Presentation Transcript

1. Corporate Finance A2

   Vysokáškolafinanční a správní Winter Semester 2012 Jaromír R. Stemberg jaromir@mail.vsfs.cz
2. Course Layout Twelve two-hour lessons The course is to introducegeneralfinancial management problems, realtions, terminology, and solutions EndswithanExam (zkouška)
3. Literature Block, Stanley: FoundationsofFinancial ManagementMcGraw-Hill, 2009ISBN 978-0-07-128525-4
4. Grading Written test, oral exam
5. Contents Review of the Last Semester Time Value of Money Valuation and Rate of Return Cost of Capital and Capital Budgeting Capital Markets Bonds, Stock and Security Financing
6. History of Money and Accounting
7. Money Barter trade Cowry shells form 1200 B.C. in China till mid 20th century in Africa Precious metal coins, banknotes Development of banking “Plastic money” of today
8. Development of Accounting Babylon, 18th century B.C.- first organized records kept to account for assets and loans Italy, 13th century A.D. - double-entry bookkeeping 20th century A.D.- international accounting standards US GAAP and IAS/IFRS
9. Financial Reports and Analysis
10. Balance Sheet AssetsLiabilities 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)
11. Cash FlowStatement
12. Ratios and Analyses Profitability Ratios- profitmargin- return on assets (investments), return on equity Asset Utilization Ratios- receivable, inventory, fixed, total assetsturnover- averagecollection period, days of sales outstanding Liquidity Ratios- current ratio- quick ratio Analyses- DuPont analysis- horizontal, vertical, trend
13. Du Pont Analysis
14. Forecast and Budget
15. 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
16. 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
17. Operational and Financial Leverage
18. Fixed and variableexpenses totalexpenses $ fixnedexpenses 0 No. ofunitsproduced
19. Fixed and variableexpenses totalexpenses $ fixnedexpenses No. ofunitsproduced
20. Break-Even Point revenue $ totalexpenses fixedexpenses No. ofunitsproduced
21. Break-Even Point revenue profit $ totalexpenses fixedexpenses No. ofunitsproduced
22. Break-Even Point revenue $ totalexpenses fixedexpenses No. ofunitsproduced
23. Operationalleverage Usesfixed/variablecost Canincreaseprofits but increases risk _Fixedcosts _Price – Variablecost per unit
24. Operationalleverage _ 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
25. 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
26. FinancialLeverage
27. 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?
28. FinancialLeverage
29. 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?
30. 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.
31. Time Value of Money
32. Money in Time 1624 theNativeAmericans sold Manhattan for $24. Ridiculouslylow pice? Iftheamountwasinvestedthenat 7.5% (compoundedannually), whatwouldbethepricetoday?
33. Money in Time almost $40 trillion (exactly $39 637 279 191 271.20) itwould make themtherichiestpeople in theworld
34. FutureValue FVn= PV * (1 + r)n
35. FutureValue FVn = PV * (1 + r)n FV389 = 24 * (1 + 0.75)389 FV389= 24 * 1.75389 FV389 = 24 * 1 651 553 299 219,63 FV = 39 637 279 181 271,20
36. FutureValueofanAnnuity TimeAnnuity Now 100 1st year 100 2nd year 100 3rd year 100 ... ... nthyear 100
37. FutureValueofanAnnuity TimeAnnuityInterest 7% Total Now 100 7.00 107.00 1st year 100 14.49 221.49 2nd year 100 22.50 343.99 3rd year 100 31.08 475.07 4th year 100 40.25 615.32 5th year 100 50.07 765.39
38. FutureValueofanAnnuity FVA = A * (1 + r)0 + A * (1 + r)1 + A * (1 + r)2 + .. + A * (1 + r)n FVA= A [(1 + r)n – 1] / r
39. PresentValue FVn = PV * (1 + r)n PV = FVn* 1 / (1 + r)n
40. PresentValue PV = FVn* 1 / (1 + r)n PV = FV1* 1 / (1 + r)1 + FV2* 1 / (1 + r)2 + .. +FVn* 1 / (1 + r)n
41. PresentValueofanAnnuity PVA= A * [1 / (1 + r)]1+ A *[1 / (1 + r)]2+ .. +A * [1 / (1 + r)]n PVA = A * {[1 – 1/(1 + r)n] / r}
42. Valuation and Rateof Return
43. Objectives Thevaluationof a financialassetisbased on thepresentvalueofthefuture cash flows Therequiredrateof return in valuinganassetisbased on the risk involved
