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Finance 1 Full Course Summary
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  • Course
  • Finance 1
  • Institution
  • Universiteit Van Amsterdam (UvA)
  • Book
  • Corporate Finance, Global Edition

This document summarizes the basic introductory finance course taught in many Business and economics-related Bachelor courses. No advanced material, mainly cash flow analysis as well NPV, CAPM and fixed income evaluation. This course serves as the conceptual base for more advanced finance and accou...

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Document information

  • No
  • Chapter 1 to 15
  • May 18, 2021
  • 21
  • 2020/2021
  • Summary

Subjects

  • capm
  • equity
  • bonds
  • fixed income
  • asset pricing
  • accounting
  • cash flow
  • fcf analysis
  • trading
  • markets

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  • Test Bank For Corporate Finance The Core, 5th Edition by Jonathan Berk, Peter DeMarzo Chapter 1-19
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Written for

  • Universiteit van Amsterdam (UvA)
  • College Of Economics And Business
  • Finance 1
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Finance 1
Week 1: Introduction

Chapter 1: The Corporation

Market Makers:
Buy at Bid Price (lower)
Sell at Ask Price (higher)

Investors:
Buy at Ask Price
Sell at Bid Price

Difference = spread


Objective of a firm = maximizing shareholder value




• Sole Proprietorship
Owner of the firm is personally liable for all obligations. Bankruptcy = personal bankruptcy

• Partnership

1) General Partners personally liable for firm’s debt obligations.

2) Limited Partners = Investors who limit their liabilities to their investments

• Limited Liability Company LLC

• Corporation

1) Legal entity
2) Public – financial reports
3) Double Taxation: Corporate Tax on Profits and personal income tax for shareholders




Shareholders exert their control over firm
by electing a Board of Directors and a CEO.



Agency Problems: Conflicts of Interest

When managers put their self-interest
above interest of the shareholders

Externalities (Pollution, Society)

,Chapter 2. Introduction Financial Statement Analysis




4 financial statements must be disclosed by (public) firm:
- Balance Sheet
- Income Statement
- Statement of cash flows
- Statement of Equity



• Net Present Value NPV
NPV = Present Value (Benefits) – Present Value (Costs)
NPV = Present Value (All project cash flows)


𝒄𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝒊𝒏 𝟏 𝒚𝒆𝒂𝒓
𝑷𝑽 𝒄𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝒊𝒏 𝟏 𝒚𝒆𝒂𝒓 (𝒃𝒆𝒏𝒆𝒇𝒊𝒕 𝒐𝒓 𝒄𝒐𝒔𝒕) =
𝟏 + 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 %
NPV Decision Rule:

When making an investment decision, take the alternative with the highest NPV. Choosing this alternative is
equivalent to its NPV in cash today

Book Value = Shareholder’s Equity

Market Value = # shares outstanding x Price per share

Enterprise Value = Equity + Debt – Cash (and cash equivalents)

Price to Book Ratio (P/B) = Market Cap / Book Value of Equity

High P/B Ratio means growth stocks - Low P/B Ratio means value stocks



Ratios:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

, 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 𝑃/𝐸 = =
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒


𝐸𝐵𝐼𝑇 (1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑂𝐼𝐶 =
(𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑒𝑡 𝐷𝑒𝑏𝑡)


𝐸𝐵𝐼𝑇
𝐸𝐵𝐼𝑇 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑆𝑎𝑙𝑒𝑠


𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑆𝑎𝑙𝑒𝑠


𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑆𝑎𝑙𝑒𝑠


𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐸𝑃𝑆 =
𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔


𝑐𝑎𝑠ℎ + 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝑐𝑎𝑠ℎ + 𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 + 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 = =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠


𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑃𝑎𝑦𝑜𝑓𝑓 − 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒




Statement of Cash Flow Income Statement

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