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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

  • Endswith a Credit (zápočet)


Literature
Literature

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


Grading
Grading

  • End ofSummersemester: Pass / Fail

  • 30%: Three assignments (10% each)

  • 18%: Seminarsattendance (3% each)

  • 52%: Written test

  • Minimum to pass: 70%

  • Students in full time study program should attend 75% of seminars as a minimum



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 element 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

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)


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


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


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

fixedexpenses

No. ofunitsproduced


Fixed and variable expenses1
Fixed and variableexpenses

$

totalexpenses

fixedexpenses

No. ofunitsproduced


Fixed and variable expenses2
Fixed and variableexpenses

totalexpenses

$

fixnedexpenses

0

No. ofunitsproduced


Fixed and variable expenses3
Fixed and variableexpenses

totalexpenses

$

fixnedexpenses

No. ofunitsproduced


Break-Even Point

revenue

$

totalexpenses

fixedexpenses

No. ofunitsproduced


Break even point
Break-Even Point

revenue

profit

$

totalexpenses

fixedexpenses

No. ofunitsproduced


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

  • A companyproducesunits (sellingprice 2.00 per unit) andneeds to purchase a newproductionmachine.

  • There are twooptions:

  • anexpensivemachine: fixedcost 60 000.00, variablecost 0.80 per unit

  • a cheapmachine: fixedcost 12 000.00, variablecost 1.60 per unit

  • _Fixedcosts _Price – Variablecost per unit


Operational leverage2
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


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.


Working capital
WorkingCapital


Production

Finishedgoods

Material

Accountsreceivable

10 days

20 days

10 days

30 days

40 dní

Accountspayable

30 days

Payment to suppliers

Paymentfromcustomers

NeedforWorkingCapital

need to finance by workingcapital


WorkingCapitalFlowCycle

Collection

Procurement

WORKING CAPITAL

Accountsreceivable

Rawmaterialinventory

Production

Logistics

Sales

Warehousing

Inventoryoffinishedproducts


Balance sheet1
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)


Balance sheet2
Balance Sheet

AssetsLiabilities

Current Assets Current Liabilities

Cash and EquivalentsShort-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)


AccountsReceivableTurnover

Accountsreceivable/ avgdaily sales (sales / 365)

Example:annual sales = 25 000 000 CZKaccountsreceivable= 1 800 000 CZK

Calculation:averagedaily sales: 25 000 000 / 365 = 68 493 daysof sales outstanding: 1 800 000 / 68 493 = 26

Daysof sales outstanding (accountreceivableturnover) is 26 days


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