Скачать презентацию Instructor Yulia Ilina Associate Professor jilina gsom pu ru Скачать презентацию Instructor Yulia Ilina Associate Professor jilina gsom pu ru

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Instructor: Yulia Ilina, Associate Professor jilina@gsom. pu. ru Teaching Assistant: Kristina Lochakova, Assistant professor Instructor: Yulia Ilina, Associate Professor jilina@gsom. pu. ru Teaching Assistant: Kristina Lochakova, Assistant professor lochakova@gsom. pu. ru

Topic 1 INTRODUCTION TO CORPORATE FINANCE Topic 1 INTRODUCTION TO CORPORATE FINANCE

TOPIC 1 Financial management: goals, primary issues, company’s value and cash flows Introduction to TOPIC 1 Financial management: goals, primary issues, company’s value and cash flows Introduction to the course Free cash flow and company’s value Accounting and market-based performance results Capital allocation process and financial markets

OBJECTIVES To understand the corporate finance framework, financial environment To identify goals and objectives OBJECTIVES To understand the corporate finance framework, financial environment To identify goals and objectives of financial management and its focus on … Explain the main goal of financial management, the concept of the free cash flow, the relationship between company’s value and cash flows Understand the capital allocation process and the role of financial markets

THE GOAL OF FINANCIAL MANAGEMENT AND INVESTMENT DECISIONS Maximizing shareholders wealth High return on THE GOAL OF FINANCIAL MANAGEMENT AND INVESTMENT DECISIONS Maximizing shareholders wealth High return on investments Choosing effective investment proposals

THE GOAL OF FINANCIAL MANAGEMENT AND FINANCING DECISIONS Maximizing shareholders wealth Sufficient financing at THE GOAL OF FINANCIAL MANAGEMENT AND FINANCING DECISIONS Maximizing shareholders wealth Sufficient financing at the low cost Choosing among sources of finance

ORGANIZATIONAL FORMS OF COMPANIES What are companies organizational forms? Which organizational form is mostly ORGANIZATIONAL FORMS OF COMPANIES What are companies organizational forms? Which organizational form is mostly hard (challenging) to manage in terms of finance?

ORGANIZATIONAL FORMS OF COMPANIES What - - could be motives for the company to ORGANIZATIONAL FORMS OF COMPANIES What - - could be motives for the company to become chartered as a corporation? Explore more financing and investment opportunities (for. ex. raising capital from financial markets) Enhancing opportunities for growth

ORGANIZATIONAL FORMS OF COMPANIES Is it true: the majority of companies are chartered as ORGANIZATIONAL FORMS OF COMPANIES Is it true: the majority of companies are chartered as corporations? Is it true: - the major part of GNP is produced by corporations? - the largest cash flows are generated by corporations? - corporations are main users of funds in financial markets (among other forms of business)?

CORPORATE FINANCE The issues studied in Corporate Finance course are primarily relevant for corporations CORPORATE FINANCE The issues studied in Corporate Finance course are primarily relevant for corporations (public companies)

CORPORATE FINANCE !!! Corporate finance is today the discipline not simply supporting the managerial CORPORATE FINANCE !!! Corporate finance is today the discipline not simply supporting the managerial decisions on various aspects of company’s activities (assets valuation, policy of debt financing, dividends payments etc. ), but is the advanced section of strategic management in which the focus is more and more transferred from purely quantitative methods of valuation on qualitative methods of decision making, however, necessarily based on mathematical models.

WHAT IS A SUCCESSFUL COMPANY AND HOW FINANCE FITS IN IT? Successful companies should WHAT IS A SUCCESSFUL COMPANY AND HOW FINANCE FITS IN IT? Successful companies should have enough funding – be able to raise capital externally Successful companies should make effective investments that add value to the firm

LARGEST AND FASTEST-GROWING Largest companies Fastestgrowing companies LARGEST AND FASTEST-GROWING Largest companies Fastestgrowing companies

WHY IS CORPORATE FINANCE IMPORTANT TO ALL MANAGERS? Corporate finance provides the skills managers WHY IS CORPORATE FINANCE IMPORTANT TO ALL MANAGERS? Corporate finance provides the skills managers need to: Identify and select the corporate strategies and individual projects that add value to their firm. Forecast the funding requirements of their company, and devise strategies for acquiring those funds.

MAXIMIZING SHAREHOLDERS' WEALTH What does this mean: maximizing company’s value? Market value or …. MAXIMIZING SHAREHOLDERS' WEALTH What does this mean: maximizing company’s value? Market value or …. Fundamental value?

