Finance Iris Lijkendijk
Lecture
Aim: Determine value of project and compare it to price of the project. It is about
the future.
Collaborates with:
• Marketing manager
• Balance sheet/ income statement/ cash ow statement
Lend or not to lend money to a rm
• By means of: Analysing cash ow and nancial statements
Three main issues in nance:
. Capital budgeting: what project to invest money in
. Asset pricing: determine fair value
. Financial investments: what do you do with additional money? - invest in
something or not to invest
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28
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9
1 1 fi fl fi fi fl
, Financial management
Financial manager is connection between nancial market and real market
• Financial markets ➡ nancial market = capital budgeting decision
• What to do with money that comes in? Financial manager decides what to do
with cash in ow
• E.g., invest in development, pay dividends/ buy stocks (give cash to
shareholder)
• Driver of decision we make: wealth creation
How to create value
Page of
98
2 fl fi fi
, Step : You invest your cash in the machine, so cash diminishes and machine is
added to the debit side. (Balance sheet of Book Value)
Step : BUT the machine is a promising project and therefore it has a higher value
than the actual price of the machine. So you have to determine the value of the
project. (Balance sheet based on Market Values) Selling the machine for a higher
price than price of machine allows investment in new machines, expansion, etc.
Step : The value of the project also determines equity
Step : Due to the change in equity, there is also a change in the price per share (P)
Step : The wealth creation is equal to - = and the wealth creation
per share is / = , . So P increases with %, investors look for ratio.
Page of
98
3 1
2
3
4
5 875 350 2 50 4375 3500
25 875
, Thus, we create value if we invest in projects that are worth more than they cost. If
price goes up, market thinks that value is higher than cost of project (positive).
But, we destroy value if we invest in projects that are worth less than they cost. If
the projects value is , the wealth creation is equal to - =- and
the wealth creation per share is - / = - . So P decreases with %.
Fundamental topics in nance (in this course)
. The capital budgeting decision (het investeringsvraagstuk)
• Acquisition of rm target by rm bidder
. Financial investment decision (het beleggingsvraagstuk)
• How to invest money over assets
. Asset pricing (prijsvormingsvraagstuk)
• When do we know if price is right
• Making use of multiples (Price earnings ratio)
Shiller PE ratio
• Price per share / earnings per share (based on average of year earning)
Page of
18
2
3
9
4
fi 2800
fi fi 700 350 2 2800
10 3500 20 700
Lecture
Aim: Determine value of project and compare it to price of the project. It is about
the future.
Collaborates with:
• Marketing manager
• Balance sheet/ income statement/ cash ow statement
Lend or not to lend money to a rm
• By means of: Analysing cash ow and nancial statements
Three main issues in nance:
. Capital budgeting: what project to invest money in
. Asset pricing: determine fair value
. Financial investments: what do you do with additional money? - invest in
something or not to invest
Page of
28
3
9
1 1 fi fl fi fi fl
, Financial management
Financial manager is connection between nancial market and real market
• Financial markets ➡ nancial market = capital budgeting decision
• What to do with money that comes in? Financial manager decides what to do
with cash in ow
• E.g., invest in development, pay dividends/ buy stocks (give cash to
shareholder)
• Driver of decision we make: wealth creation
How to create value
Page of
98
2 fl fi fi
, Step : You invest your cash in the machine, so cash diminishes and machine is
added to the debit side. (Balance sheet of Book Value)
Step : BUT the machine is a promising project and therefore it has a higher value
than the actual price of the machine. So you have to determine the value of the
project. (Balance sheet based on Market Values) Selling the machine for a higher
price than price of machine allows investment in new machines, expansion, etc.
Step : The value of the project also determines equity
Step : Due to the change in equity, there is also a change in the price per share (P)
Step : The wealth creation is equal to - = and the wealth creation
per share is / = , . So P increases with %, investors look for ratio.
Page of
98
3 1
2
3
4
5 875 350 2 50 4375 3500
25 875
, Thus, we create value if we invest in projects that are worth more than they cost. If
price goes up, market thinks that value is higher than cost of project (positive).
But, we destroy value if we invest in projects that are worth less than they cost. If
the projects value is , the wealth creation is equal to - =- and
the wealth creation per share is - / = - . So P decreases with %.
Fundamental topics in nance (in this course)
. The capital budgeting decision (het investeringsvraagstuk)
• Acquisition of rm target by rm bidder
. Financial investment decision (het beleggingsvraagstuk)
• How to invest money over assets
. Asset pricing (prijsvormingsvraagstuk)
• When do we know if price is right
• Making use of multiples (Price earnings ratio)
Shiller PE ratio
• Price per share / earnings per share (based on average of year earning)
Page of
18
2
3
9
4
fi 2800
fi fi 700 350 2 2800
10 3500 20 700
