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Summary + lecture notes Corporate finance

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A summary of the course Corporate finance and notes of all the lecture

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  • 20 oktober 2022
  • 29
  • 2022/2023
  • Samenvatting
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Summary Corporate Finance
Lecture 1 (05-09-22)
Introduction to Corporate Finance 

Accounting: Finance:
- Records the past - Discounting future cash flows
- Works with real amounts - Works with forecasts

What is corporate finance?
Investment:
- What long-term investments will you make?
Financing:
- Where will you get long-term financing for your long-term projects?
Working:
- How will you manage your everyday activities?


The financial manager:
Capital budgeting: Responsible for investment decisions
Capital structure: Responsible for financing decisions
Working capital management: Responsible for short-term financial planning
They all oversee accounting and audit function in firm. Ensure the financial welfare of
the firm.

Financial goals:
- Profitability
- Liquidity
- Security
- Independence
The goal of financial management is to manage risk, maximize share prize, and
avoid financial distress  maximize shareholder (stakeholder value)

Primary vs. secondary markets:
Primary markets:
- 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 markets:
- Investors trade securities with each other
- Money that is raised goes to seller of securities
- Share prices

The annual report:
Statement of financial position:
- The balance sheet equation: assets = liabilities + equity
- Net working capital is the difference between current assets and current
liabilities

, - It is important to ensure that net working capital is positive
- Positive net working capital means that enough cash will be available to pay
off liabilities arising
- Book value: based on accounting figures drawn from accounting standards
- Market value: based on prices or market valuations

Income statement:
- Average tax rates: percentage of income that is paid in taxes
- Tax bill divided by your taxable income
- Marginal tax rate: the tax you would pay if you earnt one more unit of
currency

Statement of cash flows:
- Often most important item to take from financial statements
- Total cash flow comes from: operating activities, investing activities,
financing activities
- Cash flow does not equal working capital
- Working capital is a snapshot, cash flow is the earning (ability) over a period
of time
- Cash flow does not equal profit
- Depreciation decreases profit but not the cash flow


Lecture 2 (07-09-22)
Financial statement analysis 

Ratio analysis: it is important to be able to analyse a firm’s financial statements and
compare them to other firms
- Profitability ratios
- Market value ratios
- Liquidity ratios (short/long term)
- Financial leverage ratio
- Turnover ratio

Profitability ratios:
 Profit margin = net income / sales  operating efficiency
 Return on asset = net income / total assets  asset use efficiency
 Return on equity = net income / total equity  equity efficiency

Financial leverage:
 Debt-equity ratio = debt / equity
 Total debt ratio = debt / (equity + debt) = debt / total assets
 Equity multiplier = total assets / equity

Market value ratios:
 EPS (earnings per share) = net income / shares outstanding
 PE (price/earnings) ratio = price per share / EPS

, The Du Pont identity (long form):
ROE = return on equity




ROE is affected by:
- Operating efficiency
- Asset use efficiency
- Financial leverage

The Du Pont identity (short form):




ROE = ROA (return on assets) x assets / equity

The time value of money 
Future value and compounding:
- Future value (FV)  the amount an investment is worth after one or more
periods
- Time convention: we are at the end of year 0, next year is end of year 1
Investing for more than one period:
 Vt(time) = V0 (1 + r) t
Vt = value after t periods
R = interest rate

Principle: original amount invested
Simple interest: interest earned only on the original principal amount invested 
interest made on the original investment
Compound interest: interest earned on both the principal and the interest reinvested
from prior periods

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