Appunti corporate finance

FCFF GCFF-CTCF

8.COMPUTE DEBT CAPITAL CASH FLOW

FCFD INT + ΔDEBT

9.COMPUTE EQUITY CAPITAL CASH FLOW

FCFE NIE + ΔEQUITY

And finally we are able to compute the TREASURY CASH FLOW (flusso di cassa)

ΔTREASURY = GCFF-CTCF=FCFF-FCDF-FCFE

NB ΔTREASURY MUST BE EQUAL TO ΔCASH IN THE BALANCE SHEET (=se questa

variazione non è uguale alla variazione di cassa tra un anno e l’altro nello stato

patrimoniale ho sbagliato i conti !!!!!!!!!!)

FCFO = FREE CASH FLOW FROM OPERATION (=RICLASSIFICAZIONE CHE MI

 PERMETTE DI CALCOLARE QUANTO DENARO L’AZIENDA HA GENERATO NON

CONSIDERANDO COME L’AZIENDA HA RACCOLTO IL DENARO)

FCFO is the amount of money in the company generated by operating activities only

FCFF is the Cash Flow (available) to the (entire) Firm (FCFF = FCFO + TaxShield)

***TAXSHIELD (=scudo fiscale) is the amount of money you are saving because you



paid the taxes that are computing in the amount of money net from the interest on the

debt.

THIS IS A POSITIVE CASH FLOW

FCFO is indeed estimated without paying Negative Interests on Debt and

therefore Taxes

are (somehow) THEORETICAL (as calculated upon EBIT, only)

***FCFO is looking only the assets indipendely what is happened in the liabilities side.

The taxes are computing on the amount of money withount the interest for debt.

***if i discount the future cash flow I calcolate the MARKET VALUE TOTAL ASSETS



(MVA).

MVA-DEBT= EQUITY

FREE CASH FLOW TO THE FIRM (FCFF)



FCFF is the amount of money in the company available to shareholders &

debt holders, that is

the Free Cash Flow (available) to the (entire) Firm

FCFF is indeed estimated without paying Negative Interests on Debt and therefore

Taxes

are (somehow) THEORETICAL as calculated upon EBIT (in practice Taxes are paid after,

on

EBT).

FCFF are Unlevered FCF: FCFF are calculated assuming Debt = 0!

LEZIONE 6

FREE CASH FLOW TO THE EQUITY = FCFE

FCFE: Equity-side Valuation [PV(FCFEs) = Market Value Equity = E]

IN THIS CASH FLOW WE CONSIDERED THAT WE HAVE INTEREST AND WE PAY THE

TAXES ON THE EBT.

LEZIONE 7

THERE ARE 2 KIND OF WORKING CAPITAL:

1.CWC (current working capital) CURRENT ASSETS – CURRENT LIABILITIES.



Current assets inventories + work-in-progress and finished goods + trade



reicevaibles (rimanenze + prodotti in corso di lavorazione + prodotti finiti + crediti

verso clienti)

Current liebilities trade payables + overdraft + short-term loans



2. NCW (standard working capital) SHORT-TERM ASSETS – SHORT-TERM



LIABILITIES

Short-term assets to cwc the short term investment + cash

add

Short-time liabilities add to wc short term loans



The area responsabile for all the decision reguarding the WORKING CAPITAL is the

WORKING CAPITAL MANAGEMENT.

It trie sto achieve 2 main aim:

-INCREASE THE FIRM PROFITABILITY it implies that the investment in current assets



should be made only if it has an ACCEPTABLE RETURN

-ENSURE THE LIQUIDITY to meet the short term obbligations it implies that the



company needs toh ave enough liquidity to match cash-ins and cash-outs.

***the company prefers to have less cash because it doesn’t give a return.

The decisons that the working capital managment must make reguard:

-the total investment needed in current assets (total value of inventories,

reiceivables..)

-the amount of investment needed in each type of current assets (=the amount of

money that a company can support)

-the way in wich current assets are to be finaced

BUT remember that different businesses have DIFFERENT WORKING CAPITAL

REQUIREMENTS based on :

-es. RECEIVABLES are different if we consider a MANUFACTURING FACTORY respect

considering a FOOD RETAILER company. In the manufacturing the reiceivables are

higher than the food reitaler because the factory allows its customers to delay the

payments.

- the CREDIT POLICES of the competitors in order to lose or not the clients.

- SEASONAL VARIATION in business

WORKING CAPITAL CAN BE MANAGED BY SEVERAL POLICIES:

A) AGGRESSIVE POLICY

The company reduce at the minimum the level of cash in order to INCREASE THE

PROFIT. lower level of inventory + receivables + cash



B) CONSERVATIVE POLICY cash balance, higher levels of inventory,

larger

credit to customers

C) MODERATE POLICY larger cash balance, higher levels of inventory, credit to



customers

BUT HOW DO THE COMPANIES FINANCE THE WORKING CAPITAL?

1. OVERDRAFTS (scoperti in conto corrente) agreement by a bank to allow a



firm to borrow up to a certain limit without the need for further discussion. Daily

interests at variable rates on debt outstanding. Flexible (variable amount

depending on firm needs) but repayable on demand.

2. SHORT-TERM LOANS fixed amount of money borrewed from a bank in order to

finance the receivables.

