN: PERIODIC PAYMENT OF A LOAN

The Periodic Repayments of a loan can be calculated by using the Present Value formula for a Regular Annuby making the I the subject of the formula as follows:

CHANGING the Present Value FORMULA for Regular ANNUITY to MAKE I THE SUBJECT be

a) PVa= I x [ {1 1/ (1+i)n } / i]i) Becomes : I = PVa/ [ {1 1/ (1+i)n } / i]



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ii) Or: I = PVa * i / [ {1 1/ (1+i)n } / i] :this formula is easier to use than the one abfor manual calculations the /I is just changed mathematicaly to go on top as * PVa

iii) Where:(1) I = Constant Amount invested each year

(2) PVa = present value of the annuity.(3) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%(4) n= number of years/periods

Where there are monthly instead of yearly payments you have to divide i/12 and multiply nX12 .Where the interest is compounded monthly but the loan repayments are made once per year, I tried to get thanswer by using the effective interest rate over a year and then just leaving out the compounded part and

sticking to the years as the n , then you get the right answer it seems .But if you just go work out the monthrepayments and multiply by 12 it wont work because you are reducing the original loan monthly (too soon) anot yearly so your interest payable will not compute properly.(you might be able to otherwise use the othermethod for multiple cash flows aver a period.-not sure)To use The P.V. tables instead:a) Just get the PVa annuity factor from the table by going to the relevant interest column and periods rowb) Then, since I= PVa/factor as in the above formulas, you just divide the PVa Loan Amount by the factor yo

read off the table.

PERPETUITY: (OR CONSOL IN UK)

A Perpetuity is a normal Annuity but with an infinite life.You only work it out by using a special formula:

PRESENT VALUE of a PERPETUITY FORMULA : PVp=I

/ia) PVp = Present Value of a Perpetuity.b) I = Constant Amount invested each yearc) i = interest rate in DECIMALS eg for 15% Use 0.15 NOT 15%d) This one is where payments are at the end of the year.- I think- it does not say in the book what it is. Als

does not say what the formula for at begin of year (annuity due) is.

PRESENT VALUE of a -growing- PERPETUITY FORMULA : PVp= D1/i - g where g=growand D1 is the same as I above but indicates the payment received at the end of the first year, Nat the beginning of the first year : so it will normally be the given payment with the first yearsgrowth added ie; not 100 but 100X 5% growth = 105!Remember : D1 means: if you get 2 odd payments in Year 1 and 2, then from year 3 a dividend of 400growing at 5 %, it means that year 3 =400 is D1 , because year 2 is Y0 for the 400 onwards part and the 400

Then on top of it year 2 is = n in the formula for PV if you want to bring the whole part from year 3 : the 400-onwards answer: down to PV-because For D1 you take year 2 of course. Watch out for this one in questions; catches you easy.AMORTISATION

PURE DISCOUNT LOANS1. This is simply where the loan is a plain PV calculation : interest + principle repaid at end of term2. Usually for short term loans, but also used for long term loans3. Note ; the interest rate on treasury bills is usually quoted as the amount in rands of interest / money rece

at end of term , not in the usual way of interest in rands/ money lent out , for some stupid historical reasthing.

INTEREST ONLY LOANS

1. This is where the borrower pays back only interest each year, then the principle at end of term.2. There is no compounding of interest, you pay R100 interest every year and then the original amount exa

back at the end. , it is a funny type of loan with no compounding at all

AMORTISED LOANS

1. This is just an ordinary annuity type thing.2. They can however complicate this one a bit by saying that you must pay back the interest for the

+ a certain amount of the principle eg R1000 is repaid every year. Then one e must do a Table caan amortization schedule and work out the decrease each year in interest due to the decrease inprinciple manually and work it out one by one from there.

SHARES : PRESENT

macn 302 own notes

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