Samenvatting
Samenvatting Corporate Finance
- Instelling
- Radboud Universiteit Nijmegen (RU)
Samenvatting van de hoorcolleges en de bijbehorende hoofdstukken uit het boek.
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Samenvatting Corporate FinanceCollege 1
Hoorcollege
Chapter 1
- Finance deals with future cash flows. To do this, it works with forecasts.
- Accounting standards forces us to value a company. In finance, we look at the market value.
- Corporate finance:
o Investment: What long-term investments will you make? (Capital Budgetting)
o Financing: Where will you get long-term financing for your long-term projects? (Capital
Structure)
o Working Capital Management (Liquidity) : How will you manage your everyday activities?
(Working Capital Management)
- Financial Goals for a company:
o Profitability: Most important goal of a company. Maximize profits. Otherwise, there is no
reason to exist.
o Liquidity: It’s not really helpful if there’s no profit. But liquidity is a strict requirement.
o Security
o Independence
- Maximizing the shareholders value:
o Maximize share price.
o Manage risk
o Avoid financial distress
- Firms interact in an environment:
- Primary Markets vs. Secondary Markets:
o 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
o Secondary Markets:
Investors trade securities with each other
Money that is raised goes to seller of securities
Share Prices
,Chapter 3
- Annual report:
o Statement of financial position: Balance sheet.
o The income statement: Money that flows.
o Statement of Cash Flows
- Balance Sheet Equation: Assets=Liabilities+ Equity
- Net Working Capital: Money that we can currently operate with. Money that a firm has as a
buffer. It’s best when it’s positive.
Net WorkingCapital=Current Assets−Current Liabilities
- Book value: Based on Accounting Figures drawn from Accounting Standards.
- Market value: Based on prices or market valuations.
- Income Statement:
- Taxes:
o Average Tax Rates: Percentage of income that is paid in taxes. Tax bill divided by your
taxable income.
o Marginal Tax Rate: The tax you would pay if you earn one more unit of currency.
- For project calculations, use the Marginal Tax Rate as that is the rate that would be taxed on any
additional income. If we do a project, it is an addition to the profit, so we use the marginal tax
rate.
- Cash Flow Statement: Often most important item to take from financial statements!
- Total Cash Flow comes from:
o Operating activities
o Investing activities
o Financing activities
- Cash Flow ≠ Working Capital: Working Capital is a snapshot, Cash Flow is the earning ability over a
period of time.
- Cash Flow ≠ Profit: Depreciation decreases profit but not the Cash Flow.
,College 2
Hoorcollege
Chapter 3
- Ratio Analysis: It is important to be able to analyze a firm’s financial statements and compare
them to other firms.
o Profitability Ratios:
Net Income
Operating Efficiency: Profit Margin=
Sales
Net Income
Asset Use Efficiency: Return on Assets=
Total Assets
Net Income
Equity Efficiency: Return on Equity=
Total Equity
o Financial Leverage (Examples):
Debt
Debt Equity Ratio=
Equity
Debt Debt
Total Debt Ratio= =
Equity+ Debt Total Assets
Total Assets
Equity Multiplier= (This is at least 1!)
Equity
o Market Value Ratios:
Net Income
Earnings per Share: EPS= (Puts into perspective the Net
SharesOutstanding
Income.)
Price per Share
Price-Earnings Ratio: PE Ratio= (Tells how expensive a company
EPS
is in combination with net income?)
o Liquidity Ratios (short/long term)
o Turnover Ratio
- Return on Equity: How Much profit does a company make out of the equity it has.
ROE=Profit Margin∗Total Asset Turnover∗Equity Multiplier
Net Income
∗Sales
Sales
∗Assets
Assets
¿
Equity
Net Income
¿
Equity
- A positive ROE is always larger than ROA, because the equity multiplier is >1.
ROA∗Assets
- ROE=
Equity
Chapter 4
- Future Value (FV): The amount an investment is worth after one or more periods.
FV =PV∗(1+i)n
t
V t =V 0∗(1+r )
- Simple Interest: Interest earned only on the original principal amount invested.
- Compound Interest: Interest earned on both the principal and the interest reinvested from prior
periods.
, - Future Value Interest Factor (FVIF): FVIF( r ,t )=(1+r )t
- Rate per half year period: r half period =r /2
- The annual percentage rate (APR) indicates the amount of interest paid or earned in one year
without compounding. APR is also known as the nominal or stated interest rate. This is the rate
required by law in the US.
- Present Value (PV): The current value of future cash flows discounted at the appropriate discount
rate.
FV
PV =
( 1+ r )t
- Discount: Calculate the present value of some future amount.
Vt
- Present Value for Multiple Periods: V 0=
( 1+r )t
1
- Present Value Interest Factor (PVIF): PVIF =
(1+r )t
- Finding the time for an investment:
n=
ln ( FV
PV )
ln ( 1+r )
- Finding the necessary rate of return:
( 1n )−1
r= ( )FV
PV
- Rule of 72: An approximate formula to determine the number of years it will take to double the
72
value of your investment. Years to double investment: n=
r∗100
Chapter 1
- When you start your own business, you have to ask yourself 3 questions:
1. What long-term investments should you make? That is, what lines of business will you be
in, and what sorts of buildings, machinery and equipment will you need?
2. Where will you get the long-term financing to pay for your investment? Will you bring in
other owners, or will you borrow the money?
3. How will you manage your everyday financial activities, such as collecting from customers
and paying suppliers?
- Corporate finance: Study to answer these three questions.
- In large corporations, the owners, shareholders, are not directly involved in making business
decisions. The managers represent the owner’s interest and make decisions on their behalf.
- Financial managers deal with the three questions:
1. Capital Budgeting: In capital budgeting the financial manager tries to identify investment
opportunities that are worth more to the firm than they cost to acquire. Loosely speaking,
this means that the value of the cash flow generated by an asset exceeds the cost of that
asset. Evaluating the size, timing and risk of future cash flows is the essence of capital
budgeting.
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