Corporate finance a1
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Corporate Finance A1. Vysoká škola finanční a správní Summ er Semester 201 2 Jaromír R. Stemberg [email protected] Course Layout. T welve two-hour lessons The course is to i ntroduce general financial management problems , realtions , terminology, and solutions

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Corporate finance a1

Corporate Finance A1

Vysokáškolafinanční a správní

Summer Semester 2012

Jaromír R. Stemberg

[email protected]


Course layout

Course Layout

  • Twelve two-hour lessons

  • The course is to introducegeneralfinancial management problems, realtions, terminology, and solutions

  • EndswithCredit (zápočet)


Literature

Literature

  • Block, Stanley: FoundationsofFinancial ManagementMcGraw-Hill, 2009ISBN 978-0-07-128525-4


Grading

Grading

  • Pass / Fail

  • 50%: Fivemathematicalgroupexcercises

  • 50%: Written test

  • Minimum to pass: 70%


Contents

Contents

  • Introduction- history of finance- goalsoffinancial management- financialmarkets

  • ReviewofAccounting- the nature and role of the balance sheet - theories of balance and their development- creation of the second balance - third and fourth balance, their formation and construction


Contents1

Contents

  • Concept of capital- preservation of the capital substance of a company- ways of addressing it

  • Accounting systems in the world- characteristics of accounting systems- process of accounting harmonization- US GAAP- IAS/IFRS, link to the directives of the European Union


History of money and accounting

History of Money and Accounting


Barter trade

Barter Trade

  • Exchange of personal possessions of value for other goods

  • From 9,000-6,000 B.C., livestock was often used as a unit of exchange; as agriculture developed, people used crops for barter

  • This kind of exchange started at the beginning of humankind and is still used today


Barter trade problems

Barter Trade Problems

  • Finding the other party: - interest - time

  • Establishing equal value of exchanged goods

  • Durability of the exchanged goods, potentiality to store it

  • Need for a common, durable, storable, non-decaying, generally accepted unit of exchange


Cowry shells

Cowry Shells

  • The first money (or medium of exchange)

  • Began to be used at about 1200 B.C. in China

  • Accepted in some African regions till 1950s


Metal coins

Metal Coins

  • China, 1000 BC: Bronze and copper cowry imitations were considered the earliest forms of metal coins. They contained holes so they could be put together like a chain.

  • Lydia (Turkey), 500 BC:The first coins developed out of lumps of silver and were stamped with emperors to mark their authenticity. The techniques were quickly copied by the Greeks, Persians, and the Roman Empire. Unlike Chinese coins, these were made from precious metals such as silver and gold, which had more inherent value.


Banknotes

Banknotes

  • China, 100 BC:Leather money – pieces of painted white deerskin.

  • China, 800 AD:The first paper banknotes appeared.

  • China, 1450 AD:Printing money led to a soaring inflation so the use of paper money in China disappeared (this was still years to come before paper currency would be used in Europe).


Development of accounting

Development of Accounting

  • Babylon, 18th century B.C.- first organized records kept to account for assets and loans- other ancient civilizations (Roman Empire, Greek Cities, Egypt) followed

  • Europe, 1st millennium A.D.fall of the Roman Empire caused serious setback in education

  • Italy, 13th century A.D. - growing trade in the Mediterranean and accumulation of wealth in Italy gave grounds to the development of banking- double-entry bookkeeping was invented by Luca Pacioli


Modern times accounting

Modern Times Accounting

  • 17th century France: - obligation to present bi-yearly balances of financial situation

    Italy:- complete theory of accounting

    Holland:- first corporation established, need for equity accounting

  • 19th century- massive increase of accounting operations- perfection of accounting principles- rules for asset evaluation


History of accounting standards

History of Accounting Standards

  • 1938: American Institute of Certified Public Accountants began to develop accounting standards (request of the Securities and Exchange Commission)

  • 1959: Accounting Principles Board established, introduction of GAAP

  • 1973:the International Accounting Standards Board (IASB) formed to develop International Accounting Standards (IAS)

  • 2001:end of IAS (41 issued so far, stillvalid); new standards are fromnow on called International FinancialReporting Standards (IFRS)thatquicklybecameacceptedworldwide


Principle s of account ing

Principles of Accounting


Record keeping

Record Keeping

  • Information – a basic management tool needed for - past references and reporting- present registration and evidence - future planning and management decision making

  • Registered entries keep track of: - amount how much- count how many- time when- place where- person who


Double entry accounting

Double-Entry Accounting

  • Accounts- recognition of individual transactions- debit and credit to be recorded at the same time

  • General Ledger (hlavníkniha)- transactions recorded in accounts, total of both sides must be equal- can be extended by subsidiary ledgers

  • Journal (účetnídeník)- transactions recorded in order as they occurred- both sides of the record must be equal


Purpose of record keeping

Purpose of Record Keeping

  • Financial accounting- provides information for owners, investors and other stake holders- serves as a base for income tax due calculation- subject to regulations by accounting standards- must be true and honest

  • Managerial accounting- serves the managers as base for strategy planning and decision making- provides specified pieces of information - outcomes don’t have to be understood by the general public


