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Samenvatting Fundamentals of Corporate Finance 4e - Corporate Finance (MAN-BCU2020)

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  • Course
  • Corporate Finance (MANBCU2020)
  • Institution
  • Radboud Universiteit Nijmegen (RU)
  • Book
  • Fundamentals of Corporate Finance 4e

Complete summary of Corporate Finance for Business Administration, including lecture slides and the book 'Fundamentals of Corporate Finance'. Scored a 9.0 on the exam.

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Document information

  • No
  • Hoofdstuk 1, 2, 3, 4, 5, 6, 7, 8, 9.1-9.5, 10.3-10.5, 11, 12, 13, 14, 20
  • October 20, 2023
  • 27
  • 2023/2024
  • Summary

Subjects

  • financial statement
  • time value of money
  • corporate governance
  • bond valuation
  • equity valuation
  • net present value
  • npv
  • project analysis
  • recent c
  • discounted cash flow valuation
  • capital investment decisions

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  • Radboud Universiteit Nijmegen (RU)
  • Business Administration
  • Corporate Finance (MANBCU2020)
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Corporate Finance – exam summary

Chapter 1

Difference between accounting and finance
 Accounting: records the past and works with real amounts
 Finance: discounting future cash flows and works with forecasts

Corporate Finance is the study of ways to answer these questions:
- Investment: what long-term investments will you make?
- Financing: where will you get long-term financing for your long-term projects?
- Liquidity: how will you manage your everyday activities?

The Financial Manager, responsible for answering the three questions instead of the owner
 Capital Budgeting: responsible for investment decisions
 Capital Structure: responsible for financing decisions, think of how much should the
firm borrow and what mixture of debt and equity is best?
 Working Capital Management: responsible for short-term financial planning, day-to-
day activity to ensure that the firm has sufficient resources to continue its operations
 Also, oversee accounting and audit function in the firm, and ensure financial welfare

Goal of financial management: make money or add value for the owners (shareholders)
 Profitability (most important), liquidity, security, independence

Stock markets
Important because it can inform management of the performance of competitors, suppliers,
customers and economy. Financial markets facilitate flow of money from those that have
surplus cash to those that need financing.

Primary vs. Secondary markets
Primary market refers to original sale of securities governments and corporations, secondary
markets are those in which these securities are bought and sold after the original sale.
 Primary market: securities are sold to investors, money that is raised goes to issuing
firm, first share issue is called an Initial Public Offering, second share issue is called a
seasoned offering
 Secondary market: investors trade securities with each other, money that is raised
goas to seller of securities, share prices

Dealer: agent who buys and sells securities from inventory
Broker: agent who arranges security transactions among investors

Chapter 3

The annual report presents three financial statements and is released every year:
1. Statement of financial position / balance sheet
2. Income statement
3. Statement of cash flows

, 1. Statement of financial position / balance sheet
 Assets: non-current (does not turn into cash within a year) and current (will turn into
cash within a year)
 Liabilities: non-current (not due in the coming year) and current (must be paid within
this year)
 Shareholders’ equity: also called owners’ equity, is the difference between total assets
and total liabilities

Balance sheet equation
Assets = liabilities + shareholders’ equity

Net Working Capital: the difference between a firm’s current assets and its current
liabilities. NWC is positive when current assets exceed current liabilities, meaning that the
cash that becomes available within 12 months is more than the cash that must be paid over
the same period. Important to ensure that NWC is positive.

Book value: based on accounting figures and standards, often used in balance sheet
Market value: based on prices or market valuations
 For current assets, market and book value will be somewhat similar because they are
bought and converted into cash over a short span of time.

2. Income Statement: measures performance over some period of time
 Revenues – expenses = income
 Net income is often expressed on a per-share basis and is called earnings per share
(EPS)
 Expenses are based on matching principle: revenue is realized at the time of sale
 Non-Cash Items: e.g. depreciating

EPS = Net Income / Total shares outstanding

Average Tax Rates: % of income that is paid in taxes > tax bill divided by taxable income
Marginal Tax Rate: tax you would pay if you earn one more unit of currency

Average Tax Rate = (0.15 x 200,000 + 0.20 x 40,000) / total taxable income
^ example numbers used

3.Cash Flow Statement: difference between cash that came in and cash that went out
 Often most important item
 Total Cash Flow comes from operating, investing and financing activities
 Cash Flow does not equal Working Capital, cause CF is over a period of time instead
of snapshot
 Cash Flow does not equal Profit, cause depreciation decreases profit but not CF

Ratio Analysis
Financial ratios are used to analyze and compare performance of a company

Profitability Ratios:
1. Profit margin = Net Income / Sales (operating efficiency)
2. Return on Asset = Net Income / Total Assets (asset use efficiency)
3. Return on Equity = Net Income / Total Equity (equity efficiency)

, Financial Leverage Ratios:
1. Debt-Equity Ratio = Debt / Equity
2. Total Debt Ratio = Debt / Debt + Equity (or Total Assets)
3. Equity Multiplier = Total Assets / Equity

Market Value Ratios:
1. Earnings Per Share (EPS) = Net Income / Shares outstanding
2. Price Earnings Ratio (PE Ratio) = Price per Share / EPS

The Du Pont Identity > way of analyzing financial performance
 ROE = Net Income / Equity
 Why is a positive ROE always larger than ROA? Cause the equity multiplier is > 1
 ROE = ROA x (assets/equity)

Using Financial Statement information

 Why do we evaluate financial statements? Because we do not have market value
information and we want to know more.
 Internal uses: performance evaluation, compare performance of multiple divisions
within a company, planning for the future, financial decision making
 External uses: useful to parties outside the firm like creditors or potential investors,
because it is a prime source of information about a firm’s financial health. Also used
for evaluating main competitors and identifying potential targets. Lastly, for reporting
for tax and authorities.

When evaluating a firm based on financial statements, what is the standard of comparison?
1. Time Trend Analysis: standard based on history, e.g. past 10 years.
2. Peer Group Analysis: standards based on firms that are similar in the same market,
assets or operations. Identify a peer group. However, difficult because no
companies are identical.

Problems with Financial Statement Analysis

 Basic problem: there is no theory to help us identify what to look at or guide us in
establishing standards. There is little help with financial statements, so we can’t say
what ratio or value matters the most.
 Peer Group Analysis only works when the firms are strictly in the same line.
 The existence of different standards and procedures makes it difficult to compare
financial statements across national borders.
 Different firms use different accounting procedures > difficult to compare statements.
 Fluctuations around the year, e.g. firms in seasonal businesses (ice cream shop) >
difficult to compare statements of financial position.
 Unusual events such as one-time profit from asset sale may affect performance and
give misleading signals.
Conclusion: difficult to compare statements because of many different reasons.

Chapter 4

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