Samenvatting - Financial management (1309TEWBDK)

1 Objectives and functions of financial management
1.1 The role of the financial manager (CFO, finance director)
- Investment decisions (Azijde van BS)
o In which assets should the firm invest?
- Financing decisions (Pzijde van BS)
o How can/ should the firm finance these assets?
- Financial planning
o How should the financial flows be managed?
 Trade off btw too much and too little money

1.2 The objective of financial management
- Maximisation of: Revenues? Profits? Profits per share? Value per share?
- VB: A company has a 20% profitability rate and a profit per share of € 2 (no debts).
The company can issue new equity and invest the proceeds in 10% bonds




Which objective?

- The creation of shareholder value
o Value is not determined by the current profit per share, but by the expected
future profits and the risk associated with these profits
o In an efficient market, the market price of a share will reflects its value
- BUT is value maximalisation really the objective of companies?
o Shouldn’t we also take into account the broader societal context?
- ESG (Environmental, Social and Governance) & CSR (Corporate Social Responsibility)
o Business practices that go beyond profit-making to positively impact society
 Key areas: environment, community engagement, ethical labor
practices, corporate governance
 Objectives: build trust, enhance brand reputation, ensure LT
sustainability
o FE: Reducing carbon footprint, fair trade sourcing, supporting local
communities
- = > Assumption: value maximization is the objective of the firm

Corporate governance:

- Concept: How can shareholders make sure that the management of the company will
maximise shareholder value?
- Often: conflicts of interest btw the management and the shareholders of a company

,- Agency-theorie:
o The ‘agent’ (= manager) acts in the interest of het ‘principal’ (= shareholder)
o In reality: the interest of the agent can be different from those of the principal
 The agent may care more about his own interests than those of the
principal
 The shareholder lacks info to have a full picture of what the manager
is doing
 The manager can use the firm to pursue his own interests, at
the expense of shareholder value
- Other agency-relations in a company:
o Controlling shareholder vs minority shareholder
 Family firms listed on a stock exchange
o Shareholders vs debtholders
 Maximizing shareholder value may be at the expense of the value of
the debtholders
 Shareholders want high dividends but debtholders want their
money back + interest on it
o Also customers, suppliers, employees and the state have interest in the firm

, PART 1: VALUATION PRINCIPLES



2 Basic valuation concepts
2.1 Present value (PV) and Future value (FV)
t
E=B ( 1+i )
E
⇔ B=
( 1+i )t

- E = endvalue = FV
- B = PV
- i = interest rate over the period
- t = number of periods
o ( 1+i )t = discount factor

Het principe van compound interest:

- = earning interest on interest -> every year more interest -> endvalue grows faster
and faster
- If you invest an amount B for 1y at an interest rate i, you will receive B (1+i ) back
after 1y. If you reinvest this amount for another year, you will receive
2
B (1+i ) ( 1+i )=B (1+i ) back in the second year

OEF:

- Assume you invest €1000 for 1y at 5%. What will be the value after 1y?
o Interest = 1000∗0,05=50
o Value after 1y = principle + interest = 1000+50=1050
o FV =1000 ( 1+0,05 )=1050
- If you invest thus sum again for 1y, what will be the value after 2y?
o FV =1000∗( 1,05 )∗( 1,05 )=1000∗ (1,05 )2=1102,50

OEF:

- Grandpa gives his granddaughter who was just born a sum of € 30000, which will be
invested at an annual interest rate of 7%
o How much money will the granddaughter have when she is 21y old? (~ FV)
 En =B∗( 1+i )n=30.000∗( 1+0,07 )21=124.217
- Grandpa wants his grandson, who is now 10y old, to have the same capital as his
granddaughter when he’s 21 years old, this is € 124217
o What amount should grandpa invest if the annual interest rate is 7%? (~ PV)

, En 124.217
 B= n
= =59.624,16
( 1+i ) ( 1+0,07 )11

2.2 Interest periodicity less than one year
FV and PV with an interest settlement shorter than 1y (per half year/ quarter/ …):


( )
m∗n
i
En =B∗ 1+
m

En
⇔ B=
( )
m∗n
i
1+
m

- m: number of periods in 1y/ interest settlement in 1y

NOTE: Higher number of interest settlements per year (m) and higher number of years
(n) -> higher end value (FV) because of compound interest

OEF:

- Investment of €100 with 8% annual interest
o Half-yearly interest settlement

( )
1
0,08
 After half a year: E1 /2=100∗ 1+ =104
2

After 1y: E =100∗( 1+
2 )
2∗1
0,08
 1 =108,16

o Interest settlement per quarter (4x/y)

( )
4∗3
0,08
 After 3y: E3 =100∗ 1+ =126,82
4

FV and PV for continuous interest settlement:

En =B∗e i∗n

En
⇔ B=
ei∗n

OEF:

- End value (FV) of a €100 investment with 8% annual interest after 3y?
o In the case of continuous interest settlement:
 E3 =100∗e0,08∗3 =127,12
o In the case of annual interest settlement:
 E3 =100∗( 1+0,08 )3=125,97

2.3 FV and PV of a series of different cash flows
In most economic problems CF’s C t are received or paid at different points in time

, FV and PV of a series of different CF’s:
n
En =∑ ( 1+i ) ∗¿C t ¿
n−t

t=1

n
Ct
B0=∑
t =1 ( 1+i )t

2.4 The valuation of annuities and perpetuities
2.4.1 PV of an infinite series of equal cash flows (perpetuity)
∞ ∞
C 1 C
B=∑ =C∗∑ =
t =1 ( 1+i ) t
t =1 ( 1+i )
t
i

OEF:

- What is the PV of €1000 received annually forever, if the interest rate is 8%?
C 1000
o B= = =12500 €
i 0,08

2.4.2 PV of an infinite series of constantly growing cash flows
If the infinite series of CF’s is not constant but grows at a constant growth rate g, then:

C 1=C0∗( 1+ g )

C 2=C1∗( 1+ g )=C 0∗( 1+ g )2
n
⇒ C n=C 0∗( 1+ g )

The PV of an infinite series of constantly growing CF’s with growth rate lower than discount
rate ( g<i ), is:
∞ ∞
Ct ( 1+ g )t C 1
B=∑ =C 0∗∑ =
t =1 ( 1+i )
t
t =1 ( 1+i )
t
i−g

2.4.3 PV and FV of a finite series of equal cash flows (annuities)
If the series of equal CF’s is finite, ending in year n, the PV will be:



( )
1

( )
n ∞ ∞ n
C 1 1 1 i C∗( 1+ i ) −1
B=∑ =C∗ ∑ −∑ =C∗ − =
t =1 ( 1+i )
t
t=1 ( 1+i )
t
t=n+ 1 ( 1+i )
t
i ( 1+ i )n i∗( 1+i )
n



FV of an annuity flow: Annuity factor = AF
t
E=B∗( 1+i )

OEF:

- At the age of 40 you decide to save an equal amount each year, with the aim of
obtaining a capital of 250000 € when you retire at the age of 65. The financial