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MFD2 Summary (EMFD-17)
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MFD 2 course summary in preparation for the final exam (Final Assignment 2). Covers all relevant learning units: LU 5-8. I received an 80/100 on this exam!
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MFD 2SUMMARY
Sarah van Notten
ACADEMIC YEAR 2020 - 2021 | BLOCK B
,SARAH VAN NOTTEN MFD 2 | ACADEMIC YEAR 2020 – 2021 | BLOCK B
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,SARAH VAN NOTTEN MFD 2 | ACADEMIC YEAR 2020 – 2021 | BLOCK B
TABLE OF CONTENTS
HOW BUSINESSES RAISE FINANCIAL CAPITAL ..................................................................... 4
LU5: PROSPECTING FOR VALUE-ADDING INVESTMENTS AND FUNDING .............................. 6
5.1 The Characteristics of Hospitality ......................................................................................................... 6
5.2 Owner’s Value ...................................................................................................................................... 7
5.3 Asset Structure ..................................................................................................................................... 8
5.4 Capital Structure ................................................................................................................................... 9
5.5 Capital Budgeting & Leverage .............................................................................................................. 9
5.6 Risk...................................................................................................................................................... 10
5.7 Feasibility Studies (Forecasting) ......................................................................................................... 11
LU6: SETTING CRITERIA FOR NEW INVESTMENTS ............................................................. 14
6.1 Time Value of Money ......................................................................................................................... 14
6.2 Discounting ......................................................................................................................................... 14
6.3 Compounding ..................................................................................................................................... 15
6.4 Net Present Value ($) ......................................................................................................................... 15
6.5 Average Rate of Return: ARR (%) ....................................................................................................... 17
6.6 Payback Period (years) ....................................................................................................................... 17
6.7 Profitability Index: PI (ratio) ............................................................................................................... 17
LU7: SELECTING THE BEST INVESTMENTS ......................................................................... 18
7.1 Weighted Average Cost of Capital: WACC.......................................................................................... 18
7.2 Calculating NVP with WACC ............................................................................................................... 19
7.3 Internal Rate of Return: IRR ............................................................................................................... 19
7.4 Using the Capital Budgeting Methods ................................................................................................ 20
LU8: FEASIBILITY AND PROSPECTING ............................................................................... 22
8.1 Financial Markets ............................................................................................................................... 22
8.2 Financial Intermediaries ..................................................................................................................... 22
8.3 Reading Stock Reports ........................................................................................................................ 23
8.4 Funding Options ................................................................................................................................. 24
8.5 Loans ................................................................................................................................................... 24
8.6 Bonds .................................................................................................................................................. 24
8.7 Shares/Common Stock ....................................................................................................................... 25
8.8 Intrinsic Value ..................................................................................................................................... 26
8.9 Excess Cash Management .................................................................................................................. 27
8.10 Assessing Project Risk ......................................................................................................................... 28
PRACTICE EXAM QUESTIONS ........................................................................................... 30
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, SARAH VAN NOTTEN MFD 2 | ACADEMIC YEAR 2020 – 2021 | BLOCK B
HOW BUSINESSES RAISE FINANCIAL
CAPITAL
Companies can raise early-stage financial capital in several ways: from their owners’ or
managers’ personal savings, or credit cards and from private investors like angel
investors and venture capital firms.
A bond is a financial contract through which a borrower agrees to repay the amount that
was borrowed. A bond specifies an amount that will be borrowed, the amounts that will
be repaid over time based on the interest rate when the bond is issued, and the time
until repayment. Corporate bonds are issued by firms; municipal bonds are issued by
cities, state bonds by U.S. states, and Treasury bonds by the federal government
through the U.S. Department of the Treasury.
Stock represents ownership of a firm. The stock of a company is divided into shares. A
firm receives financial capital when it sells stock to the public. A company’s first sale of
stock to the public is called the initial public offering (IPO). However, a firm does not
receive any funds when one shareholder sells stock in the firm to another investor. The
rate of return on stock is received in two forms: dividends and capital gains.
A private company is usually owned by the people who run it on a day-to-day basis,
although it can be run by hired managers. A private company owned and run by an
individual is called a sole proprietorship, while a firm owned run by a group is called a
partnership. When a firm decides to sell stock that can be bought and sold by financial
investors, then the firm is owned by its shareholders—who in turn elect a board of
directors to hire top day-to-day management—and is called a public company. Corporate
governance is the name economists give to the institutions that are supposed to watch
over top executives, though it does not always work.
Bond: a financial contract through which a borrower like a corporation, a city or state, or
the federal government agrees to repay the amount that was borrowed and also a rate of
interest over a period of time in the future
Bondholder: someone who owns bonds and receives the interest payments
capital gain: a financial gain from buying an asset, like a share of stock or a house, and
later selling it at a higher price
corporate bond: a bond issued by firms that wish to borrow
corporate governance: the name economists give to the institutions that are supposed
to watch over top executives in companies owned by shareholders
corporation: a business owned by shareholders who have limited liability for the
company’s debt yet a share of the company’s profits; may be private or public and may
or may not have publicly-traded stock
dividend: a direct payment from a firm to its shareholders
initial public offering (IPO): the first sale of shares of stock by a firm to outside
investors
municipal bonds: a bond issued by cities that wish to borrow
partnership: a company run by a group as opposed to an individual
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