Lecture 1: Chapter 1, 2 & 3
What is corporate finance? The role of the financial manager
- Shareholders
- Banks
- Other stakeholders (owners bonds, governments)
- Project A, B, C, D
o Revenues
Cost goods
EBIT
Interest costs
Net profit
- Goal: maximize shareholder value
o Making the company a cash generating activity
Generating cash?
Financial markets:
- Capital markets:
o Primary market
▪ When a corporation issues securities (stocks or bonds), cash flows from investors
to the firm
o Secondary market
▪ Involve the exchange of already issued securities between investors
▪ Securities may be exchange traded or traded over-the-counter in a dealer market
, o
Financial statement analysis
- Liquidity ratios
- Solvency and leverage ratios
- Asset management / turnover ratios
- Profitability ratios
- Market value ratios
- Financial statements provide important information about the economic situation of the firm
- But:
o Financial statements do not express the risk
o Financial ratios generally refer to performance in previous years
Net working capital:
,Liquidity: ability to pay back short-term debts in time
- Net working capital = current assets – current liabilities
- If positive, then available cash is larger than cash to be paid in the next 12 months
- Ratios:
o inventories are less liquid
Solvency ratios:
- Ability to pay back all debts when firm stops to exist
-
Asset management or turnover ratios:
- The ability to use the assets effectively and efficiently
-
Profitability ratios:
, -
Market value ratios:
The Du Pont identity:
Lecture 2: Chapter 4 & 5
Time value of money:
1. The Principle: the value of money today is worth more than the same amount in the future.
a. You can get returns by investing or saving
b. Due to inflation your money loses value
2. The Future Value: the estimated value of a sum of money as it grows over time at a certain
interest rate.
a. What is the value of 100 euro if we put it in a savings account in a year from now
3. The Present Value: the value of the future sum of money as if it was in your hand right now.
One-period case – certainty:
- Keith
o Keith is trying to sell a piece of land. Yesterday (ca. now) he was offered $10000 cash for
the property (option 1)
o He was about ready to accept the offer when another individual offered him $11424 to
be paid next year (option 2)
o Which offer should Keith choose, assuming that both offers are reliable:
▪ It depends on the interest rate