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Summary Corporate Finance 2IBM
- Cours
- Corporate Finance
- Établissement
- Arteveldehogeschool (Artevelde)
Full summary of Corporate Finance, including all the solutions of the exercises that the teacher has provided.
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Par: okeyokennedy • 5 année de cela
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2017-2018 Financial ManagementCorporate Finance
International Business Management
, 1 Introduction
Chapter 1
• Identify the key financial decisions facing the financial manager of any business
• Identify the basic forms of business organization and their respective strengths and
weaknesses
• Describe the typical organization of the financial function in a large corporation
• Explain why maximizing the current value of the firm’s stock is the appropriate goal for
management
• Discuss how agency conflicts affect the goal of maximizing stockholder value
2 Interpretation and analysis of FS & Cash flow
Chapter 3
• Discuss and compare generally accepted accounting principles (gaap) and international
financial reporting standards (ifrs)
• Discuss the main components of an annual report
• Explain the balance sheet identity and why a balance sheet must balance
• Describe how market-value balance sheets differ from book value balance sheets
• Identify the basic equation for the (multi-step) income statement and the information it provides
• Understand the calculation of cash flows from operating, investing, and financing activities
required in the statement of cash flows and be able to prepare a cash flow statement
• Explain how the four major financial statements discussed in this chapter are related
Chapter 4
• Explain the three perspectives from which financial statements can be viewed
• Describe common-size financial statements, explain why they are used, and be able to prepare
and use them to analyze the historical performance of a firm
• Discuss how financial ratios facilitate financial analysis and be able to compute and use them
to analyze a firm’s performance
• Describe the dupont system of analysis and be able to use it to evaluate a firm’s performance
(in comparison with benchmarking, cf below) and identify corrective actions that may be
necessary (suggestions to the management)
• Explain what benchmarks are, describe how they are prepared, and discuss why they are
important in financial statement analysis
• Identify the major limitations in using financial statement analysis
3 Capex & cost of capital
Future and present value techniques from Chapter 5
• Discuss the time value of money, future and present value and its importance to finance.
• Be able to use the techniques of present and future valuation.
• Be able to recognize (multiple) (future or present) cash flows, (growing) annuities and (growing)
perpetuities and calculate their value using the appropriate formulas.
Chapter 9
Corporate Finance 2
, • Discuss why capital budgeting decisions are the most important investment decisions made by
a firm’s management
• Explain the benefits of using the net present value (npv) method to analyze capital expenditure
decisions and calculate the npv for a capital project
• Describe the strengths and weaknesses of the payback period as a capital expenditure
decision-making tool and compute the payback period for a capital project
• Explain why the accounting rate of return (arr) is not recommended for use as a capital
expenditure decision-making tool
• Compute the internal rate of return (irr) for a capital project and discuss the conditions under
which the irr technique and the npv technique produce different results
Chapter 11
• Explain what the weighted average cost of capital for a firm is and why it is often used as a
discount rate to evaluate projects
• Calculate the cost of debt for a firm. Update: being able to calculate the cost of bonds (YTM,
EAR) is not required.
• Calculate the cost of common stock and the cost of preferred stock for a firm
• Calculate the weighted average cost of capital for a firm, explain the limitations of using a firm’s
weighted average cost of capital as a discount rate when evaluating a project, and discuss the
alternatives to the firm’s weighted average cost of capital
4 Working capital management
Chapter 12
• Define net working capital, discuss the importance of working capital management, and
compute a firm’s net working capital
• Define the operating and cash conversion cycles, explain how are they used, and compute
their values for a firm
• Explain how accounts receivable are created and managed
• Explain the trade-off between carrying costs and reorder costs, and compute the economic
order quantity for a firm’s inventory orders
• Define cash collection time, discuss how a firm can minimize this time
• Describe three current asset financing strategies and discuss the main sources of short-term
financing
5 Capital structure & Financing
Chapter 14
• Describe the relevance of capital structure decisions and calculate the return on equity.
• Discuss the benefits and costs of using debt financing and calculate the value of the income tax
benefit associated with debt.
• Describe the trade-off and pecking order theories of capital structure choice and explain what
the empirical evidence tells us about these theories.
• Discuss some of the practical considerations that managers are concerned with when they
choose a firm’s capital structure.
Chapter 13
• Explain what is meant by bootstrapping when raising seed financing and why bootstrapping is
important.
Corporate Finance 3
, • Describe the role of venture capitalists in a firm and explain the venture-capital funding cycle.
