FINANCE 2 HTH
LEARNING OUTCOMES PER LEARNING UNIT
LEARNING UNIT 1: Risk & Financing
- Identify types of risk. LEARNING UNIT 5: Valuation I
- Explain how risk affects hospitality. - Apply time value of money, discounting &
- Define sources of finance. compounding.
- Compare financing options. - Value projects and companies.
- Perform horizontal, base year, and vertical - Calculate payback period.
analysis of USALI statements. - Understand value creation.
- Assess financial and operational risk in
LEARNING UNIT 2: Financial Analysis investments.
- Apply horizontal, base year, and vertical
analysis to USALI data. LEARNING UNIT 6: Valuation II
- Calculate operating, profitability, activity, and - Compare mutually exclusive investment options.
solvency ratios. - Calculate Terminal Value using Perpetual
- Use benchmarks to assess financial Growth.
performance. - Perform a Discounted Cash Flow (DCF)
analysis.
LEARNING UNIT 3: Net Working Capital & Cash
Conversion LEARNING UNIT 7: Real Estate Valuation (Colliers)
- Calculate the cash conversion cycle. - Assess value drivers of hospitality real estate.
- Understand NOWC and NWC. - Understand real estate-specific valuation
- Suggest improvements to working capital. methods.
- Explain the impact of NOWC on financing - Advise on appropriate valuation concepts for a
needs. case.
LEARNING UNIT 4: Cash Flow Statement & - Budgeting
- Understand the purpose of the cash flow
statement. STUDY FOR EXAM:
- Identify operating, investing, and financing cash - FIN 1 summary
flows. - FIN 1 ‘refresher’ PP slides HTH
- Analyze a company using its cash flow - FIN 2 masterclass
statement. - FIN 2 summary
- Link the income statement, balance sheet, and - Workbook exercises
cash flow. - Sample exams
- Understand basic cash budgeting. - Learning outcomes
1
,LEARNING UNIT 1: RISK & FINANCING
Risk vs. Reward
To face the risks, capital providers( = investors) require return on their investment.
- Risk is important because it determines the return investors expect.
- The higher the risk, the higher the potential reward (demanded return)
- This influences the discount rate used in company
valuation and investment decisions.
Differences Profit vs. Value:
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
- Profit refers to the financial gain within a specific period (usually short-term)
- Value (= Risk adjusted profit) represents the total expected future cash flows of a company or
project, adjusted for risk and discounted to their present value. It considers not just the
amount of profit, but also how stable, safe, and sustainable that profit is over time (long-term
measure & risk-adjusted). Value is discounted to their present value.
Types of Investment Risks
We divide risks into categories because each type of risk is fundamentally different: in its cause, its
impact, and the way it should be managed.
- Market Risk: the risk of losses caused by external market factors such as inflation, interest
rate changes, or economic downturns.
- Liquidity Risk: the risk that a company doesn’t have enough cash or liquid assets to meet its
short-term financial obligations.
- Operational Risk: the risk of loss due to failures in internal processes, people, systems, or
unexpected external events.
- Credit Risk: the risk that a borrower or customer fails to repay money owed, leading to
financial loss for the lender or supplier.
Systematic vs. Unsystematic Risks
- Systematic Risks affect the entire market or a large sector (recession, political instability).
These risks cannot be avoided and impact all businesses.
- Unsystematic Risks are specific to a company or industry (poor management, product failure).
These risks can be reduced through diversification, spreading investments across different
companies or sectors.
4 Stages of Managing Unsystematic Risk:
1. Risk Identification → Recognizing potential risks
2. Risk Assessment → Evaluating the likelihood and impact of each risk.
3. Risk Mitigation → Taking steps to reduce or eliminate risk
4. Risk Monitoring → Continuously tracking risks and improving processes.
Risk Management Process
Companies manage risks in 4 ways:
- Protective: Uses tools like financial reporting and quality control to manage risks.
- Preventive: Stops risks before they happen using audits, contracts, and credit checks.
- Proactive: Identifies risks early with risk maps, safety rules, and policies.
- Reactive: Handles risks after they occur using crisis plans, insurance, and recovery.
2
, Capital structure (Assets)
Companies finance their operations with either equity (own money from investors) or debt (borrowed
money). → 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 = 𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
EQUITY DEBT
Money from shareholders (shares or retained Money from loans, credit, or bonds that must be
earnings). paid back with interest.