Financial reports analysis

Financial ReportsAnalysis


Balance sheet

Balance Sheet

AssetsLiabilities

Current AssetsCurrent Liabilities

Cash and EquivalentsShort-Term Accounts Payable

Short-Term ReceivablesCurrent Tax Payable

InventoryShort-Term Loans and Borrowings

Accruals and Other S/T AssetsAccruals and Other S/T Liabilities

Long-Term AssetsLong-Term Liabilities

Intangible Fixed AssetsLong-Term Payables

  • Tangible Fixed AssetsProvisions

  • Long-Term Receivables

  • Owners’ Equity

    Share Capital

    Share Premium and Capital Funds

    Retained Earnings

    Y-T-D Profit (Loss)


Cash flow statement

Cash FlowStatement


Statement of changes in equity

StatementofChanges in Equity


Profitability ratios

Profitability Ratios

  • Profit margin

  • Return on assets (investments)

  • Return on equity


Profit margin

Profit Margin

Net income / Sales = 200 / 4 000 = 5%


Return on assets

Return on Assets

Net income / Totalassets = 200 / 1 600 = 12,5%


Return on equity

Return on Equity

Net income / Stockholders‘ equity = 200 / 1 000 = 20%


Asset utilization ratios

AssetUtilizationRatios

  • Receivableturnover

  • Averagecollection period

  • Inventoryturnover

  • Fixedassetturnover

  • Totalassetturnover


Receivable turnover

ReceivableTurnover

Sales / Accountsreceivable = 4 000 / 350 = 11,4 times


Average collection period

AverageCollection Period

Accountsreceivable / (Sales / 365) = 350 / 11 = 32 days


Fixed assets turnover

FixedAssetsTurnover

Sales / FixedAssets = 4 000 / 800 = 5 times


Total assets turnover

TotalAssetsTurnover

Sales / Totalassets = 4 000 / 1 600 = 2,5 times


Inventury turnover

Inventury Turnover

Sales / FixedAssets = 4 000 / 800 = 5 times


Liquidity ratios

LiquidityRatios

  • Current ratio

  • Quick ratio


Current ratio

Current Ratio

Currentassets / Currentliabilities = 800 / 300 = 2,67


Quick ratio

Quick Ratio

(Currentassets - Inventory) / Currentliabilities = 430 / 300 = 1,43


Debt utilization ratios

DebtutilizationRatios

  • Debt to totalassets

  • Timesinterestearned


Debt to total assets

Debt to TotalAssets

Totaldebt / Totalassets = 600 / 1 600 = 37,5%


Times interest earned

TimesInterestEarned

EBIT / Interest = 550 / 50 = 11 times


Du pont analysis

Du Pont Analysis


Trend analysis

Trend Analysis


Forecast and budget

Forecast and Budget


Corporate finance a1

Budgetting

  • Systematic setting of future goals

  • Bottom-up or top-down

  • Identification of external influence and risks (such as customers, competition, macroeconomics)

  • Identification of external influence and risks (such as capacity of production and resources, human factor)

  • Setting of expected growth (reduction), pipeline, percent-of-sales, investment planning


Corporate finance a1

Financial Forecasting

  • Pro forma income statement

    • Revenue (pipeline, funnel, percentage)

    • Expenses (variable, fixed)

  • Pro forma balance sheet

    • A/R, A/P, inventory

    • Fixed assets, liabilities, equity

  • Pro forma cash flow statement


Operational and financial leverage

Operational and Financial Leverage


Fixed and variable expenses

Fixed and variableexpenses

totalexpenses

$

fixnedexpenses

0

No. ofunitsproduced


Fixed and variable expenses1

Fixed and variableexpenses

totalexpenses

$

fixnedexpenses

No. ofunitsproduced


Corporate finance a1

Break-Even Point

revenue

$

totalexpenses

fixedexpenses

No. ofunitsproduced


Break even point

Break-Even Point

revenue

profit

$

totalexpenses

fixedexpenses

No. ofunitsproduced


Corporate finance a1

Break-Even Point

revenue

$

totalexpenses

fixedexpenses

No. ofunitsproduced


Operational leverage

Operationalleverage

  • Usesfixed/variablecost

  • Canincreaseprofits but increases risk

  • _Fixedcosts _Price – Variablecost per unit


Operational leverage1

Operationalleverage

  • _ Fixedcosts _Price – Variablecost per unit

  • Fixedcost 60.000Fixedcost 12.000Variablecost 0,80 / unitVariablecost1,60 / unitUnitprice 2,00Unit price 2,00 60.000/(2,00-0,80) = 50.00012.000/(2,00-1,60)= 30.000break-even point isbreak-evenpoint is50.000 units30.000 units


Financial leverage

FinancialLeverage

2 firms: exactly the same

  • Same sector

  • Same opportunities

  • Same Management…

    The only difference:the debt

  • L (leveraged firm) has 50% of debt

  • U (unleveraged firm) has no debt


Financial leverage1

FinancialLeverage


Financial leverage2

FinancialLeverage

The shareholder of L has a return of 15 (before tax)

The shareholder of U has a return of 10 (before tax)

What do you prefer?


Financial leverage3

FinancialLeverage


Financial leverage4

FinancialLeverage

The shareholder of L has a return of -5 (before tax)

The shareholder of U has a return of 0 (before tax)

What do you prefer?


Financial leverage5

FinancialLeverage

For leverage to be profitable,

the rate of return on the investment

must be higher than the cost of the borrowed money

Conclusion

Leverage can create value or destroy it

To create value, the IRR must be higher than the cost of loan; if not, leverage destroys value.


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