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Corporate Finance A1. Vysoká škola finanční a správní Summ er Semester 201 2 Jaromír R. Stemberg 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

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Corporate Finance A1

Vysokáškolafinanční a správní

Summer Semester 2012

Jaromír R. Stemberg

Course Layout

  • Twelve two-hour lessons

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

  • EndswithCredit (zápočet)


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


  • Pass / Fail

  • 50%: Fivemathematicalgroupexcercises

  • 50%: Written test

  • Minimum to pass: 70%


  • 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


  • 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

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

  • 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

  • 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

  • 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.


  • 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

  • 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

  • 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

  • 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

Principles of Accounting

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

  • 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

  • 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 ReportsAnalysis

Balance Sheet


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 FlowStatement

StatementofChanges in Equity

Profitability Ratios

  • Profit margin

  • Return on assets (investments)

  • Return on equity

Profit Margin

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

Return on Assets

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

Return on Equity

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


  • Receivableturnover

  • Averagecollection period

  • Inventoryturnover

  • Fixedassetturnover

  • Totalassetturnover


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

AverageCollection Period

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


Sales / FixedAssets = 4 000 / 800 = 5 times


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

Inventury Turnover

Sales / FixedAssets = 4 000 / 800 = 5 times


  • Current ratio

  • Quick ratio

Current Ratio

Currentassets / Currentliabilities = 800 / 300 = 2,67

Quick Ratio

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


  • Debt to totalassets

  • Timesinterestearned

Debt to TotalAssets

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


EBIT / Interest = 550 / 50 = 11 times

Du Pont Analysis

Trend Analysis

Forecast and Budget


  • 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

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

Fixed and variableexpenses





No. ofunitsproduced

Fixed and variableexpenses




No. ofunitsproduced

Break-Even Point





No. ofunitsproduced

Break-Even Point






No. ofunitsproduced

Break-Even Point





No. ofunitsproduced


  • Usesfixed/variablecost

  • Canincreaseprofits but increases risk

  • _Fixedcosts _Price – Variablecost per unit


  • _ 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


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



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?



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?


For leverage to be profitable,

the rate of return on the investment

must be higher than the cost of the borrowed money


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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