Advantages: Short-Term Debt
- No repayment required - Often cheaper
- No interest costs - Must renegotiate when it ends
- Dividends only paid when there’s profit - Risky if market conditions are poor
- Hard to get if already in a lot of debt
Disadvantages:
- Investors expect high returns (last in line Long-Term Debt
when a company goes bankrupt). - More expensive (longer risk for lenders)
- You share ownership (dilution) - Brings more financial stability
- Hard to find investors if the company - Fixed interest → predictable costs
isn’t attractive - Also hard to get if highly leveraged
- Can affect personal relationships (if
funded by family/friends) General pros of debt:
- No ownership is given away
- Interest is tax-deductible
- Fixed payments = predictable
- Can boost return on equity (leverage)
Cons:
- Must be paid back no matter what
- Increases financial risk
Financial Leverage
Financial leverage shows how much a company uses debt (borrowed money) to finance its operations
instead of equity (own funds).
- Debt increases return on equity (ROE) if used wisely, because profits are made using
borrowed money. But it also increases financial risk: if profits fall, debt must still be repaid.
- Rate of Return Trap: refers to the mistake of judging a company’s performance only by its
ROE, ignoring the capital structure (debt / equity) high ROE looks attractive, but comes from
the high debt: the company may appear profitable, but it's taking on more financial risk to
achieve that return.
- High leverage = more debt → higher potential returns and higher risk.
- Low leverage = more equity → safer, but lower returns.
- Creditors (Kd) get fixed interest; shareholders (Ke) take more risk and want a higher return.
Goal: keep WACC low by choosing the right capital structure.
𝑑𝑒𝑏𝑡
Capital structure & debt dependence: 𝑒𝑞𝑢𝑖𝑡𝑦
𝑒𝑞𝑢𝑖𝑡𝑦
the percentage of the company’s assets funded by equity: 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐴𝑠𝑠𝑒𝑡𝑠
Leverage of assets (how debt-heavy the firm is): 𝐸𝑞𝑢𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦
How much equity is available to cover liabilities: 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Asset coverage for total debt: 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
3
LEARNING OUTCOMES PER LEARNING UNIT
LEARNING UNIT 1: Risk & Financing
- Identify types of risk. LEARNING UNIT 5: Valuation I
- Explain how risk affects hospitality. - Apply time value of money, discounting &
- Define sources of finance. compounding.
- Compare financing options. - Value projects and companies.
- Perform horizontal, base year, and vertical - Calculate payback period.
analysis of USALI statements. - Understand value creation.
- Assess financial and operational risk in
LEARNING UNIT 2: Financial Analysis investments.
- Apply horizontal, base year, and vertical
analysis to USALI data. LEARNING UNIT 6: Valuation II
- Calculate operating, profitability, activity, and - Compare mutually exclusive investment options.
solvency ratios. - Calculate Terminal Value using Perpetual
- Use benchmarks to assess financial Growth.
performance. - Perform a Discounted Cash Flow (DCF)
analysis.
LEARNING UNIT 3: Net Working Capital & Cash
Conversion LEARNING UNIT 7: Real Estate Valuation (Colliers)
- Calculate the cash conversion cycle. - Assess value drivers of hospitality real estate.
- Understand NOWC and NWC. - Understand real estate-specific valuation
- Suggest improvements to working capital. methods.
- Explain the impact of NOWC on financing - Advise on appropriate valuation concepts for a
needs. case.
LEARNING UNIT 4: Cash Flow Statement & - Budgeting
- Understand the purpose of the cash flow
statement. STUDY FOR EXAM:
- Identify operating, investing, and financing cash - FIN 1 summary
flows. - FIN 1 ‘refresher’ PP slides HTH
- Analyze a company using its cash flow - FIN 2 masterclass
statement. - FIN 2 summary
- Link the income statement, balance sheet, and - Workbook exercises
cash flow. - Sample exams
- Understand basic cash budgeting. - Learning outcomes
1
,LEARNING UNIT 1: RISK & FINANCING
Risk vs. Reward
To face the risks, capital providers( = investors) require return on their investment.
- Risk is important because it determines the return investors expect.
- The higher the risk, the higher the potential reward (demanded return)
- This influences the discount rate used in company
valuation and investment decisions.
