Corporate Finance Summary
Chapter 1; Introduction to Corporate Finance
Corporate finance answers three questions;
1. What long-term investments should you make?
o Capital budgeting; the process of planning and managing a firm’s long-term investments.
Goal is to identify business opportunities that are worth more than they cost.
Evaluating the size, timing and risk of a future cash flow.
2. Where will you get the long-term financing to pay for your investment?
o Capital structure (financial structure); the mixture of long-term debt and equity the firm uses to
finance its operations.
Long-term debt; long-term borrowing by the firm (> 1 year)
Equity; amount of money raised by a firm that comes from the owners (shareholders)
The mixture chosen will affect the risk and the value of the firm.
3. How will you manage your everyday financial activities, such as collecting from customers and paying
suppliers?
a. Net working capital management; ensures that a firm has sufficient resources to continue its
operations and avoid costly interruptions.
i. Working capital; a firm’s short-term assets and liabilities.
Accounting; records the past and works with real amounts.
Finance; discounting future cashflows and works with forecasts.
The main goal of financial management is to make money or add value for the owners. Other goals might be;
profitability, liquidity, security and independence. The appropriate goal for a financial manager is; to maximize the
current value per share of existing equity (maximize shareholder value).
Financial markets can facilitate the flow of money from those that have surplus cash to those that need financing.
- Primary market; the original sale of securities by governments and corporations
o The corporation is the seller and the transaction raises money for the corporation.
o Public offerings; selling securities to the general public
o Private placement; negotiated sale involving a specific buyer.
o Initial public offering; first share issue, after that, there is seasoned offering
o Seasoned offering; second share issue
- Secondary market; where the securities are bought and sold after the original sale.
o One owner or creditor selling to another, transferring ownership of corporate securities for two
reasons; (1) to liquidate their investment (get our money back) and (2) to price our investments.
o If a security can be resold in the secondary market, investors are more willing to purchase securities
in a primary market transaction.
o Auction market; brokers/agents match buyers & sellers, but don’t own the commodity sold/bought
| it has a physical location
o Dealer market; dealers buy and sell for themselves, at their own risk.
| over-the-counter (OTC) markets; trade of equities and long-term debt (mostly electronically)
(A) Cash flows to the firm from the financial
markets
(B) The firm invests the cash in assets
(C) These short/long term assets generate cash.
(D) Some of these cash is used to pay corporate
taxes
(E) After the taxes, some cash flow is reinvested in
the firm
(F) The rest is going back to the financial markets as
cash paid to creditors and shareholders.
(G) Cash from savings of households come into the
financial markets directly
(H) Or the cash from households come into the
financial markets via financial institutions
, Chapter 3; the financial statement analysis
Every year, a company will release its annual report, with three financial statements;
The statement of financial position (balance sheet)
The income statement
The statement of cash flows
The statement of financial position (balance sheet); showing a firm’s accounting value on a particular date.
! balance sheet identity assets = liabilities + equity
- Assets (left side);
o current assets (<12 months)
o non-current assets (>12 months); tangible or intangible (tastbaar of niet)
o assets can be stated in two ways;
historical costs model; you value what is paid for the asset
revaluation model; according to the current value in the market today (fair value amount)
- Libilities (right side);
o current liabilities (<12 months)
o non-current liabilities (>12 months)
- Equity (right side); shareholder’s equity/ordinary equity/owner’s equity.
- Net working capital = current assets – current liabilities
o It is important to ensure that net working capital is positive, because positive net working capital
means that enough cash will be available to pay of liabilities arising.
The income statement; financial statement summarizing a firm’s performance over a period of time.
- Net Income = revenue – expenses = gross profit – taxes
- Addition to retained earnings = net income - dividend
- earnings per share (EPS) = net income / total share outstanding = dividend per share
- book value per share = total equity / shares
- sales per share = sales / shares
- price-sales ratio = share price/ sales per share
- IAS (international accounting standards);
o Realization principle; revenue will be shown on the income statement when it is accrued
o Matching principle; expenses are matched with revenues
- non-cash items; expenses charged against revenues that do not directly affect cash flow (depreciation)
- marginal tax rate; the tax you would pay if you earned one more unit or currency.
- Average tax rate; the percentage of your income that goes to pay taxes.
o Tax bill / taxable income
Statement of cash flows; all transactions in which money flows in or out of the organization over a period of time.
! Cash flow identity; Cash flow from assets = cash flow to creditors + cash flow to shareholders.
- Cash flow; the difference between the cash that came in and the cash that went out.
- Total cash flow = cash flow operating activities + cash flow investing activities + cash flow financing activities.
o Cash flow from operating activities; results from firm’s day-to-day activities of producing/selling
| OCF (operating cash flows) = revenue – cost + changes in non-cash net working capital
o Cash flow from investing activities; cash generated or expended for a firm’s long-term investments.
o Cash flow from financing activities; cash generated or expended as a result of its debt and equity
choices
! Cash flow is not the same as working capital; Working capital is a snapshot. Cash flow is the earning (ability) over a
period of time. Cash flow is also not profit, because depreciation decreases profit but not the cash flow.
To understand how healthy a company is, and how well it has performed is to carry out a ratio analysis and compare
the financial ratios of the firm with those of its competitors. Financial ratios are relationships that are determined
from a firm’s financial information and are used for comparison purposes.
Why evaluate financial statements?
