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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)
  • 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
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.
  • 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
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
balance sheet
Balance Sheet


Current Assets Current Liabilities

Cash and Equivalents Short-Term Accounts Payable

Short-Term ReceivablesCurrent Tax Payable

Inventory Short-Term Loans and Borrowings

Accruals and Other S/T Assets Accruals and Other S/T Liabilities

Long-Term AssetsLong-Term Liabilities

Intangible Fixed Assets Long-Term Payables

  • Tangible Fixed AssetsProvisions
  • Long-Term Receivables
  • Owners’ Equity

Share Capital

Share Premium and Capital Funds

Retained Earnings

Y-T-D Profit (Loss)

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
  • Receivableturnover
  • Averagecollection period
  • Inventoryturnover
  • Fixedassetturnover
  • Totalassetturnover
receivable turnover

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

average collection period
AverageCollection Period

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

fixed assets turnover

Sales / FixedAssets = 4 000 / 800 = 5 times

total assets turnover

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

inventury turnover
Inventury Turnover

Sales / FixedAssets = 4 000 / 800 = 5 times

liquidity ratios
  • 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
  • Debt to totalassets
  • Timesinterestearned
debt to total assets
Debt to TotalAssets

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

times interest earned

EBIT / Interest = 550 / 50 = 11 times

  • 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
fixed and variable expenses
Fixed and variableexpenses





No. ofunitsproduced

fixed and variable expenses1
Fixed and variableexpenses




No. ofunitsproduced

Break-Even Point





No. ofunitsproduced

break even point
Break-Even Point






No. ofunitsproduced

Break-Even Point





No. ofunitsproduced

operational leverage
  • Usesfixed/variablecost
  • Canincreaseprofits but increases risk
  • _Fixedcosts _Price – Variablecost per unit
operational leverage1
  • _ Fixedcosts _Price – Variablecost per unit
  • Fixedcost 60.000 Fixedcost 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

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 leverage2

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 leverage4

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

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.