• Discuss the advantages and disadvantages of going public.
• Review the main financing options of a firm.
6 Budgeting
Chapter 16
• Explain what a financial plan is and why financial planning is so important.
• Discuss how management uses financial planning models in the planning process, and explain
the importance of sales forecasts in the construction of financial planning models.
• Discuss how the relation between projected sales and balance sheet accounts can be
determined, and analyze a strategic investment decision using a percent of sales model
• Describe the conditions under which fixed assets vary directly with sales, and discuss the
impact of so-called lumpy assets on this relation.
• Explain what factors determine a firm’s sustainable growth rate, discuss why it is of interest to
management, and compute the sustainable growth rate for a firm.
Corporate Finance 4
,Corporate Finance – 2IBM
CHAPTER 1 – Introduction
PLANNING:
§ Introduction
§ Interpretation and analysis of FS
§ Cash flow
§ Capex
§ Working capital management
§ Capital structure
§ Financing
§ Budgeting
GOAL OF THE FIRM:
Corporate Finance 5
,THREE FUNDAMENTAL DECISIONS AFFECTING THE BALANCE SHEET:
BASIC FORMS OF BUSINESS ORGANISATION:
à Sole Proprietorship
§ Pro: creation, control, dissolving, profit
§ Con: risk, liability, tax, equity
à Partnership (owned by 2+, 1+ managing)
§ Pro: limited risk/liability, non-managing owners, equity+, expertise+
§ Con: shared control and profit, dissolving
à Corporation (legal entity – “person” distinct from owners)
§ Pro: protection/liability, ownership change+, equity++
§ Con: expensive creation, dilution of control
à LLP, LLC, PC, PLC
SIMPLIFIED CORPORATE ORGANISATION CHART:
Corporate Finance 6
,CHAPTER 2 – Interpreting and analysing financial statements
1. Financial statements and accounting principles
à Annual report
§ Summarizes the overall performance of a firm for the most recent fiscal year
§ Information
o The company, its products, its activities, and its future
o Summary of financial performance for the most recent year
o Audited financial statements, five-year summary of financial
FINANCIAL INFORMATION IN THE ANNUAL REPORT:
FINANCIAL BILINGUALISM:
à Purpose of accounting
§ Universal language of business
à Purpose of financial statements
§ Provide stakeholders a foundation for evaluating the financial health of a firm
à Global markets
§ Global companies (global accounting standards?!)
FINANCIAL STATEMENTS: SHELL AND WALMART
à Balance sheet / statement of financial position
§ Total assets = total liabilities + total stockholder’s equity
Total stockholder’s equity = total current assets – total current liabilities
à Long term assets and liabilities
§ Net valuation (depreciation as non-cash expense)
§ Amortization of intangible assets
à Equity
§ Common, retained earnings, treasury stock, preferred stock
MARKET VS BOOK VALUE:
Corporate Finance 7
, à Recording asset value
§ Assets traditionally reported at historical cost à does not reflect current market value – only the
acquisition cost
à Asset valuation
§ Better information is provided to management and investors by making-to-market – reporting
items at current market values
o Difficult to determine market values of assets, complex financial modelling, inaccurate
when deviations form fundamentals because of incorrect information of
optimistic/pessimistic expectations
è Market value of assets – market value of liabilities = realistic estimate of the market value of
shareholders’ equity
THE INCOME STATEMENT:
§ Flow of operating activity over a period
§ Measures profitability
𝑵𝑬𝑻 𝑰𝑵𝑪𝑶𝑴𝑬 = 𝑹𝑬𝑽𝑬𝑵𝑼𝑬𝑺 − 𝑬𝑿𝑷𝑬𝑵𝑺𝑬𝑺
STATEMENT OF RETAINED EARNINGS:
à Retained earnings
§ Shows cumulative effect of adjustments to shareholders’ equity resulting from profit, losses and
paying dividends
§ Shows changes in the account for a period based on profit, loss, or dividend paid
§ Cases
STATEMENT OF CASH FLOWS:
à Purpose: relevant info (summary) about cash receipts (inflow) and cash payments (outflow)
§ The statement provides the answer to: “what happened to the company’s most liquid
resource during the period?”
à Content
§ Cash effects of operations
§ Investing transactions
§ Financing transactions
§ Net increase/decrease in cash
o Ties cash flow statement with balance sheet cash account, cf later
Corporate Finance 8
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