Financial Management BUS 310 Jon Hunter

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Financial ManagementBUS 310Jon Hunter
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Exam 3 review

• Business risks
• Operating risk
• Financial risk

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Operating risk

• Sensitivity to economy
• Competition
• Product diversification
• Operating leverage
• Growth prospects
• Size

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Breakeven analysis

• Another tool to help make good decisions
• What kinds?
• capital expenditures
• pricing
• growth plans

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Breakeven analysis

• Fixed costs
• Variable costs
• Semi-variable costs

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Breakeven analysis

• Revenue price x volume
• COS direct cost x volume
• Fixed cost doesnt change

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Breakeven analysis

• Contribution margin price cost per unit
• Breakeven point fixed cost / contribution

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Operating leverage

• Concepts
• change in EBIT / change in sales
• Examples page 479

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Operating leverage

• gt 1 sales go up, profits up faster
• lt 1 sales go up, profits risk less
• If we make estimates about future sales, should
  we shift costs between fixed and variable?

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Financial leverage

• How does financing structure affect the owners
  (common stockholders)?
• DFL change in EPS
• change in EBIT
• (EBIT earnings before interest taxes)

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Financial leverage

• All common stock 100 1.00
• 100
• Some debt 125 1.25
• 100
• More debt 150 1.50
• 100

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Combined leverage

• Total leverage DOL x DFL
• Problem page 489

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Financial structure

• The mix of financing
• Cost
• Leverage

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Financial structure

• Cash flow
• Expansion
• Dividends
• What do shareholders want?

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Financial structure

• Debt to equity decisions
• Capacity for new money
• TIE
• Capital constrained companies

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Financial structure

• Business cycles
• Worst case scenario
• Examples

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Financial structure

• Page 551
• Table 14.11

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Financial structure

• The mix of financing
• Objective
• To maximize shareholder value
• (What to shareholders want?)
• Factors Risk, variance, availability of funds,
  investment opportunities.

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Financial structure

• Cash flow
• Expansion (retain the earnings)
• Dividends (payout the earnings to the owners)

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Financial structure

• Debt to equity decisions
• Is there a perfect ratio?
• What are the goals?

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Financial structure

• Debt to equity decisions
• - Leverage
• - Where are funds available?
• - What are the cost of funds?
• - What are the characteristics of the investment
  opportunities?

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Financial structure

• The business cycle
• Worst case scenario the year ahead
• -- the longer term
• Range of possibilities
• Likelihood of possibilities

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Financial structure

• Page 551 - Table 14.11
• Page 552 Summary

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Dividend payout policy

• Dividends are paid in cash
• They are often compared to
• accounting earnings

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Dividend payout policy

• Dividends per share dividend payout
• Earnings per share ratio
• Dividends per share dividend yield
• Market price

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Dividend payout policy

• Do dividends matter?
• 1) No, dividend policy is irrelevant
• - Perfectly efficient markets
• - No taxes
• - Market prices are always correct
• - No transaction costs
• - Investors dont care how or when they receive
  their returns

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Dividend payout policy

• Do dividends matter?
• 2) Yes, high dividends increase stock value
• - Returns are more predictable
• - Returns are faster

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Dividend payout policy

• Do dividends matter?
• 3) Yes, low dividends increase stock value
• - dividends are often taxed at higher rates
• - taxes on capital gains are deferred

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Dividend payout policy

• - residual dividend theory
• - the clientele effect
• - information effects
• - agency costs
• - expectations theory

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Dividend payout policy

• Managerial beliefs
• Page 587 Table 15.4

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Dividend payout policy

• Do dividends matter?
• 2) Yes, high dividends increase stock value
• - Returns are more predictable
• - Returns are faster

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Dividend payout policy

• Do dividends matter?
• 3) Yes, low dividends increase stock value
• - dividends are often taxed at higher rates
• - taxes on capital gains are deferred

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Dividend payout policy

• Managerial beliefs
• Page 587 Table 15.4

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Dividend payout policy

• Legal restrictions
• Liquidity position
• Absence or lack of other sources of financing

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Dividend payout policy

• Dividend payment procedures
• Quarterly
• Holders of record
• Declaration date
• Date of record
• Ex-dividend date
• Payment date

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Dividend payout policy

• What happens to the stock price?

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Dividend payout policy

• Stock dividends/stock splits
• Not in cash
• Ownership doesnt change
• Number of shares increases
• EPS and BVPS decrease

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Dividend payout policy

• Stock dividends/stock splits
• So why do companies issue stock dividends and
  splits?

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Dividend payout policy

• Stock dividends/stock splits
• So why do companies issue stock dividends and
  splits?
• Because they think investors are stupid

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Dividend payout policy

• Stock repurchases
• A form of dividend
• Cash to shareholders
• Optional to shareholder