Basics of Corporate Finance Basics of Corporate Finance May 1994 Basics of Corporate Finance Warning These workbook and computer-based materials are the product of, and copyrighted by, Citi- bank N.A They are solely for the internal use of Citi-bank, N.A., and may not be used for any other purpose It is unlawful to reproduce the contents of these materials, in whole or in part, by any method, printed, electronic, or other- wise; or to disseminate or sell the same without the prior written consent of the Professional Development Center of Latin America Global Finance and the Citibank Asia Pacific Banking Institute Please sign your name in the space below Table of Contents TABLE OF CONTENTS Introduction: Basics of Corporate Finance Course Overview xi Course Objectives xiv The Workbook xv Unit 1: Financial Statement Analysis Introduction 1-1 Unit Objectives 1-1 Balance Sheet .1-2 Assets 1-2 Short-term Assets 1-3 Long-term Assets 1-3 Liabilities (Debt) and Equity 1-4 Debt vs Equity 1-4 Liability / Equity Accounts 1-5 Assets Equal Liabilities Plus Equity 1-6 Summary 1-8 Progress Check 1.1 1-9 Income Statement 1-13 Shareholder Return on Investment 1-15 Depreciation 1-16 Summary 1-17 Progress Check 1.2 1-19 Cash Flow Statement 1-21 Operating Activities 1-23 Sources 1-23 Uses .1-24 Financing Activities 1-25 Summary 1-27 v05/15/94 v-1.1 p01/14/00 ii TABLE OF CONTENTS Unit 1: Financial Statement Analysis (Continued) Progress Check 1.3 1-29 Financial Ratios 1-33 Liquidity Ratios 1-35 Current Ratio 1-35 Quick (Acid-Test) Ratio 1-36 Asset Management Ratios 1-36 Inventory Turnover Ratio 1-36 Average Collection Period 1-37 Fixed Assets Turnover Ratio 1-38 Total Assets Turnover Ratio 1-38 Debt Management Ratios 1-39 Total Debt to Total Assets Ratio (Debt Ratio) 1-40 Times Interest Earned (TIE) Ratio 1-41 Fixed Charge Coverage Ratio 1-41 Profitability Ratios 1-42 Profit Margin Ratio 1-42 Basic Earnings Power Ratio 1-42 Return on Total Assets Ratio 1-43 Return on Common Equity Ratio 1-43 Market Value Ratios 1-44 Price / Earnings Ratio 1-44 Market / Book Ratio 1-45 Using Ratios 1-45 Unit Summary 1-46 Progress Check 1.4 1-49 Unit 2: Financial Markets and Interest Rates Introduction 2-1 Unit Objectives 2-1 Overview of Financial Markets 2-2 v-1.1 v05/15/94 p01/14/00 TABLE OF CONTENTS iii Unit 2: Financial Markets and Interest Rates (Continued) Market Players 2-2 Types of Financial Markets 2-2 Money Markets 2-3 Capital Markets 2-3 Interest Rates 2-5 Calculating Interest Rates 2-6 Pure Interest Rate 2-7 Inflation 2-7 Risk 2-8 Term Structure of Interest Rates 2-10 Yield Curve 2-10 Normal Yield Curve Theories .2-12 Effect on Stock Prices 2-14 Unit Summary 2-14 Progress Check 2-17 Unit 3: Time Value of Money Introduction 3-1 Unit Objectives 3-1 Future Value 3-2 Calculating Interest Payments 3-2 Simple Interest 3-3 Practice Exercise 3.1 .3-5 Compound Interest 3-9 Discrete Compounding for Annual Periods 3-9 Discrete Compounding for Nonannual Periods 3-11 Continuous Compounding 3-12 Summary 3-16 Practice Exercise 3.2 3-17 Present Value 3-21 v05/15/94 v-1.1 p01/14/00 .. .Basics of Corporate Finance May 1994 Basics of Corporate Finance Warning These workbook and computer-based materials are the product of, and copyrighted by, Citi-... INTRODUCTION: BASICS OF CORPORATE FINANCE COURSE OVERVIEW Basics of Corporate Finance serves as an introductory course for students beginning their study of finance and financial markets The ideas and calculations... Please sign your name in the space below Table of Contents TABLE OF CONTENTS Introduction: Basics of Corporate Finance Course Overview xi Course Objectives xiv