44. Bonds Coupon / zero coupon bonds Valuation of bonds: present value of future cash inflows P = P .. bond price Y .. Yield Pn .principalpaymentat maturity i .. interest (orexpected return) t .. numbercorresponding to a period n ..numberofperiods
45. Stock Infinitestreamoflevel dividend payments Constantgrowth in dividends D .. dividend payment r .. requiredrateof return g ..dividend growth
46. CostofCapital
47. CostofCapital Weightedaverageof: costofdebt (loans, bonds) costofequity (commonstock, preferredstock)
48. CostofDebt Interestpayment minus tax Kd = i (1 – t) Kd.... Costofdebt i .... Interestpaid t .... corporate tax rate
49. CostofEquity Dividend devided by market price Ke = D / P0 Ke .... costofequity D .... current dividend P0 .... market priceofthestock Ifdividendsconstantlygrow, then Ke= (D / P0) + g g .... constantgrowthrate in dividends Sellingcosts are to bedeductedfrompricefornewlyissuedstock
50. SourcesofFinancing Hiddenreserveswithinthecompany Suppliers‘ credit Bank loans Financialinvestors Strategicinvestors Securities
51. TheCapitalBudgetingDecision Long-term investmentdecision Cash flowratherthenearnings Paybackmethod Dynamicmethods
52. Long-Term Investment Most significantfinancialdecisions Infuencesthefirm‘spreformance in many futureyears Planninginvolvesfuturerevenues and expenditures Thefarther in thefuturethetimehorizon, the more uncertainoutcome
53. CapitalBudgeting Proces Searchforinvestmentopportunities Collectionof data Analysis,evaluation and decisionmaking Reevaluation and adjustment
54. INVESTMENT PROJECTS Investment project: investment in the phase ofplanning or implementation Conventional cash flow:cash out at the beginning followed by cash inflows Feasibility Study:document describing strategic, financial, technical, marketing and sales information needed for go / no-go decision
55. InvestmentProjectsCategories Accounting: financial tangible intangible Development new development re-newing regulatory - safety - environment - new regulations
56. InvestmentProjectsCategories Mutual influence substitution (mutually excluding) independent complementary (mutually supporting) Cash flow conventional − period of expenses is replaced by lasting period of revenue unconventional − a few income / expense periods switch during the project duration
57. InvestmentProjectsCategories Function newfixedasset newproduct neworganizationstructure newcompany newlegislation newmarkets History green field running business
58. PhasesofanInvestment Project Pre-investmentphase projectsidentification feasibilitystudy Investmentphase establishementoflegal, financial and organizationalbase tender – suppliers acquisitionof technology and documentation personnel trial run Implementationphase implementation management
59. Project Identification Monitoring of the business surroundings market of products, supplies, services, capital, workforce technology legislation, political and economical influence Short list monitoring of possibilities evaluation of basic idea attractiveness preliminary estimate of returns and profitability
60. EvaluationTechniques Static Averageannualrevenue(totalrevenues/totalduration) Averagepayback(investment/averageannualrevenue) Averagemargin(averageannualrevenue/investment) Payback period Dynamic Net PresentValue(NPV) InternalRateofReturn (IRR) Paybeck Period (PP) Profitability Index (PI)
61. Cash FlowOverAccounting Projectsevaluated by cash generationrahterthanaccountingresults Eliminate non-cash transactions and add in cash expenditures Problem: publiclytradedcompanies
62. PaybackMethod Computesthetimerequired to recouptheinitialinvestment Ignorestheinflowsafterthecutoff period Doesn‘tconsiderthetimevalueofmoney
63. InternalRateof Return Project 1
64. InternalRateof Return Project 2
65. Net PresentValue
66. Analysis
67. Risk and CapitalBudgeting
68. TheConceptof Risk Based on uncertainityoffutureoutcomes Most investors are risk-averse Thegreater risk isinvolvedthehigher return isexpected Risk decisionmaking: simulationmodels and decisiontrees Risk of a projectinconnectionwiththetotal risk ofthefirm
69. Basic Business Statistics
70. Standard Deviation