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Summary Financial Accounting Management - Business Case
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Financial & Accounting ManagementWeek 1.
Net income increases –> retained earnings increase as well.
Income statement is not about cash (assets), Cash flow is
Cash flow statement
Net income 65
+Depreciation 200
-/+ changes in working capital (acc. Rec; acc. Pay; inventory).
Operational cash flow
- investments
free cash flow
Week 3.
Discounted cash flow: C1/ (1+R)N
Discount rate/rate of return
Steps to calculate the market value of a company:
1. Make assumptions about the future
2. Forecast of future cashflows
3. Y1= 100 fcf Y2=150 fcf (timeline)
4. Calculate the WACC (is estimation of the future risk of the company)
5. Market value= CF1/(1+wacc)^1+CF2/(1+wacc)^2…+ terminal value
6. Terminal value= cash flow last planned period * (1+growth) / (wacc - growth rate)
7. Market value - debt= market value of equity
Week 5.
Ch. 1. Commonly used valuation Methods.
Basis valuation methods:
1. Discounted cash flow valuation: determine how much we are willing to pay for a business today
by forecasting the cash flows expect to receive in the future by discounting them pack to the present.
Value= C1/(1+r)1 + C2/(1+r)2 + C3/(1+r)3 etc.
C= cash flow of that year
r= discount rate
2. Price multiple valuation method: Valuating the company relative to other similar companies.
Value= (net income) x (price/earnings multiple)
, Price/earnings multiple means estimating the company selling for (for example) 10 times its expected
earnings.
3. The liquidation valuation method: looks at the worst case scenario, if the company has to go
bankrupt, what do the owners get.
If its assets that can be sold are worth $50,000, and has an outstanding loan and debt to suppliers of
$15,000. The owners of the company will receive a total of $35,000 of the company.
This methods may be used by banks as part of their decision making to grant credits.
Ch. 2. An overview of Financial statements.
Analysing a company’s financial statements can provide important insights about its value. Items such
as working capital, liquidity, profitability, and operating cash flow are often key drivers in valuation.
Types of financial statements:
1. Balance sheet: provides information regarding a company’s assets and liabilities at a specific point
in time. Difference between assets and liabilities represents owner’s equity.
Illustrates a company’s financial position at a specific point in time. Provides insights regarding short-
term liquidity and long-term solvency.
Net working capital: difference between current assets and current liabilities.
2. Income statement: provides information regarding revenues and expenses over a period of time.
Revenue – expenses= net income, which is not the same as cash flow. You may have a positive net
income, but a negative cash flow.
3. Cash flow statement: provides information regarding a company’s sources and uses of cash over a
period of time. Organized by operating activities (core business activity), investing activities
(purchase or sale of fixed assets), or financial activities (obtaining or repaying additional funds).
These together contain the net change in cash.
4. Statement of changes in owner’s equity: provides detailed information regarding changes in the
company’s equity capital over a period of time. Less important for valuation purposes than what is
found on the other three statements.
Measuring assets and liabilities: BALANCE SHEET
- Historical costs: the value of the assets or liabilities when it was acquired, including any
acquisition, preparation, or installation costs.
- Fair value (market value): the amount at which an asset could be sold or liability be fulfilled
between a willing buyer and a willing seller in an “arm’s length” transaction.
The specific assumptions regarding the measurements of assets and liabilities are provided in the
notes to financial statements. Companies usually use both methods, and therefore we cannot assume
that they accurately represent the company’s current market value.
Some companies have off-balance-sheet items that could represent a source of risk and decrease the
estimate of a company’s value.
Where to focus on in a balance sheet to value a company?
- Big numbers- most significant assets and liabilities. .
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