Summary of the Financial Management course given by Geert Kesteleyn & Eric Leurquin at Thomas More Mechelen. This is a summary of the powerpoints, the exercises and the lessons given. It contains the 15 chapters seen. The document is written in English, just like the course.
Financial Management (YB1027| 2024)
September 2024 – Januari 2025 (examen /2024)
Docent Geert Kesteleyn
Copyright 2019 Pearson Education, Ltd. All rights reserved.
Table of Contents
Formularium ............................................................................................................................. 1
1. The role of managerial finance ............................................................................................... 3
Finance and the firm.................................................................................................................. 3
Managing the firm ..................................................................................................................... 4
Organizational forms, taxation, and the principal-agent relationship ............................................ 5
Exercises chapter 1 .................................................................................................................... 7
2. The financial market environment .........................................................................................11
Financial institutions.................................................................................................................11
Financial markets .....................................................................................................................11
Regulation of Financial Markets and Institutions ........................................................................13
The securities issuing process....................................................................................................14
Financial Markets in crisis .........................................................................................................15
Exercises chapter 2 ...................................................................................................................16
3. Funding................................................................................................................................19
Exercise chapter 3 ....................................................................................................................21
4. Long and short term financial planning ..................................................................................23
The financial planning process...................................................................................................23
Measuring the firm’s cashflow ..................................................................................................23
Cash planning: cash budgets .....................................................................................................26
Profit planning: pro forma statements .......................................................................................29
Exercises chapter 4 ...................................................................................................................30
5. Time value of money ............................................................................................................33
The Role of Time Value in Finance .............................................................................................33
Single amounts: Future Value of a Single Amount.......................................................................34
Single amounts: Present Value of a Single Amount .....................................................................34
Annuities .................................................................................................................................35
Annuities: Future Value of an Ordinary Annuity..........................................................................35
Annuities: Present Value of an Ordinary Annuity ........................................................................35
Present value of a perpetuity ....................................................................................................36
Mixed streams: Future Value of a Mixed Stream ........................................................................36
Mixed streams: Present Value of a Mixed Stream .......................................................................37
Compounding Interest more frequently than annually................................................................37
Formularium ............................................................................................................................38
Exercises chapter 5 ...................................................................................................................38
6. Interest rates and bond evaluation ........................................................................................45
Interest rates and required returns............................................................................................45
Debt-specific risk premium components ....................................................................................47
Government and corporate bonds.............................................................................................47
Valuation fundamentals............................................................................................................48
Bond valuation .........................................................................................................................48
Exercises chapter 6 ...................................................................................................................52
Extra exercises (test 1) ..............................................................................................................56
7. Stock valuation .....................................................................................................................58
Differences between debt and equity ........................................................................................58
, Common and preferred stock....................................................................................................58
Common stock valuation ..........................................................................................................59
Decision making and common stock value .................................................................................62
Exercises chapter 7 ...................................................................................................................63
8. Risk & return ........................................................................................................................66
Risk and return fundamentals ...................................................................................................66
How do we measure the risk in finance? ....................................................................................67
Risk of a single asset .................................................................................................................67
Risk of a portfolio .....................................................................................................................67
Exercises chapter 8 ...................................................................................................................68
9. The cost of capital ................................................................................................................69
Overview of the cost of capital ..................................................................................................69
Cost of long-term debt..............................................................................................................69
Cost of common stock ..............................................................................................................70
Weighted average cost of capital...............................................................................................70
Exercises chapter 9 ...................................................................................................................71
10. Capital budgeting techniques ................................................................................................75
Overview of capital budgeting ...................................................................................................75
Payback period.........................................................................................................................76
Net present value (NPV) ...........................................................................................................76
What is “r” the discount rate.....................................................................................................77
Internal rate of return (IRR).......................................................................................................78
Net present value profiles .........................................................................................................79
Exercises chapter 10 .................................................................................................................80
Extra exercises (test 2 = chapter 7, 8 & 9)...................................................................................83
11. Capital budgeting cash flows .................................................................................................85
Relevant cash flows ..................................................................................................................85
The Basic Format for Determining Initial Investment (CFo) ..........................................................86
Finding the Initial Investment ....................................................................................................86
Finding the Operating Cash Flows = CF1; CF2; etc….....................................................................87
Finding the terminal cash flow ..................................................................................................88
Real options .............................................................................................................................89
Capital rationing .......................................................................................................................90
Capital rationing (THE GOOD METHOD) .....................................................................................90
Exercises chapter 11 .................................................................................................................91
12. Leverage and capital structure...............................................................................................95
What is leverage? .....................................................................................................................95
Leverage: Operating leverage....................................................................................................95
Leverage: Financial Leverage .....................................................................................................97
Leverage: Total leverage ...........................................................................................................98
Leverage: Relationship of Operating, Financial, and Total Leverage .............................................99
The Firm’s Capital Structure: Types of Capital........................................................................... 100
Basic Shortcoming of EBIT-EPS Analysis.................................................................................... 101
Choosing the Optimal Capital Structure ................................................................................... 102
Exercises chapter 12 ............................................................................................................... 102
13. Payout Policy...................................................................................................................... 107
The basics of payout policy ..................................................................................................... 107
The mechanics of payout policy............................................................................................... 107
Factors affecting dividend policy ............................................................................................. 108
Types of Dividend Policies ....................................................................................................... 109
Exercices chapter 13 ............................................................................................................... 110
,14. Current Liabilities Management........................................................................................... 113
Net working capital fundamentals ........................................................................................... 113
Cash conversion cycle ............................................................................................................. 113
Inventory management .......................................................................................................... 115
Accounts Receivable Management .......................................................................................... 117
Exercices chapter 14 ............................................................................................................... 120
15. Current Liababilities Management ....................................................................................... 123
ST liabilities ............................................................................................................................ 123
Spontaneous Liabilities ........................................................................................................... 123
Exercises chapter 15 ............................................................................................................... 125
16. Theory questions ................................................................................................................ 126
• Compounding interest more frequently than annually:
• Discounting interest more frequently than annually:
𝑐𝑜𝑢𝑝𝑜𝑛 1 𝑀
• Value of a bond: 𝐵0 = ∗ (1 − )+ or B0 = (Coupon/r)*(1-(1/(1+r)^n)) + M/(1+r)^n
𝑟 (1+𝑟) 𝑛 (1+𝑟) 𝑛
• Yield to maturity: we use Excel of a financial calculator to solve the previous equation for ‘r’.
• Value of a share; basic:
o Zero growth:
o Constant growth: with D1 given or else D1 = D0* (1+g)
• Cost of capital (in case there is no preferred stock): 𝑟𝑤𝑎𝑐𝑐 = (𝑤𝑑 × 𝑟𝑑 ). (1 − 𝑇) + (𝑤𝑠 × 𝑟𝑠 )
o (and in case there are preferred stocks): 𝑟𝑤𝑎𝑐𝑐 = ( 𝑤𝑑 × 𝑟𝑑 ). ( 1 − 𝑇) + ( 𝑤𝑠 × 𝑟𝑠 ) + (𝑤𝑝 𝑥 𝑟𝑝 )
• Payback period (only in case of annuity) =initial investment / annual cash inflow
• Payback period (in case of mixed cash flows) : cumulate the cash flows
• NPV = CF1/(1+r) + CF2/(1+r)² + CF3 / (1+r)³ + … + CFn / (1+r) n - CF0
o NPV = present value of cashflows – initial investment
• Profitability index:
• IRR (solve for IRR):
• Operating breakeven point:
1
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 femsv. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.55. You're not tied to anything after your purchase.