PRICE AND VALUE: DIFFERENCE Price is what you pay, Value is what you get. PRICE AND VALUE: DIFFERENCE Price is what you pay, Value is what you get. Warren Buffet

CORPORATE SCANDALS AND SHAREHOLDERS VALUE MAXIMIZATION What lessons could be learned from the corporate CORPORATE SCANDALS AND SHAREHOLDERS VALUE MAXIMIZATION What lessons could be learned from the corporate failures? Didn’t managers strive for a company’s value maximization? Fundamental value vs. Market price

SHAREHOLDERS VALUE MAXIMIZATION How the corporate form of business could come into conflict with SHAREHOLDERS VALUE MAXIMIZATION How the corporate form of business could come into conflict with this goal? Separation of ownership and control Agency problem

Which sources of financing are to be used? How we should estimate the Which sources of financing are to be used? How we should estimate the cost of each of sources? How to choose the most effective capital structure? Which investment opportunities to accept? How corporate governance mechanisms could be used to avoid the conflict of interests? How to increase company’s value?

CORPORATE FINANCE COURSE CONTENT Topic 1. Introduction to Corporate Finance. Topic 2. Valuing Debt CORPORATE FINANCE COURSE CONTENT Topic 1. Introduction to Corporate Finance. Topic 2. Valuing Debt Securities. Bonds Valuation and Interest Rates. Topic 3. Stocks Valuation. Topic 4. Risk and Return. Capital Asset Pricing Model. Topic 5. Cost of Capital. Topic 6. Long-term Financial Decisions: Capital Budgeting and Investment Valuation. Topic 7. Capital Structure Decisions. Topic 8. Financial Statements Analysis and Corporate Valuation. Topic 9. Corporate Governance. IPO.

TEXTBOOKS Required textbook E. Brigham, M. Ehrhardt. Financial Management: Theory & Practice. 13 th TEXTBOOKS Required textbook E. Brigham, M. Ehrhardt. Financial Management: Theory & Practice. 13 th ed. Thomson-South Western. 2010 (http: //www. cengage. com/brigham) Additional recommended textbook (available at GSOM library) S. A. Ross, R. W. Westerfield, B. D. Jordan. Essentials of Corporate Finance. 6 -th ed. Mc. Graw Hill. 2008.

GRADING SYSTEM GRADING SYSTEM

CURRENT EVALUATION In-class tests (40 min) are open-book assignments that combine open questions, multiple CURRENT EVALUATION In-class tests (40 min) are open-book assignments that combine open questions, multiple choice questions and problems (сalculus). In case of missing (failure) the test, missing other inclass assignments they are not to be repeated or substituted by other types of activities. Group home assignments, based on in-class group discussions, are assigned only for those students, who participated in group class work. Group project: A comprehensive group assignment based on application of corporate finance concepts to particular company case. Students should be able to demonstrate their skills in valuing company’s securities, based on various methods, to estimate the cost of capital and capital structure, to value a company and make financial statements analysis.

FINAL EVALUATION (EXAM) Final evaluation is exercised by written openbook exam (100 min). Exam FINAL EVALUATION (EXAM) Final evaluation is exercised by written openbook exam (100 min). Exam includes minitests, problems, and essay questions. See Course Syllabus for other details.

WHAT DETERMINES A FIRM’S VALUE? The ability to generate cash flows in the long WHAT DETERMINES A FIRM’S VALUE? The ability to generate cash flows in the long run. Free cash flow – cash flow available for distribution to company’s investors; cash flow available to all providers of the firm’s capital after the firm’s investment decisions have been made. FCF = Sales revenues – Operating costs – Operating taxes – Required investments in operating capital

FREE CASH FLOW Revenue Cost of goods sold Depreciation Selling, General and Administrative =Operating FREE CASH FLOW Revenue Cost of goods sold Depreciation Selling, General and Administrative =Operating profit (EBIT) - Tax on operating profit = Net operating profit after tax (NOPAT) + Depreciation -Capital expenditures -Investment in Working capital = Cash flow from operations (FCF)

FREE CASH FLOW FCF is the amount of cash available from operations for distribution FREE CASH FLOW FCF is the amount of cash available from operations for distribution to all investors!!! (including stockholders and debtholders) after making the necessary investments to support operations. A company’s value depends on the amount of FCF it can generate.

