Corporate Financial Management
Financial manager tasks:
- Where to invest in
- How to finance it
- How to keep solvency in short term
Goal: maximizing net profits for the shareholders. – Maximize shareholder value, making a
company a cash-generating activity.
Primary market: when a corporation issues security (stocks or bonds), cash flows from
investors to the firm.
Secondary market: where the stocks are traded. Involve the exchange if already issued
securities between investors. Securities may be exchange traded or traded over-the-counter
in a dealer market.
Financial statements provide important information about the economic situation of the
firm.
- Financial statements do not express the risk
- Financial rates generally refer to performance in previous years.
Inflow -> decrease of assets or increase of debt
Outflow -> increase of assets or decrease of debt
Net working capital = current assets – current liabilities
- If positive, then the there is enough cash to pay the next 12 months.
Liquidity – ability to pay back short-term debts in time.
Liquidity ratios – ability to pay back all bills in the short run.
,Current ratio = current assets / current liabilities
- If you have a very high current ratio, you can start investing more, (geld laten liggen
op je rekening is niet goed).
Quick ratio = (current assets – inventories) / current liabilities
Solvency ratios – ability to pay back all debts when the firm stops to exist.
o Equity multiplier = total assets / equity
o Debt equity ratio = liabilities / equity
o Debt ratio = liabilities / total assets
o Times interest earned ratio = EBIT / interest payable
Asset management – Turnover ratios = the ability to use the assets effectively and efficiently.
o Asset turnover ratio = sales / total assets
o Sales per unit of asset
o Inventory turnover = cost of sales / average inventories
o Number of times a year the average inventory is sold
o Days in inventory = 365 / inventory turnover
o Number of days it takes to sell an average inventory.
Profitability ratios
o Return on assets = net income / total assets
o Return on equity = net income / equity
o (net) Profit margin = net income / sales
Market value ratios
o Earnings per share = net income / number of shares
o Price earnings ratio = price per share / earnings per share
o Market to book ratio = market value per share / book value per share
Lecture 2
Future / compound value = investment x 1 + interest rate.
Present / discount value =
Net Present Value:
- To calculate the incremental cost or benefit from adopting an investment.
FV =
Interest rate = or
Present Value =
, Net present value-
Effective annual interest rate / effective annual yield -
Multi-period compounding frequencies -
Compounding an investment m times a year provides end-of-year wealth of:
C0(1+ (r/m))m
C0 is the initial investment
R is the stated annual investment rate
o The stated annual interest rate is the annual interest rate without consideration of
compounding.
Compound every infinitesimal instant:
Perpetuity = A constant stream of cash flows without end
PV = c/r
Growing perpetuity = A constant stream of increasing cash flows without end
PV = C/(r-g)
Annuity = A level stream of regular payments that lasts for a fixed number of periods
Future value of an annuity:
Growing annuity:
Bond = (obligatie) is a certificate showing that a borrower owes a specified sum.
To repay the money, the borrower has agreed to make interest and principal payments on
designated ‘maturity’ dates.
Financial manager tasks:
- Where to invest in
- How to finance it
- How to keep solvency in short term
Goal: maximizing net profits for the shareholders. – Maximize shareholder value, making a
company a cash-generating activity.
Primary market: when a corporation issues security (stocks or bonds), cash flows from
investors to the firm.
Secondary market: where the stocks are traded. Involve the exchange if already issued
securities between investors. Securities may be exchange traded or traded over-the-counter
in a dealer market.
Financial statements provide important information about the economic situation of the
firm.
- Financial statements do not express the risk
- Financial rates generally refer to performance in previous years.
Inflow -> decrease of assets or increase of debt
Outflow -> increase of assets or decrease of debt
Net working capital = current assets – current liabilities
- If positive, then the there is enough cash to pay the next 12 months.
Liquidity – ability to pay back short-term debts in time.
Liquidity ratios – ability to pay back all bills in the short run.
,Current ratio = current assets / current liabilities
- If you have a very high current ratio, you can start investing more, (geld laten liggen
op je rekening is niet goed).
Quick ratio = (current assets – inventories) / current liabilities
Solvency ratios – ability to pay back all debts when the firm stops to exist.
o Equity multiplier = total assets / equity
o Debt equity ratio = liabilities / equity
o Debt ratio = liabilities / total assets
o Times interest earned ratio = EBIT / interest payable
Asset management – Turnover ratios = the ability to use the assets effectively and efficiently.
o Asset turnover ratio = sales / total assets
o Sales per unit of asset
o Inventory turnover = cost of sales / average inventories
o Number of times a year the average inventory is sold
o Days in inventory = 365 / inventory turnover
o Number of days it takes to sell an average inventory.
Profitability ratios
o Return on assets = net income / total assets
o Return on equity = net income / equity
o (net) Profit margin = net income / sales
Market value ratios
o Earnings per share = net income / number of shares
o Price earnings ratio = price per share / earnings per share
o Market to book ratio = market value per share / book value per share
Lecture 2
Future / compound value = investment x 1 + interest rate.
Present / discount value =
Net Present Value:
- To calculate the incremental cost or benefit from adopting an investment.
FV =
Interest rate = or
Present Value =
, Net present value-
Effective annual interest rate / effective annual yield -
Multi-period compounding frequencies -
Compounding an investment m times a year provides end-of-year wealth of:
C0(1+ (r/m))m
C0 is the initial investment
R is the stated annual investment rate
o The stated annual interest rate is the annual interest rate without consideration of
compounding.
Compound every infinitesimal instant:
Perpetuity = A constant stream of cash flows without end
PV = c/r
Growing perpetuity = A constant stream of increasing cash flows without end
PV = C/(r-g)
Annuity = A level stream of regular payments that lasts for a fixed number of periods
Future value of an annuity:
Growing annuity:
Bond = (obligatie) is a certificate showing that a borrower owes a specified sum.
To repay the money, the borrower has agreed to make interest and principal payments on
designated ‘maturity’ dates.