Differences Profit vs. Value:
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
- Profit refers to the financial gain within a specific period (usually short-term)
- Value (= Risk adjusted profit) represents the total expected future cash flows of a company or
project, adjusted for risk and discounted to their present value. It considers not just the
amount of profit, but also how stable, safe, and sustainable that profit is over time (long-term
measure & risk-adjusted). Value is discounted to their present value.
Types of Investment Risks
We divide risks into categories because each type of risk is fundamentally different: in its cause, its
impact, and the way it should be managed.
- Market Risk: the risk of losses caused by external market factors such as inflation, interest
rate changes, or economic downturns.
- Liquidity Risk: the risk that a company doesn’t have enough cash or liquid assets to meet its
short-term financial obligations.
- Operational Risk: the risk of loss due to failures in internal processes, people, systems, or
unexpected external events.
- Credit Risk: the risk that a borrower or customer fails to repay money owed, leading to
financial loss for the lender or supplier.
Systematic vs. Unsystematic Risks
- Systematic Risks affect the entire market or a large sector (recession, political instability).
These risks cannot be avoided and impact all businesses.
- Unsystematic Risks are specific to a company or industry (poor management, product failure).
These risks can be reduced through diversification, spreading investments across different
companies or sectors.
4 Stages of Managing Unsystematic Risk:
1. Risk Identification → Recognizing potential risks
2. Risk Assessment → Evaluating the likelihood and impact of each risk.
3. Risk Mitigation → Taking steps to reduce or eliminate risk
4. Risk Monitoring → Continuously tracking risks and improving processes.
Risk Management Process
Companies manage risks in 4 ways:
- Protective: Uses tools like financial reporting and quality control to manage risks.
- Preventive: Stops risks before they happen using audits, contracts, and credit checks.
- Proactive: Identifies risks early with risk maps, safety rules, and policies.
- Reactive: Handles risks after they occur using crisis plans, insurance, and recovery.
2
, Capital structure (Assets)
Companies finance their operations with either equity (own money from investors) or debt (borrowed
money). → 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 = 𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
EQUITY DEBT
Money from shareholders (shares or retained Money from loans, credit, or bonds that must be
earnings). paid back with interest.
Advantages: Short-Term Debt
- No repayment required - Often cheaper
- No interest costs - Must renegotiate when it ends
- Dividends only paid when there’s profit - Risky if market conditions are poor
- Hard to get if already in a lot of debt
Disadvantages:
- Investors expect high returns (last in line Long-Term Debt
when a company goes bankrupt). - More expensive (longer risk for lenders)
- You share ownership (dilution) - Brings more financial stability
- Hard to find investors if the company - Fixed interest → predictable costs
isn’t attractive - Also hard to get if highly leveraged
- Can affect personal relationships (if
funded by family/friends) General pros of debt:
- No ownership is given away
- Interest is tax-deductible
- Fixed payments = predictable
- Can boost return on equity (leverage)
Cons:
- Must be paid back no matter what
- Increases financial risk
Financial Leverage
Financial leverage shows how much a company uses debt (borrowed money) to finance its operations
instead of equity (own funds).
- Debt increases return on equity (ROE) if used wisely, because profits are made using
borrowed money. But it also increases financial risk: if profits fall, debt must still be repaid.
- Rate of Return Trap: refers to the mistake of judging a company’s performance only by its
ROE, ignoring the capital structure (debt / equity) high ROE looks attractive, but comes from
the high debt: the company may appear profitable, but it's taking on more financial risk to
achieve that return.
- High leverage = more debt → higher potential returns and higher risk.
- Low leverage = more equity → safer, but lower returns.
- Creditors (Kd) get fixed interest; shareholders (Ke) take more risk and want a higher return.
Goal: keep WACC low by choosing the right capital structure.
𝑑𝑒𝑏𝑡
Capital structure & debt dependence: 𝑒𝑞𝑢𝑖𝑡𝑦
𝑒𝑞𝑢𝑖𝑡𝑦
the percentage of the company’s assets funded by equity: 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐴𝑠𝑠𝑒𝑡𝑠
Leverage of assets (how debt-heavy the firm is): 𝐸𝑞𝑢𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦
How much equity is available to cover liabilities: 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Asset coverage for total debt: 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
3
