Corporate Finance 1 — Assets, Liabilities & Equity + Cashflow basics
Using the example of Snap Inc. (“Disappearing Cash Flows” FMG Case) as per interestingly,
Snap Inc. only is funded with convertible debt
Link to the case
Key => this set of notes covers basic concepts of Assets, Liabilities, Equity and cashflow management
relying on the example of Snap Inc., the company studied in the HBS Case, while using those basic
concepts to answer basic questions about the company’s corporate financial policies.
- Main issue in Corporate Finance (CF): helping companies whether to choose Debt or Equity
as a source of financing, to respond to their funding needs
- Current Liabilities & Assets (A&L) determine a company’s current funding needs
- Plant, Property & Equipment (PPE), Assets, Goodwill are ignored for this part of the course as
opposed to CURRENT A&L
- Accounting and Book values for A&L are determined through historical cost (most common)
or current value (cost of acquiring the asset today, a.k.a fair value or replacement cost)
Assets = Liabilities + Equity
Equity is just a residual: Assets – Liabilities
o This residual has NO connection to the « enterprise » value/Equity value of Snap
estimated by (Number of shares) * Share Price
Cash flow: amount of money received — amount spent over a period of time
Asset = anything owned (entirely or in part) by the company, that produces cash-flows
o Hence value of an asset = value of the CFs it will produce
o Value of an Asset (project, firm, machinery…) = PRESENT expected value (i.e., now)
of all the cash-flows it will generate in the future
/!\ To estimate the value of an asset, don’t go towards a potential sale of the asset but rather
towards which cash-flows said asset brings to the business
Market-value Balance Sheets => where everything (all A&L) is valued with Market Value => helpful
to make decisions, estimating the value impact of investments and business decisions:
- Assets: value(s) of future cashflows brought to the Company
- Liabilities: values of future cashflows promised to lenders
- Equity: value of cashflows NOT promised away, belonging to firm owners/shareholders
Accounting Balance Sheets => help understand Sources & Uses of Funds (financial planning)
The Corporate Finance part of this course focuses on how to finance the purchase of assets!
Investment decisions such as CapEx, acquiring IP, or acquiring another Company
The Valuation part of the course focuses, instead, on how to value entire companies and projects
Case work: Snap Inc.: Disappearing Cash-flows (by HBS, downloadable through most university
library portals)
(1) Snap’s business model and its main challenges: how is it unique? How can it create value?
- Monetizing its messaging service through ads and AI products
, - Unique value proposition (used to be) disappearing messages
- Business Model rests upon getting ads in front of the users through regular and augmented
reality, sponsored filters, story intermissions etc …
- Naturally, Snap depends on sub-company “Snapchat” for revenue, whereas the rest of its
business segments orientated around AI products are not yet profitable at all
- Snapchat’s disappearing messages feature is no longer unique > competitors are taking
time/attention span off of the demographic targeted as unique features have been replicated
by competitors such as Instagram
- The root of their cash-flow problems was that Snap could not monetize their ads Revenue as
efficiently as competitors
(2) What are Snap’s primary uses of funds? Main sources of funds?
- Uses: mostly R&D + all salaries and operational expenses stemming from paying salaries
(Government-related) + share repurchases + interest on debt (although moderated by the
fact they mostly rely on convertibles, which often have a low interest rate)
o Exceptional use of funds : buying other companies like Wave Optics for $500M
- Accumulating cash is ALSO a use of funds > it is costly for any company to save money as
opposed to investing it in valuable projects/CapEx/other companies …
- Sources: IPO (2017), Convertible Notes, selling some of their A-Class shares to the
companies they acquired + paying employees in shares (share-based compensation
schemes, which help preserve cash)
o Most of their expenses are actually not cash expenses
Course specific definitions:
Funding Surplus => the cashflow generated by operating & financial activities over a given period
(not taking account of investing cash-flows, i.e. any supplemental funding through reaping dividends,
interest from cash invested, etc)
Cash flow = Money in — Money out
Cash inflow = anything that needs to be distributed to investors or saved > once the money is
generated, you need to use it: buy-back shares, give dividends, save … essentially anything generated
by Revenue (not exactly your standard definition, so be mindful implementing this in other contexts
outside this course)
Cash outflow = anything needing to be funded by new capital (debt or equity) or the Company’s cash
Examples:
- Salaries = cash outflow
o But what if they’re paid with shares? You still have to issue shares so it’s still a cash
outflow (although accountants would disagree)
- Stock-financed acquisitions (following this logic) = cash outflow
- Depreciation & Amortization = NOT (and never) a cash outflow
- Revenue recognized from selling goods on credit (i.e., the buyer does not pay you, the
company, right now, but later instead) = not a cash inflow for that particular period
o As no money has come in during that period, it’s what you call an ACCRUALS issue,
and the matter comes in to matching products & services sold with the moment
they’re paid for by the customer (i.e., when the cash comes in)
- Reduction in Accounts Receivable because I get paid = that’s a cash inflow > I’ve received
cash but nothing changes on my income statement considering I’ve already recognized the
cash as per accrual accounting (see right below for more extensive definition)
Using the example of Snap Inc. (“Disappearing Cash Flows” FMG Case) as per interestingly,
Snap Inc. only is funded with convertible debt
Link to the case
Key => this set of notes covers basic concepts of Assets, Liabilities, Equity and cashflow management
relying on the example of Snap Inc., the company studied in the HBS Case, while using those basic
concepts to answer basic questions about the company’s corporate financial policies.