- Internal uses; performance evaluation, comparing divisions, planning for the future
Chapter 1; Introduction to Corporate Finance
Corporate finance answers three questions;
1. What long-term investments should you make?
o Capital budgeting; the process of planning and managing a firm’s long-term investments.
Goal is to identify business opportunities that are worth more than they cost.
Evaluating the size, timing and risk of a future cash flow.
2. Where will you get the long-term financing to pay for your investment?
o Capital structure (financial structure); the mixture of long-term debt and equity the firm uses to
finance its operations.
Long-term debt; long-term borrowing by the firm (> 1 year)
Equity; amount of money raised by a firm that comes from the owners (shareholders)
The mixture chosen will affect the risk and the value of the firm.
3. How will you manage your everyday financial activities, such as collecting from customers and paying
suppliers?
a. Net working capital management; ensures that a firm has sufficient resources to continue its
operations and avoid costly interruptions.
i. Working capital; a firm’s short-term assets and liabilities.
Accounting; records the past and works with real amounts.
Finance; discounting future cashflows and works with forecasts.
The main goal of financial management is to make money or add value for the owners. Other goals might be;
profitability, liquidity, security and independence. The appropriate goal for a financial manager is; to maximize the
current value per share of existing equity (maximize shareholder value).
Financial markets can facilitate the flow of money from those that have surplus cash to those that need financing.
- Primary market; the original sale of securities by governments and corporations
o The corporation is the seller and the transaction raises money for the corporation.
o Public offerings; selling securities to the general public
o Private placement; negotiated sale involving a specific buyer.
o Initial public offering; first share issue, after that, there is seasoned offering
o Seasoned offering; second share issue
- Secondary market; where the securities are bought and sold after the original sale.
o One owner or creditor selling to another, transferring ownership of corporate securities for two
reasons; (1) to liquidate their investment (get our money back) and (2) to price our investments.
o If a security can be resold in the secondary market, investors are more willing to purchase securities
in a primary market transaction.
o Auction market; brokers/agents match buyers & sellers, but don’t own the commodity sold/bought
| it has a physical location
o Dealer market; dealers buy and sell for themselves, at their own risk.
| over-the-counter (OTC) markets; trade of equities and long-term debt (mostly electronically)
(A) Cash flows to the firm from the financial
markets
(B) The firm invests the cash in assets
(C) These short/long term assets generate cash.
(D) Some of these cash is used to pay corporate
taxes
(E) After the taxes, some cash flow is reinvested in
the firm
(F) The rest is going back to the financial markets as
cash paid to creditors and shareholders.
(G) Cash from savings of households come into the
financial markets directly
(H) Or the cash from households come into the
financial markets via financial institutions
, Chapter 3; the financial statement analysis
Every year, a company will release its annual report, with three financial statements;
The statement of financial position (balance sheet)
The income statement
The statement of cash flows
The statement of financial position (balance sheet); showing a firm’s accounting value on a particular date.
! balance sheet identity assets = liabilities + equity
- Assets (left side);
o current assets (<12 months)
o non-current assets (>12 months); tangible or intangible (tastbaar of niet)
o assets can be stated in two ways;
historical costs model; you value what is paid for the asset
revaluation model; according to the current value in the market today (fair value amount)
- Libilities (right side);
o current liabilities (<12 months)
o non-current liabilities (>12 months)
- Equity (right side); shareholder’s equity/ordinary equity/owner’s equity.
- Net working capital = current assets – current liabilities
o It is important to ensure that net working capital is positive, because positive net working capital
means that enough cash will be available to pay of liabilities arising.
The income statement; financial statement summarizing a firm’s performance over a period of time.
- Net Income = revenue – expenses = gross profit – taxes
- Addition to retained earnings = net income - dividend
- earnings per share (EPS) = net income / total share outstanding = dividend per share
- book value per share = total equity / shares
- sales per share = sales / shares
- price-sales ratio = share price/ sales per share
- IAS (international accounting standards);
o Realization principle; revenue will be shown on the income statement when it is accrued
o Matching principle; expenses are matched with revenues
- non-cash items; expenses charged against revenues that do not directly affect cash flow (depreciation)
- marginal tax rate; the tax you would pay if you earned one more unit or currency.
- Average tax rate; the percentage of your income that goes to pay taxes.
o Tax bill / taxable income
Statement of cash flows; all transactions in which money flows in or out of the organization over a period of time.
! Cash flow identity; Cash flow from assets = cash flow to creditors + cash flow to shareholders.
- Cash flow; the difference between the cash that came in and the cash that went out.
- Total cash flow = cash flow operating activities + cash flow investing activities + cash flow financing activities.
o Cash flow from operating activities; results from firm’s day-to-day activities of producing/selling
| OCF (operating cash flows) = revenue – cost + changes in non-cash net working capital
o Cash flow from investing activities; cash generated or expended for a firm’s long-term investments.
o Cash flow from financing activities; cash generated or expended as a result of its debt and equity
choices
! Cash flow is not the same as working capital; Working capital is a snapshot. Cash flow is the earning (ability) over a
period of time. Cash flow is also not profit, because depreciation decreases profit but not the cash flow.
To understand how healthy a company is, and how well it has performed is to carry out a ratio analysis and compare
the financial ratios of the firm with those of its competitors. Financial ratios are relationships that are determined
from a firm’s financial information and are used for comparison purposes.
Why evaluate financial statements?
- Internal uses; performance evaluation, comparing divisions, planning for the future
