FINANCIAL MANAGEMENT
TABLE OF CONTENTS
Practical info ............................................................................................................................................................................... 3
Chapter 1: Objectives and functions of financial management ..................................................................................................... 4
1.1 The role of the finance director (CFO) ................................................................................................................................ 4
1.2 The objective of the company from a financial point of view .............................................................................................. 4
Chapter 2: Basic valuation concepts ............................................................................................................................................ 7
2.1 Single amount, to be received or paid afet one year........................................................................................................... 7
2.2 Single amount, to be paid or received after n years ............................................................................................................ 7
2.3 Impact of the interest or discount factor ............................................................................................................................ 8
2.4 Interest periodicity less than one year ............................................................................................................................... 9
2.5 Future and present value of a series of different money flows ......................................................................................... 10
2.6 Present value of a series of equal money flows ................................................................................................................ 10
2.7 Nominal and real interest rates on loans with a periodicity less than one year ................................................................. 11
Chapter 3: Valuation of (bond) loans and shares........................................................................................................................ 13
3.1 Valuation of simple (bond) loans...................................................................................................................................... 13
3.2 Valuation shares based on dividends ............................................................................................................................... 20
Chapter 4: The relationship between the required rate of return and risk .................................................................................. 29
4.1 Lessons from history........................................................................................................................................................ 29
4.2 Determining the risk ........................................................................................................................................................ 29
4.3 Attitutde towards risk ...................................................................................................................................................... 30
4.4 The ‘efficient set theorem’ and risk + 4.6 The effect of diversification: investing in multiple shares .................................. 31
4.5 Calculating the expected rate of return and risk ............................................................................................................... 32
4.7 The capital market line .................................................................................................................................................... 34
4.8 The required rate of return for an individual share........................................................................................................... 34
4.9 Beta as a measure of risk ................................................................................................................................................. 35
4.10 Detecting overvalued and undervalued shares using CAPM............................................................................................ 36
4.11 Alternative models ........................................................................................................................................................ 38
Exercises ............................................................................................................................................................................... 40
Chapter 5: Valuing options ........................................................................................................................................................ 41
5.1 Definition ........................................................................................................................................................................ 41
5.2 Value of an option on exercise date ................................................................................................................................. 41
5.3 Valuation of options: qualitative approach....................................................................................................................... 42
5.4 Valuation of options: quantitative approach .................................................................................................................... 45
Exercises ............................................................................................................................................................................... 50
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,Chapter 6: Assessing Investment projects.................................................................................................................................. 51
6.1 Determining cash flows ................................................................................................................................................... 51
6.2 Example: an expansion investment .................................................................................................................................. 52
6.3 Evaluation methods ......................................................................................................................................................... 53
6.4 Comparison of net present value and internal rate of return ............................................................................................ 54
Exercises ............................................................................................................................................................................... 56
Chapter 7: Further refinements in assessing the investment ...................................................................................................... 57
7.1 Further refinements in assessing the investment ............................................................................................................ 57
7.2 Capital rationing .............................................................................................................................................................. 58
7.3 Projects with different lifetimes ....................................................................................................................................... 58
7.4 Real options in investment projects ................................................................................................................................. 60
Exercises ............................................................................................................................................................................... 62
Chapter 8: Cost of capital .......................................................................................................................................................... 64
8.1 Basic principles of the cost of capital................................................................................................................................ 64
8.2 Required rate of return on ordinary share capital ............................................................................................................ 64
8.3 The cost of preference shares .......................................................................................................................................... 66
8.4 The cost of debt financing................................................................................................................................................ 66
8.5 The weighted average cost of capital of a company ......................................................................................................... 66
8.6 The required rate of return on an investment project in a diversified company ................................................................ 67
Exercises ............................................................................................................................................................................... 68
Chapter 9: Capital Structure ...................................................................................................................................................... 69
9.1 Maximising corporate value and shareholder value.......................................................................................................... 70
9.2 Modigliani and miller: the capital structure is of no importance in a perfect capital market .............................................. 70
9.3 The impact of corporate taxes ......................................................................................................................................... 74
9.4 Bankruptcy costs ............................................................................................................................................................. 76
Exercises ............................................................................................................................................................................... 80
Chapter 12: Issuing shares......................................................................................................................................................... 82
12.1 Shares ........................................................................................................................................................................... 82
12.2 Organised stock merkets................................................................................................................................................ 91
12.3 Public issue of shares ..................................................................................................................................................... 93
12.4 Rights offering of shares ................................................................................................................................................ 96
12.5 Advantages and disadvantages of a stock exchange listing ............................................................................................. 99
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,Chapter 13: Financial dept....................................................................................................................................................... 100
13.1 The credit decision ...................................................................................................................................................... 100
13.2 Types of credit provided by financial institutions.......................................................................................................... 101
13.3 Bonds: introductory concepts ...................................................................................................................................... 101
13.4 Types of bonds ............................................................................................................................................................ 102
13.5 Bonds with a call (or early redemption) option............................................................................................................. 103
13.6 Bonds with warrants.................................................................................................................................................... 104
13.7 Convertible bonds ....................................................................................................................................................... 104
13.8 Commercial Paper ....................................................................................................................................................... 107
Chapter 15: Working capital management............................................................................................................................... 108
15.1 The hedging approach to the financing maturity .......................................................................................................... 108
15.2 The impact of the working capital requirement ............................................................................................................ 109
Chapter 16: Cash management and financial planning ............................................................................................................. 113
Chapter 17: Valuation of companies ........................................................................................................................................ 115
PRACTICAL INFO
• Prof. Dr. Marc Deloof
E-mail:
Contact: by appointment
• Assistent: Nina Marien
E-mail:
Contact: by appointment
• Book:
Marc Deloof, Sophie Manigart, Hubert Ooghe, Cynthia Van Hulle
Corporate Finance (2nd edition, 2023)
Published by Intersentia – Bookshops Acco and Universitas
• Teaching methods:
o Lectures
o Practice sessions
• Evaluation
o Closed book, ON COMPUTER
o Multiple choice questions and open questions
o There will be a ‘trial’ exam in early May
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, CHAPTER 1: OBJECTIVES AND FUNCTIONS OF FINANCIAL MANAGEMENT
1.1 THE ROLE OF THE FINANCE DIRECTOR (CFO)
• Investment decisions
o In which assets should the firm invest?
