Attached.

Running head: CORPORATE FINANCE

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Corporate Finance
Student Name
Course/Number
Due Date
Faculty Name

CORPORATE FINANCE

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Corporate Finance
Chapter 3

FINANCIAL STATEMENTS ANALYSIS AND FINANCIAL MODELS
Financial statements are desirable since the numbers, and the statements obtained from
the statements are the principal methods of communicating financial data within and outside the
organization. It is vital to note that one of the goals of the accountants is to report financial data
to the user since the financial statements do not come with a user guide. One thing that should be
considered when comparing the financial statements of an organization with other financial
statements of other organizations is to standardize the financial statements by using percentages
in place of total dollars which results to the common-size statement. It is vital for the total
change to be zero since the ending and the beginning numbers must sum up to 100%. The
common size income statements provide information on how each dollar obtained from the sales
is used. The percentages obtained from common-size income statements are important when
making comparisons.
Comparing and calculating financial ratios are vital to avoiding the issues that are
involved when comparing organizations of different sizes. A problem that arises with the
financial ratios is that different sources and different people do not compute them in the same
manner. One should be careful when they are using ratios as analysis tools to document how they
calculate each other. The financial statements are primarily grouped into short-term solvency,
long-term solvency, asset management, profitability ratios and market value ratios. The short
term solvency ratios are meant to provide data about the liquidity of the firm. The ratios are at
terms referred to as liquidity measures. The principal concern is the ability of the firm to pay the

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bills with no undue stress. The long term solvency ratios are meant to address the long-run
capability to meet the obligations of the firm.
The difference between ROE and ROA reflects the use of financial leverage or debt
financing. The investigation relationship between ROA and ROE is achieved by investigating a
known way of decomposing the ROE into the component sections. It is critical, to begin with,
the definition of the ROE as the return on equity which is equal to the net income over the total
equity. In the DuPont identity, an increase in the amount of debt in the organization can be used
in leveraging of the ROE.
Majority of the financial planning methods use pro forma financial statements which
imply that the financial statements are the form that is used to summarize the projected financial
status of the firm in the future. In financial models, long-term and short-term debts are used as
plugs even though it is emphasized as a possible strategy. Many more scenarios can be used in
the investigations of the financial statements.
Growth and the needed external financing are related. The higher the growth rates in
assets or sales the need for external financing increases. Determining the relationship between
growth and the needed External Financing is critical. In long-range planning, the internal growth
rate and sustainable growth rates are the two growth rates that are vital.
Financial planning models are not able to ask important questions. They instead divert the
attention of the user to questions that regard the relationship between firm growth and debtequity ratio. It is vital to note the factors that determine ROE are critical in determining growth.
The previous discussions show that ROE can be written as a product of profit margin, total asset
turnover and equity multiplier. In financial planning, plans are developed, examined and then
modified over and over again.

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Chapter 4
Discount Cash Flow Valuation

One of the key concepts in this chapter is how to be able to compute the present single
cash flow value or future value or a sequence of cash flows. The other important concept in the
chapter is how one can be able to compute the return on investment. In the chapter, It is indicated
how an organization can be able to understand annuities and perpetuities. The chapter shows
how one can be able to use a spreadsheet or a financial calculator to handle time value hitches.
If one were to invest 10,000 us dollars at an interest of 5% for a year, the investment
would experience a growth of up to 10,500 US dollars. The five hundred dollars would be the
interest as the 10,000 US dollars are the principal repayment where $10,000 is the total due that
is calculated as $10,000 × (1.05) is equal to $10,500. The total sum that is due at the end of the
investment is known as the Compound value or the Future Value. The future value is calculated
by multiplying the present value by (1+ the appropriate interest rate or the compound rate). If
one is promised to get 10,000 dollars to repay in a year and the interest is 5%, the worth of the
investment would be dividing the $10,000 by the interest percentage which is 1.05. The sum that
the borrower needs to set aside to make the payment by the end of the year is known as the
present value.
In the multi-period period, the general method for calculating the value of a future
investment over a couple of periods is written as FV= PV×(1 + r)t where PV is the present
value, r is the required interest rate, while t is the total of the periods over which the sum of the
money had been invested. For example, is the stock pays a $1.10 dividend, the dividend is
anticipated to grow at 40 per cent each year for the coming five years. Using the formula for
calculating the future value, the dividend will be $5.92 where $5.92 = $1.10 × (1.40)5. It is vital

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to note that the five year dividend is greater than the total of the principal dividend plus five 40%
increases on the original 1.10 US dollar dividend. This is a result of the compounding where
money makes money, and the money that makes that money makes even more money.
Even though we have already seen that discounting compounding happens annually, at
times compounding can happen more often than just in a year. For instance, when a bank gives a
10% interest rate which is compounded semiannually, $1,000 deposit made in the bank is worth
$1,000 3 1.05 5 $1,050 after six months and $1,102.50 = $1,050 × 1.05. Interest can also be
compounded quarterly where it yields wealth at the end of the year. The general formula that can
be used in calculating a compounded investments future value over a couple of periods is written
as FV = C0×erT. In the formula Co stands for the cash flow at date 0, r is the annual interest
while T is the number of years while e is the number that is approximated as equal to 2.718.
In simplifications, perpetuity is seen as a continuous stream of cash flows that last
forever. Growing perpetuity is a flow of cash that grows at a continuous rate all through. An
annuity is the continuous flow of cash that lasts for a period that is fixed. Growing annuity is a
sequence of flow of cash that grows at a rate that is constant for some periods that are fixed.
When a lender extends a loan, some provisions are made for repaying the original loan.
Pure Discount Loans are the simplest loans. The borrower of the loan receives their loan which
they can pay back the principle and the interest at a time in future. Interest-Only Loans require
repayment of interest every period with the principal being paid fully when the loan matures. The
principal’s amortized loans need to be repaid with time in addition to the interest that is required.
In interest-Only Loans, the cash flow is similar to the cash flows on corporate bonds. In
amortized loans that have fixed payments, every payment covers the expens...