- Main issue in Corporate Finance (CF): helping companies whether to choose Debt or Equity
as a source of financing, to respond to their funding needs
- Current Liabilities & Assets (A&L) determine a company’s current funding needs
- Plant, Property & Equipment (PPE), Assets, Goodwill are ignored for this part of the course as
opposed to CURRENT A&L
- Accounting and Book values for A&L are determined through historical cost (most common)
or current value (cost of acquiring the asset today, a.k.a fair value or replacement cost)
Assets = Liabilities + Equity
Equity is just a residual: Assets – Liabilities
o This residual has NO connection to the « enterprise » value/Equity value of Snap
estimated by (Number of shares) * Share Price
Cash flow: amount of money received — amount spent over a period of time
Asset = anything owned (entirely or in part) by the company, that produces cash-flows
o Hence value of an asset = value of the CFs it will produce
o Value of an Asset (project, firm, machinery…) = PRESENT expected value (i.e., now)
of all the cash-flows it will generate in the future
/!\ To estimate the value of an asset, don’t go towards a potential sale of the asset but rather
towards which cash-flows said asset brings to the business
Market-value Balance Sheets => where everything (all A&L) is valued with Market Value => helpful
to make decisions, estimating the value impact of investments and business decisions:
- Assets: value(s) of future cashflows brought to the Company
- Liabilities: values of future cashflows promised to lenders
- Equity: value of cashflows NOT promised away, belonging to firm owners/shareholders
Accounting Balance Sheets => help understand Sources & Uses of Funds (financial planning)
The Corporate Finance part of this course focuses on how to finance the purchase of assets!
Investment decisions such as CapEx, acquiring IP, or acquiring another Company
The Valuation part of the course focuses, instead, on how to value entire companies and projects
Case work: Snap Inc.: Disappearing Cash-flows (by HBS, downloadable through most university
library portals)
(1) Snap’s business model and its main challenges: how is it unique? How can it create value?
- Monetizing its messaging service through ads and AI products
, - Unique value proposition (used to be) disappearing messages
- Business Model rests upon getting ads in front of the users through regular and augmented
reality, sponsored filters, story intermissions etc …
- Naturally, Snap depends on sub-company “Snapchat” for revenue, whereas the rest of its
business segments orientated around AI products are not yet profitable at all
- Snapchat’s disappearing messages feature is no longer unique > competitors are taking
time/attention span off of the demographic targeted as unique features have been replicated
by competitors such as Instagram
- The root of their cash-flow problems was that Snap could not monetize their ads Revenue as
efficiently as competitors
(2) What are Snap’s primary uses of funds? Main sources of funds?
- Uses: mostly R&D + all salaries and operational expenses stemming from paying salaries
(Government-related) + share repurchases + interest on debt (although moderated by the
fact they mostly rely on convertibles, which often have a low interest rate)
o Exceptional use of funds : buying other companies like Wave Optics for $500M
- Accumulating cash is ALSO a use of funds > it is costly for any company to save money as
opposed to investing it in valuable projects/CapEx/other companies …
- Sources: IPO (2017), Convertible Notes, selling some of their A-Class shares to the
companies they acquired + paying employees in shares (share-based compensation
schemes, which help preserve cash)
o Most of their expenses are actually not cash expenses
Course specific definitions:
Funding Surplus => the cashflow generated by operating & financial activities over a given period
(not taking account of investing cash-flows, i.e. any supplemental funding through reaping dividends,
interest from cash invested, etc)
Cash flow = Money in — Money out
Cash inflow = anything that needs to be distributed to investors or saved > once the money is
generated, you need to use it: buy-back shares, give dividends, save … essentially anything generated
by Revenue (not exactly your standard definition, so be mindful implementing this in other contexts
outside this course)
Cash outflow = anything needing to be funded by new capital (debt or equity) or the Company’s cash
Examples:
- Salaries = cash outflow
o But what if they’re paid with shares? You still have to issue shares so it’s still a cash
outflow (although accountants would disagree)
- Stock-financed acquisitions (following this logic) = cash outflow
- Depreciation & Amortization = NOT (and never) a cash outflow
- Revenue recognized from selling goods on credit (i.e., the buyer does not pay you, the
company, right now, but later instead) = not a cash inflow for that particular period
o As no money has come in during that period, it’s what you call an ACCRUALS issue,
and the matter comes in to matching products & services sold with the moment
they’re paid for by the customer (i.e., when the cash comes in)
- Reduction in Accounts Receivable because I get paid = that’s a cash inflow > I’ve received
cash but nothing changes on my income statement considering I’ve already recognized the
cash as per accrual accounting (see right below for more extensive definition)