o Determines size of company – operating results – operational risk
• Financing decisions
o How can/should the firm finance these assets?
o Dept financing (different types of depts (long term vs short term, …))
o What is the best way to fund investments?
o Lots of choices!!
o Determines the fixed financial costs of the company – the financial risk
• Financial planning
o How should the financial flows be managed?
o You’ve got a number of cashflows → how are we going to optimize these? Trade off!
▪ All times cash available to fund things you need to pay (investments, wages, …)
▪ VS you don’t want too much cash, nothing is happening with that money and that’s not good because
it doesn’t bring any profit
• Dividend decisions
o Determines the size of the reserved profits → impact on the equity
• Risk management
o All these decisions above influence the financial risk of a company → management is necessary
1.2 THE OBJECTIVE OF THE COMPANY FROM A FINANCIAL POI NT OF VIEW
• Maximization of
o revenues?
▪ Costs involves → not a good idea
o profits?
▪ What profits? Absolute terms? Profit per share? …?
o Profits per share?
o Value per share?
▪ Include both expected profit and risk!
▪ Risk is not entailed in the other three
• Example: 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
o Increase because of the new invested bond
o Profitability goes down because extra money is invested in bonds which only entails 10% → bad investment
because it reduces profitability
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TABLE OF CONTENTS
Practical info ............................................................................................................................................................................... 3
Chapter 1: Objectives and functions of financial management ..................................................................................................... 4
1.1 The role of the finance director (CFO) ................................................................................................................................ 4
1.2 The objective of the company from a financial point of view .............................................................................................. 4
Chapter 2: Basic valuation concepts ............................................................................................................................................ 7
2.1 Single amount, to be received or paid afet one year........................................................................................................... 7
2.2 Single amount, to be paid or received after n years ............................................................................................................ 7
2.3 Impact of the interest or discount factor ............................................................................................................................ 8
2.4 Interest periodicity less than one year ............................................................................................................................... 9
2.5 Future and present value of a series of different money flows ......................................................................................... 10
2.6 Present value of a series of equal money flows ................................................................................................................ 10
2.7 Nominal and real interest rates on loans with a periodicity less than one year ................................................................. 11
Chapter 3: Valuation of (bond) loans and shares........................................................................................................................ 13
3.1 Valuation of simple (bond) loans...................................................................................................................................... 13
3.2 Valuation shares based on dividends ............................................................................................................................... 20
Chapter 4: The relationship between the required rate of return and risk .................................................................................. 29
4.1 Lessons from history........................................................................................................................................................ 29
4.2 Determining the risk ........................................................................................................................................................ 29
4.3 Attitutde towards risk ...................................................................................................................................................... 30
4.4 The ‘efficient set theorem’ and risk + 4.6 The effect of diversification: investing in multiple shares .................................. 31
4.5 Calculating the expected rate of return and risk ............................................................................................................... 32
4.7 The capital market line .................................................................................................................................................... 34
4.8 The required rate of return for an individual share........................................................................................................... 34
4.9 Beta as a measure of risk ................................................................................................................................................. 35
4.10 Detecting overvalued and undervalued shares using CAPM............................................................................................ 36
4.11 Alternative models ........................................................................................................................................................ 38
Exercises ............................................................................................................................................................................... 40
Chapter 5: Valuing options ........................................................................................................................................................ 41
5.1 Definition ........................................................................................................................................................................ 41
5.2 Value of an option on exercise date ................................................................................................................................. 41
5.3 Valuation of options: qualitative approach....................................................................................................................... 42
5.4 Valuation of options: quantitative approach .................................................................................................................... 45
Exercises ............................................................................................................................................................................... 50
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,Chapter 6: Assessing Investment projects.................................................................................................................................. 51
6.1 Determining cash flows ................................................................................................................................................... 51
6.2 Example: an expansion investment .................................................................................................................................. 52
6.3 Evaluation methods ......................................................................................................................................................... 53
6.4 Comparison of net present value and internal rate of return ............................................................................................ 54
Exercises ............................................................................................................................................................................... 56
Chapter 7: Further refinements in assessing the investment ...................................................................................................... 57
7.1 Further refinements in assessing the investment ............................................................................................................ 57
7.2 Capital rationing .............................................................................................................................................................. 58
