Entrepreneurial Finance
Exam preparation
1) Introduction into theory
Di ering between nancing and investment decisions
• Investment decision = decision to invest in tangible or intangible assets
• Financing decision = decision on the sources and amount of nancing
—> the mix of long-term debt and equity nancing to pay for investment
—> Core question: How will we raise the money needed?
Understanding the agency theory and agency costs
• The agency problem arises because the corporate nance decisions are made by managers
(agents) and not the owners/shareholders of the company (principals)
• The agents are tempted to act in their own interest instead of maximizing shareholder value
because they have di erent objectives and asymmetric information
—> Managers want to maximize their own wealth rather than the one of stakeholders (they
want to get the juicy premiums)
—> Managers also have responsibilities to the interests of stakeholders
• Therefore, agency costs may arise —> value lost due to agency problems or costs of mitigating
agency problems
The core objectives of corporate nance
• The primary goal of nancial management is to increase the value of the rm by …
—> selecting value creating projects (investment decision)
—> making smart nancing decisions
• In doing so, they must consider
—> pro t maximization vs. nancial risks
—> maximizing the value of existing shares
2) Financial statement analysis
Di erent nancial statements
Balance Sheet Income statement Cash Flow Statement
De nition Snapshot of the rms Shows revenues, Shows rms cash
assets and liabilities at expenses, and net receipts and cash
one point in time income over a period of payments of a period of
time time
What is included? Current assets & xed Revenue, COGS, xed Net income,
assets + current costs, depreciation, depreciation, changes in
liabilities, long-term debt interest expenses, taxes, working capital items,
& equity dividends capital expenditure,
acquisitions and
investments, change in
debt, dividends
What can we calculate Common-size balance EBIT, net income Free Cash Flow
with it? sheet (proportion of
di erent elements to
total assets or liabilities)
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, Relationship between the di erent nancial statements
The di erence between cash ows and accounting pro ts
Cash Flows (in ows and out ows) (Accounting) pro ts = revenue - costs
Spendings on equipment are documented as cash Pro ts Substrat depreciation/amortization (when
out ow when they occur new equipment is bought, you don’t include that
cash out ow, but document it as yearly payments
over the lifetime of the product)
Cash ows take changes in working capital into Pro ts do not consider changes in working capital
account (crucial for determining whether company
can meet operating costs)
Cash ows include expenditures on new capital Pro ts ignore expenditures on new capital (the
expense is capitalized)
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Exam preparation
1) Introduction into theory
Di ering between nancing and investment decisions
• Investment decision = decision to invest in tangible or intangible assets
• Financing decision = decision on the sources and amount of nancing
—> the mix of long-term debt and equity nancing to pay for investment
—> Core question: How will we raise the money needed?
Understanding the agency theory and agency costs
• The agency problem arises because the corporate nance decisions are made by managers
(agents) and not the owners/shareholders of the company (principals)
• The agents are tempted to act in their own interest instead of maximizing shareholder value
because they have di erent objectives and asymmetric information
—> Managers want to maximize their own wealth rather than the one of stakeholders (they
want to get the juicy premiums)
—> Managers also have responsibilities to the interests of stakeholders
• Therefore, agency costs may arise —> value lost due to agency problems or costs of mitigating
agency problems
The core objectives of corporate nance
• The primary goal of nancial management is to increase the value of the rm by …
—> selecting value creating projects (investment decision)
—> making smart nancing decisions
• In doing so, they must consider
—> pro t maximization vs. nancial risks
—> maximizing the value of existing shares
2) Financial statement analysis
Di erent nancial statements
Balance Sheet Income statement Cash Flow Statement
De nition Snapshot of the rms Shows revenues, Shows rms cash
assets and liabilities at expenses, and net receipts and cash
one point in time income over a period of payments of a period of
time time
What is included? Current assets & xed Revenue, COGS, xed Net income,
assets + current costs, depreciation, depreciation, changes in
liabilities, long-term debt interest expenses, taxes, working capital items,
& equity dividends capital expenditure,
acquisitions and
investments, change in
debt, dividends
What can we calculate Common-size balance EBIT, net income Free Cash Flow
with it? sheet (proportion of
di erent elements to
total assets or liabilities)
fffffi fi fi fififi fifi ff fi fifi fi fi fi fi
, Relationship between the di erent nancial statements
The di erence between cash ows and accounting pro ts
Cash Flows (in ows and out ows) (Accounting) pro ts = revenue - costs
Spendings on equipment are documented as cash Pro ts Substrat depreciation/amortization (when
out ow when they occur new equipment is bought, you don’t include that
cash out ow, but document it as yearly payments
over the lifetime of the product)
Cash ows take changes in working capital into Pro ts do not consider changes in working capital
account (crucial for determining whether company
can meet operating costs)
Cash ows include expenditures on new capital Pro ts ignore expenditures on new capital (the
expense is capitalized)
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fl fi flff fl fi fi