HOW THE FIRM’S FUNDAMENTAL VALUE IS RELATED TO THE FCF AND THE COST OF HOW THE FIRM’S FUNDAMENTAL VALUE IS RELATED TO THE FCF AND THE COST OF CAPITAL? The value of the firm is determined by the present value of its free cash flows (FCF) discounted at the weighted average cost of capital (WACC)

COST OF CAPITAL Rate of return for suppliers of capital Cost of money for COST OF CAPITAL Rate of return for suppliers of capital Cost of money for users of capital

Determinants of Intrinsic Value: Calculating FCF Sales revenues − Operating costs and taxes − Determinants of Intrinsic Value: Calculating FCF Sales revenues − Operating costs and taxes − Required investments in operating capital Free cash flow (FCF) Value = = FCF 1 FCF 2 FCF∞ + +. . . + (1 + WACC)1 (1 + WACC)2 (1 + WACC)∞ Weighted average cost of capital (WACC) Market interest rates Cost of debt Firm’s debt/equity mix Market risk aversion Cost of equity Firm’s business risk 30

Is it true? Financial managers generate company’s cash flows. - No! Financial managers function Is it true? Financial managers generate company’s cash flows. - No! Financial managers function is to make financial decisions (financing – raising capital, investing) to increase company’s value.

FREE CASH FLOW – WHAT TO KNOW Company with high growth opportunities might have FREE CASH FLOW – WHAT TO KNOW Company with high growth opportunities might have negative free cash flow even if the company is profitable When the growth slows, FCF of the profitable company could be positive and large

FREE CASH FLOW Revenue Cost of goods sold Depreciation Selling, General and Administrative =Operating FREE CASH FLOW Revenue Cost of goods sold Depreciation Selling, General and Administrative =Operating profit (EBIT) - Tax on operating profit = Net operating profit after tax (NOPAT) + Depreciation -Capital expenditures -Investment in Working capital = Cash flow from operations (FCF)

FINANCIAL STATEMENTS: INCOME STATEMENT 2009 2010 Sales $3, 432, 000 $5, 834, 400 COGS FINANCIAL STATEMENTS: INCOME STATEMENT 2009 2010 Sales $3, 432, 000 $5, 834, 400 COGS 2, 864, 000 4, 980, 000 340, 000 720, 000 18, 900 116, 960 3, 222, 900 5, 816, 960 209, 100 17, 440 62, 500 176, 000 146, 600 (158, 560) 58, 640 (63, 424) 87, 960 ($ 95, 136) Other expenses Depreciation Total operating costs EBIT Interest expense EBT Taxes (40%) Net income $ 34

FINANCIAL STATEMENTS. BALANCE SHEET: ASSETS Cash Short-term investments Accounts receivable Inventories Total CA Gross FINANCIAL STATEMENTS. BALANCE SHEET: ASSETS Cash Short-term investments Accounts receivable Inventories Total CA Gross FA Less: Depreciation Net FA Total assets $ 2009 9, 000 48, 600 $ 2010 7, 282 20, 000 351, 200 632, 160 715, 200 1, 124, 000 491, 000 146, 200 344, 800 $1, 468, 800 1, 287, 360 1, 946, 802 1, 202, 950 263, 160 939, 790 $2, 886, 592 35

FINANCIAL STATEMENTS. BALANCE SHEET: LIABILITIES & EQUITY Accounts payable Notes payable Accruals 2009 $ FINANCIAL STATEMENTS. BALANCE SHEET: LIABILITIES & EQUITY Accounts payable Notes payable Accruals 2009 $ 145, 600 200, 000 136, 000 2010 $ 324, 000 720, 000 284, 960 Total CL Long-term debt Common stock Retained earnings Total equity Total L&E 481, 600 323, 432 460, 000 203, 768 663, 768 $1, 468, 800 1, 328, 960 1, 000 460, 000 97, 632 557, 632 $2, 886, 592 36

FINANCIAL STATEMENTS. STATEMENT OF CASH FLOWS: 2010 Operating Activities Net Income Adjustments: Depreciation Change FINANCIAL STATEMENTS. STATEMENT OF CASH FLOWS: 2010 Operating Activities Net Income Adjustments: Depreciation Change in AR Change in inventories Change in AP Change in accruals Net cash provided (used) by operations. ($ 95, 136) 116, 960 (280, 960) (572, 160) 178, 400 148, 960 ($503, 936) 37

FINANCIAL STATEMENTS. STATEMENT OF CASH FLOWS: 2010 Investing Activities Cash used to acquire FA FINANCIAL STATEMENTS. STATEMENT OF CASH FLOWS: 2010 Investing Activities Cash used to acquire FA Change in short-term invest. Net cash prov. (used) by inv. act. ($711, 950) 28, 600 ($683, 350) 38

