Summary
Corporate Finance Summary
- Course
- Institution
Summary of Corporate Finance for BA2 Business Economics at the VUB.
[Show more]
Seller
Follow
frdrickrger
Content preview
Frédéric Kröger Corporate Finance – SummaryCorporate Finance – Summary
❖ Role and Objective of Financial Management (Chap 1)
o MANAGING IN A COMPETITIVE WORLD
o 3 Kind of questions faced by Financial Managers
▪ Investment decisions
E.g. Will a particular investment be successful ?
▪ Financing decisions
E.g. Where will the funds come from to finance the investment ?
▪ Dividend decisions
E.g. How should cash flows be used or distributed ? What’s the optimal dividend policy ?
o FIRM’S CASH FLOW GENERATION PROCESS (within a company)
▪ To start a company you need funds
→ External funds
▪ With loan money you can make investments
▪ Which is used to produce and sell GaS
▪ Then you distribute or reinvest (→ Internal funds)
GaS ➔ Goods and Services
Engine of the Company
o SHAREHOLDER WEALTH MAXIMIZING
▪ Main goal of Financial Managers is shareholder wealth maximizing
▪ Creating value is something with a view on the future (lies within the future)
o Maximizing PV (present value) of expected future cash flows
▪ Stock price depends on how the future of the company looks like
• What is the amount of expected cash flows ?
• What is the timing of expected cash flows ?
• What is the risk of expected cash flows ?
o Shareholder Wealth Maximization IS NOT Profit Maximization
▪ Profit Maximization is not good because
• It’s an accounting figure
• No timing
• No risk
o AGENCY RELATIONSHIP
o Different Roles
▪ Shareholders (owners) elect every year → Board of Directors
▪ Board of Directors evaluate and check if take good decisions → Management
(CEO, CFO, …)
▪ Management goal is to maximize wealth of shareholders
o Agency Problems
▪ Sometimes Management take decisions not in line with value maximization
Aim at maximizing own welfare instead of shareholders’ wealth
• E.g.: Consumption of on-the-job perquisites (company cars, airplanes, …)
• E.g.: Empire building
▪ There are solutions but they cost money → Agency Costs
o Agency Costs
1
,Frédéric Kröger Corporate Finance – Summary
▪ Management incentives (stock options)
▪ Monitor performance (audits)
▪ Complex organization structures (multiple managers)
▪ Protective covenants (capital rationing)
o SAMPLE ORGANIZATION CHART
2
,Frédéric Kröger Corporate Finance – Summary
❖ Time Value of Money (Chap 5)
“A $ today is worth more than a $ tomorrow”
o FUTURE VALUE OF A CASH FLOW
o Simple Interest ➔ Interest paid on the principal sum only
𝑭𝑽𝒏 = 𝑷𝑽𝟎 . (𝟏 + 𝒏 . 𝒊)
o Compound Interest ➔ Interest paid on the principal and on prior interest
𝑭𝑽𝒏 = 𝑷𝑽𝟎 . (𝟏 + 𝒊)𝒏
▪ (1 + i)n is Future Value Interest Factor (FVIFi,n ) can be found in Table I
When using the table → 𝑭𝑽𝒏 = 𝑷𝑽𝟎 . (𝑭𝑽𝑰𝑭𝒊,𝒏 )
o PRESENT VALUE OF A CASH FLOW
o Present Value
𝟏
𝑷𝑽𝟎 = 𝑭𝑽𝒏 . [ ]
(𝟏 + 𝒊)𝒏
▪ Present Value Interest Factor (PVIFi,n ) can be found in Table II
When using the → 𝑷𝑽𝟎 = 𝑭𝑽𝒏 . (𝑷𝑽𝑰𝑭𝒊,𝒏 )
o INTEREST COMPOUNDED MORE THAN ONE PER YEAR
▪ Interest paid out more frequently than once per year
o Future Value
▪ m ➔ # of times interest is compounded
▪ n ➔ # of years
▪ 𝐢𝐧𝐨𝐦 ➔ Nominal interest rate
𝒊𝒏𝒐𝒎 𝒏𝒎
𝑭𝑽𝒏 = 𝑷𝑽𝟎 . [𝟏 + ]
𝒎
o Present Value
𝑭𝑽𝒏
𝑷𝑽𝟎 = 𝒏𝒎
𝒊
[𝟏 + 𝒏𝒐𝒎
𝒎 ]
o Effective annual rate of interest
• If I get 5% per year but it is paid twice a year, it means you get twice 2,5%
which is more valuable than getting once 5%
• 𝐢𝐞𝐟𝐟 ➔ Effective interest rate
𝒊𝒏𝒐𝒎 𝒎
𝟏 + 𝒊𝒆𝒇𝒇 = [𝟏 + 𝒎
]
o ANNUITY
▪ Annuity ➔ Series of equal cashflows (PMT (payment)) for a specified number
of periods
o Ordinary Annuity
▪ Ordinary Annuity ➔ PMT occurs at the end of each period
3
, Frédéric Kröger Corporate Finance – Summary
▪ Future Value of an Ordinary Annuity
(1+i)n −1
• is Future Value Interest Factor of an Annuity (FVIFAi,n ) can be
i
found in Table III
When using the table → 𝑭𝑽𝑨𝑵𝒏 = 𝑷𝑴𝑻 . (𝑭𝑽𝑰𝑭𝑨𝒊,𝒏 )
▪ Present Value of an Ordinary Annuity
1
1−
i(1+i)n
• is Present Value Interest Factor of an Annuity (PVIFAi,n ) can
i
be found in Table IV
When using the table → 𝑷𝑽𝑨𝑵𝟎 = 𝑷𝑴𝑻 . (𝑷𝑽𝑰𝑭𝑨𝒊,𝒏 )
▪ Present Value of a Perpetuity
• Perpetuity is a special Annuity that goes on forever
𝑷𝑴𝑻
𝑷𝑽𝑷𝑬𝑹𝟎 =
𝒊
o Annuity Due
▪ Annuity Due ➔ PMT occurs at the beginning of each period
▪ Future Value of an Annuity Due
(1+i)n −1
• is Future Value Interest Factor of an Annuity (FVIFAi,n ) can be
i
found in Table III
When using the table → 𝑭𝑽𝑨𝑵𝑫𝒏 = 𝑷𝑴𝑻 . (𝑭𝑽𝑰𝑭𝑨𝒊,𝒏) . (𝟏 + 𝒊)
▪ Present Value of an Annuity Due
1
1−
i(1+i)n
• is Present Value Interest Factor of an Annuity (PVIFAi,n ) can
i
be found in Table IV
When using the table → 𝑷𝑽𝑨𝑵𝑫𝟎 = 𝑷𝑴𝑻 . (𝑷𝑽𝑰𝑭𝑨𝒊,𝒏 ) . (𝟏 + 𝒊)
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller frdrickrger. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.39. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
56326 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now