Finance is study of how people and business evaluate investment and raise capital to fund then.

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- Venture capital firms (VC): Raise money from investors which they then use to provide financing for private start-up companies when they are first founded.

- Leveraged buyout fund: Funds acquire established firms that typically have not been performing very well with the objective of making them profitableagain and then selling them.

The Financial Marketplace: Securities Markets

Security is a negotiable instrument that represents a financial claim. Securities markets are typically discussed in terms of the primary and secondary markets. Primary market, in this market, firms issue new securities to raise money that they can then use to help finance their business. Secondary market, the principal benefit for the shareholders of firms that sell their securities to the public is liquidity.

Types of Securities

Firms borrow money like a note or a bond.

Equity Securities

Represent ownership of the corporation. Common Stock is a security that represents equity ownership in a corporation, provides voting rights, and entitles the holder to a share of the company’s success in the form of the dividends and any capital appreciation in the value of the security. Preferred Stock is like common stock, but preferred shareholders receive their dividends from whatever is left over.

Chapter 3: Understanding Financial Statements, Taxes and Cash Flows

Basic Financial Statements

- Income Statement – includes the revenue the firm has earned over a specific period of time, usually a quarter of a year or a full year, the expenses it has incurred during the year to earn its revenues and the profit the firm has earned.

- Balance Sheet- contains information as of the date of its preparation about the firm’s assets, liabilities and shareholders’ equity.

- Cash flow statement - reports cash received and cash spent by the firm over a specified period of time, usually one quarter of a year or full year.

- Statement of shareholders’ equity – provides a detailed account of the firm’s activities in the common and preferred stock accounts, the retained earnings account and changes to owner’s equity that do not appear in the income statement.

Why Study Financial Statements?

- Financial statement analysis: The basic objective of financial statement analysis is to assess the financial condition of the firm being analyzed.

- Financial control: Managers use financial statements to monitor and control the firm’s operation.

- Financial forecasting and planning: This statement provide a universally understood format for describing a firm’s operations.

Computing Taxable Income

Is often referred to in its income statement as earnings before taxes. Earnings before taxes are equal to the firm’s net operating income less interest expenses.

Federal Income Tax Rates for Corporate Income

2010 Incorporate tax rate in U.S.A:

Taxable Income

Marginal Tax Rate

$0-$50,000

15%

$50,001-$75,000

25%

$75,001-$100,000

34%

$100,001-$335,000

39%

$335-001-$10,000,000

34%

$10,000,001-$15,000,000

35%

$15,000,001-$18,333,333

38%

$18,333,333- over

35%

Marginal and Average Tax Rates

Examples:

Taxable Income

Marginal Tax Rate

Tax liability

Cumulative Tax liability

Average Tax Rate

$50,000

15%

$7,500

$7,500

15.00%

75,000

25%

6,250

13,250

18.33%

100,000

34%

8,500

22,250

22.25%

Dividend Exclusion for Corporate Stockholders

Ownership Interest

Dividend Exclusion

Dividend Income

Taxable Income

Less than 20%

70%

$100,000

$30,000

20% to 79%

75%

$100,000

$25,000

80% or more

100%

$100,000

$0

The Balance Sheet

The Income Statement reports the cumulative results from operating the business over a period of time, but the balance sheet is a snapshot of the firm on a specific date the equation