FINANCIAL STATEMENTS. STATEMENT OF CASH FLOWS: 2010 Financing Activities Change in notes payable $ FINANCIAL STATEMENTS. STATEMENT OF CASH FLOWS: 2010 Financing Activities Change in notes payable $ 520, 000 Change in long-term debt 676, 568 Payment of cash dividends (11, 000) Net cash provided (used) by fin. act. $1, 185, 568 39

Net cash provided (used) by ops. ($ 503, 936) Net cash to acquire FA Net cash provided (used) by ops. ($ 503, 936) Net cash to acquire FA (683, 350) Net cash prov. (used) by fin. act. 1, 185, 568 Net change in cash (1, 718) Cash at beginning of year Cash at end of year 9, 000 $ 7, 282

EXERCISE Calculate a FCF for a given company EXERCISE Calculate a FCF for a given company

Calculating Free Cash Flow in 5 Easy Steps Step 1 Step 2 Earning before Calculating Free Cash Flow in 5 Easy Steps Step 1 Step 2 Earning before interest and taxes Operating current assets X (1 − Tax rate) − Operating current liabilities Net operating profit after taxes Net operating working capital Step 3 Net operating working capital + Operating long-term assets Total net operating capital Step 5 Step 4 Net operating profit after taxes Total net operating capital this year − Net investment in operating capital − Total net operating capital last year Free cash flow Net investment in operating capital 42

FCF 1. 2. 3. 4. 5. NOPAT Net operating working capital Total net operating FCF 1. 2. 3. 4. 5. NOPAT Net operating working capital Total net operating capital Net investment in operating capital Free cash flow.

1. NET OPERATING PROFIT AFTER TAXES (NOPAT) NOPAT = EBIT(1 - Tax rate) 1. NET OPERATING PROFIT AFTER TAXES (NOPAT) NOPAT = EBIT(1 - Tax rate)

2. NET OPERATING WORKING CAPITAL (NOWC) NOWC = Operating CA - Operating CL WHAT 2. NET OPERATING WORKING CAPITAL (NOWC) NOWC = Operating CA - Operating CL WHAT ARE OPERATING CURRENT ASSETS? Operating current assets are the CA needed to support operations. Op CA include: cash, inventory, receivables. Op CA exclude: short-term investments, because these are not a part of operations.

2. NET OPERATING WORKING CAPITAL (NOWC) NOWC = Operating CA - Operating CL WHAT 2. NET OPERATING WORKING CAPITAL (NOWC) NOWC = Operating CA - Operating CL WHAT ARE OPERATING CURRENT LIABILITIES? Operating current liabilities are the CL resulting as a normal part of operations. Op CL include: accounts payable and accruals. Op CL exclude: notes payable, because this is a source of financing, not a part of operations.

2. NET OPERATING WORKING CAPITAL (NOWC) NOWC = Operating CA Operating CL 2. NET OPERATING WORKING CAPITAL (NOWC) NOWC = Operating CA Operating CL

3. TOTAL NET OPERATING CAPITAL (ALSO CALLED OPERATING CAPITAL) Operating Capital= NOWC + Net 3. TOTAL NET OPERATING CAPITAL (ALSO CALLED OPERATING CAPITAL) Operating Capital= NOWC + Net fixed assets.

4. NET INVESTMENT IN OPERATING CAPITAL 4. NET INVESTMENT IN OPERATING CAPITAL

FREE CASH FLOW (FCF) FOR 2010 FCF = NOPAT - Net investment in operating FREE CASH FLOW (FCF) FOR 2010 FCF = NOPAT - Net investment in operating capital How do you suppose investors reacted?

Calculating Free Cash Flow in 5 Easy Steps Step 1 Step 2 Earning before Calculating Free Cash Flow in 5 Easy Steps Step 1 Step 2 Earning before interest and taxes Operating current assets X (1 − Tax rate) − Operating current liabilities Net operating profit after taxes Net operating working capital Step 3 Net operating working capital + Operating long-term assets Total net operating capital Step 5 Step 4 Net operating profit after taxes Total net operating capital this year − Net investment in operating capital − Total net operating capital last year Free cash flow Net investment in operating capital 51

FCF Is it always bad when FCF is negative? What are primary uses of FCF Is it always bad when FCF is negative? What are primary uses of FCF?

1. Pay interest on debt. 2. Pay back principal on debt. 3. Pay 1. Pay interest on debt. 2. Pay back principal on debt. 3. Pay dividends. 4. Buy back stock. 5. Buy nonoperating assets (e. g. , marketable securities, investments in other companies, etc. ).