3. TRADE CREDIT agreement to take payment for goods and services at a later



date than that on which goods and services are supplied to the consuming

company (= the possibility of the company to delay the payment of raw

materials)

NB : Short-term finance compared to long-term finance cheaper and more flexible



+ riskier (it may not be renewed or may be renewed on less favorable terms

We must remeber that Company assets can be split into:

• NON-CURRENT ASSETS (PCA), i.e. long-term assets in which the firm expects to

derive benefits over several periods (machinery,buildings, etc.)

• PERMANENT CURRENT ASSETS, i.e. investment in inventories and receivables to

sustain the normal levels of business trading activity

• FLUCTUATING CURRENT ASSETS, i.e. variations in the level of current assets arising

from normal

business activity.

FINANCING WORKING CAPITAL WHIT:

A) AGGRESSIVE POLICY WHIT AN AGGRESSIVE POLICY short-

term funds finance fluctuating current

assets and some of the permanent

current assets.

This policy offers greatest rick of

insolvency, but OFFERS HIGHER

PROFITABILITY

***attivo immobilizzato viene

finanziato da debiti a m/l termine

***attivo corrente fisso + attivo

corrente variabile viene finanziato da

B) CONSERVATIVE POLICY CONSERVATIVE APROACH:

some of the fluctuating current assets are

financed with long-run finance.

Permanent current assets and non-current

assets

are financed with long term funds.

There is less reliance on short-term funds:

the risk of

such a policy is lower but the higher cost of

long-term finance reduces profitability

(HIGHER COSTS IN TERM OF INTEREST ON

C) MODERATE POLICY (also called matching policy) it’s a match between the



other two companies fluctuating current assets are

financed

with short-term funds, and

permanent current assets and non-

current assets are financed with

long term funds.

THE CASH CONVERSION CYCLE (CCC) it represents the number of days of operation



fro which financing is needed (= the days witch you miss your money so you have to

use overdraft)

Inventory days = avg time to use up raw materials + avg time to convert raw

 materials into finished goods + avg time to sell finished goods to customers

Trade receivables day = avg time taken by credit customers to settle their

 accounts

Trade payables = avg time taken by the firm to pay its payables



THE MANAGEMENT OF CASH

Cash management optimizing the amount of cash available maximizing the



interests earned by spare funds not requie immediately.

Opportunity cost of cash return that could be earned if the cash had been invested



or put to

productive use. Reducing the opportunity cost increases the risk of being unable to

meet debts

as they fall due

there are three reasons which explain why the company hold (detiene) cash:

-TRANSACTIONS MOTIVE cash reserve is needed to balance short-term inflows with



outflows as

they are not perfectly matched

-PRECAUTIONARY MOTIVE cash reserve helps dealing with unexpected demand for



cash due (scadenze) to the uncertainty of future cash flows

-SPECULATIVE MOTIVE cash reserve can be used to take advantage of attractive



investment opportunities that may arise

FACTORS AFFECTING OPTIMUM CASH LEVEL efficiency of cash flow management,

availability of

liquid assets in the firm, borrowing capability of the firm, availability and cost of short-

term

finance, firm risk-tolerance.

THE MANAGEMENT OF INVENTORY

Inventories allow firms to satisfy customers without unreasonable delay and potential

loss of

sales. These benefits are counterbalanced by costs, as holding costs, replacement

costs (e.g.

obsolete inventory), cost of inventory itself, opportunity cost of cash tied up in

inventory.

In order to reduce the inventory costs, companies can minimize the inventory levels by

using the JUST IN TIME INVENTORY POLICY its purpose i sto minimize or eliminate



the time wich elapses between delivery and use of inventory.

THE MANAGEMENT OF RECEIVABLES

For a trade receivables policy, a company needs to set up a credit analysis system, a

credit control system, and a trade receivables collection system

l

LEZIONE 7

THERE ARE TWO WAYS IN WHICH THE COMPANY CAN RAISE THE MONEY:

1.DEBT the company reiceves money but it has to pay a fixed amount of INTEREST



and at the end of the maturity period it has got to give the capital back to the

investors

2.EQUITY the company issues (emette) new stocks in the market but it depends on



the cash flows reimaned.

Between these 2 forms there are SECURITIES

HYBRID

Composition of equity: this is more riskness than debt

 

-owner’s equità

-venture capital

-common stock (azioni ordinarie)

-warrants

Hybrid Securities:



-convertible debt similar to bond so it gives an interest but at the and of the



maturity time the investors receive shares not money (at the beginning they are debt

then they become shareholders)

-prefered stocks with this the investors get dividens before all the others but they



don’t have voting rights

-option linked bonds 

Debt : bank debt + commercial paper + corporate bonds



When a company is looking for long term investment it issues BONDS.



BONDS (=obbligazioni)

(are now available for the no leasted company but they are called mini bonds)

The value of bonds is determined by 3 factors:

1.CASH FLOW GENERATED CONNECTED TO THE PAYMENTS OF INTEREST (COUPON)

2.INTEREST RATE (=tasso interesse)

3. COST OF CAPITAL YTM yield to maturity (tasso di rendimento del bond )



NB:

cash flow + interest rate depend on THE CONTRACT od debt

yiel to maturity is defined by MARKET

how to calcolate the price