7.3 Projects with different lifetimes ....................................................................................................................................... 58
7.4 Real options in investment projects ................................................................................................................................. 60
Exercises ............................................................................................................................................................................... 62
Chapter 8: Cost of capital .......................................................................................................................................................... 64
8.1 Basic principles of the cost of capital................................................................................................................................ 64
8.2 Required rate of return on ordinary share capital ............................................................................................................ 64
8.3 The cost of preference shares .......................................................................................................................................... 66
8.4 The cost of debt financing................................................................................................................................................ 66
8.5 The weighted average cost of capital of a company ......................................................................................................... 66
8.6 The required rate of return on an investment project in a diversified company ................................................................ 67
Exercises ............................................................................................................................................................................... 68
Chapter 9: Capital Structure ...................................................................................................................................................... 69
9.1 Maximising corporate value and shareholder value.......................................................................................................... 70
9.2 Modigliani and miller: the capital structure is of no importance in a perfect capital market .............................................. 70
9.3 The impact of corporate taxes ......................................................................................................................................... 74
9.4 Bankruptcy costs ............................................................................................................................................................. 76
Exercises ............................................................................................................................................................................... 80
Chapter 12: Issuing shares......................................................................................................................................................... 82
12.1 Shares ........................................................................................................................................................................... 82
12.2 Organised stock merkets................................................................................................................................................ 91
12.3 Public issue of shares ..................................................................................................................................................... 93
12.4 Rights offering of shares ................................................................................................................................................ 96
12.5 Advantages and disadvantages of a stock exchange listing ............................................................................................. 99
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,Chapter 13: Financial dept....................................................................................................................................................... 100
13.1 The credit decision ...................................................................................................................................................... 100
13.2 Types of credit provided by financial institutions.......................................................................................................... 101
13.3 Bonds: introductory concepts ...................................................................................................................................... 101
13.4 Types of bonds ............................................................................................................................................................ 102
13.5 Bonds with a call (or early redemption) option............................................................................................................. 103
13.6 Bonds with warrants.................................................................................................................................................... 104
13.7 Convertible bonds ....................................................................................................................................................... 104
13.8 Commercial Paper ....................................................................................................................................................... 107
Chapter 15: Working capital management............................................................................................................................... 108
15.1 The hedging approach to the financing maturity .......................................................................................................... 108
15.2 The impact of the working capital requirement ............................................................................................................ 109
Chapter 16: Cash management and financial planning ............................................................................................................. 113
Chapter 17: Valuation of companies ........................................................................................................................................ 115
PRACTICAL INFO
• Prof. Dr. Marc Deloof
E-mail:
Contact: by appointment
• Assistent: Nina Marien
E-mail:
Contact: by appointment
• Book:
Marc Deloof, Sophie Manigart, Hubert Ooghe, Cynthia Van Hulle
Corporate Finance (2nd edition, 2023)
Published by Intersentia – Bookshops Acco and Universitas
• Teaching methods:
o Lectures
o Practice sessions
• Evaluation
o Closed book, ON COMPUTER
o Multiple choice questions and open questions
o There will be a ‘trial’ exam in early May
Gedownload door: fetahsoufiane | Wil jij €76 per
Dit document is auteursrechtelijk beschermd, het verspreiden van dit document is strafbaar. maand verdienen?
3
, CHAPTER 1: OBJECTIVES AND FUNCTIONS OF FINANCIAL MANAGEMENT
1.1 THE ROLE OF THE FINANCE DIRECTOR (CFO)
• Investment decisions
o In which assets should the firm invest?
o Determines size of company – operating results – operational risk
• Financing decisions
o How can/should the firm finance these assets?
o Dept financing (different types of depts (long term vs short term, …))
o What is the best way to fund investments?
o Lots of choices!!
o Determines the fixed financial costs of the company – the financial risk
• Financial planning
o How should the financial flows be managed?
o You’ve got a number of cashflows → how are we going to optimize these? Trade off!
▪ All times cash available to fund things you need to pay (investments, wages, …)
▪ VS you don’t want too much cash, nothing is happening with that money and that’s not good because
it doesn’t bring any profit
• Dividend decisions
o Determines the size of the reserved profits → impact on the equity
• Risk management
o All these decisions above influence the financial risk of a company → management is necessary
1.2 THE OBJECTIVE OF THE COMPANY FROM A FINANCIAL POI NT OF VIEW
• Maximization of
o revenues?
▪ Costs involves → not a good idea
o profits?
▪ What profits? Absolute terms? Profit per share? …?
o Profits per share?
o Value per share?
▪ Include both expected profit and risk!
▪ Risk is not entailed in the other three
• Example: 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
o Increase because of the new invested bond
o Profitability goes down because extra money is invested in bonds which only entails 10% → bad investment
because it reduces profitability
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4