STOCK PRICE AND OTHER DATA 2009 2010 Stock price $8. 50 $6. 00 # STOCK PRICE AND OTHER DATA 2009 2010 Stock price $8. 50 $6. 00 # of shares 100, 000 EPS $0. 88 -$0. 95 DPS $0. 22 $0. 11

What is a market value of the firm? What is MVA? What is a market value of the firm? What is MVA?

MARKET VALUE ADDED (MVA) MVA = Market Value of the Firm - Book Value MARKET VALUE ADDED (MVA) MVA = Market Value of the Firm - Book Value of the Firm Market Value = (# shares of stock)(price per share) + Value of debt Book Value = Total common equity + Value of debt 56

MVA If the market value of debt is close to the book value of MVA If the market value of debt is close to the book value of debt, then MVA is: MVA = Market value of equity – book value of equity 57

MVA FOR OUR COMPANY: WHAT IS AN ASSUMPTION? Market Value of Equity 2010: (100, MVA FOR OUR COMPANY: WHAT IS AN ASSUMPTION? Market Value of Equity 2010: (100, 000)($6. 00) Book = $600, 000. Value of Equity 2010: $557, 632.

MAIN FINANCIAL PERFORMANCE RESULTS: ACCOUNTING AND MARKET-BASED EBITDA EBIT EBT Net Income Cash flow MAIN FINANCIAL PERFORMANCE RESULTS: ACCOUNTING AND MARKET-BASED EBITDA EBIT EBT Net Income Cash flow Free cash flow NOPAT Market value MVA Are directly obtained from financial statements (as they are presented in annual reports) Market-based measures

EXERCISE (HOME) Using the financial statements (see file-home exercise 1. 1) a. Calculate net EXERCISE (HOME) Using the financial statements (see file-home exercise 1. 1) a. Calculate net operating working capital, total net operating capital, net operating profit after taxes, free cash flow for the most recent year. b. Assume that there were 15 million shares outstanding at the end of the year, the year-end closing stock price was $65 per share, and the aftertax cost of capital was 8%. Calculate MVA for the most recent year. . . home exercise 1. 1. xlsx Home exercise 1. 1

CAPITAL ALLOCATION PROCESS AND FINANCIAL MARKETS CAPITAL ALLOCATION PROCESS AND FINANCIAL MARKETS

CAPITAL ALLOCATION PROCESS AND FINANCIAL MARKETS Who are net savers and net borrowers (investors)? CAPITAL ALLOCATION PROCESS AND FINANCIAL MARKETS Who are net savers and net borrowers (investors)? What types of securities are used for providing corporate financing?

WHO ARE NET SAVERS AND NET BORROWERS? Households: Net savers Non-financial corporations: Net users WHO ARE NET SAVERS AND NET BORROWERS? Households: Net savers Non-financial corporations: Net users (borrowers) Governments: U. S. governments are net borrowers, some foreign governments are net savers Financial corporations: Slightly net borrowers, but almost breakeven

Types of financial instruments Type of issuer Government, government agencies States (regions, provinces), municipalities Types of financial instruments Type of issuer Government, government agencies States (regions, provinces), municipalities Corporations Financial institutions Others

TYPES OF FINANCIAL INSTRUMENTS Maturity Short-term instruments Long-term instruments TYPES OF FINANCIAL INSTRUMENTS Maturity Short-term instruments Long-term instruments

TYPES OF FINANCIAL INSTRUMENTS Type of yield Dividend bearing (stocks) Discount debt Instruments (treasury TYPES OF FINANCIAL INSTRUMENTS Type of yield Dividend bearing (stocks) Discount debt Instruments (treasury bills) Interest-bearing income instruments (bonds)

TYPES OF FINANCIAL INSTRUMENTS By level of risk Risk-free instruments (treasury bills) Low-risky securities TYPES OF FINANCIAL INSTRUMENTS By level of risk Risk-free instruments (treasury bills) Low-risky securities (treasury notes and bonds), investment grade corporate bonds) High-risky securities (junk bonds, stocks), derivatives

FOR FURTHER DISCUSSION ON THE TOPIC 1 READ: BE, chapters 1, 2. FOR FURTHER DISCUSSION ON THE TOPIC 1 READ: BE, chapters 1, 2.

REQUIRED FOR DISCUSSION IN CLASS 2: Mortgage securitization and it’s role in financial crisis REQUIRED FOR DISCUSSION IN CLASS 2: Mortgage securitization and it’s role in financial crisis BE, chapter 1 (pp. 17 -18, 36 -43) Video tutorial (Mortgage-backed securities I, III): http: //www. foreclosuresinmass. com/mortgage _securitization. aspx