MB101 International Corporate Finance

Part 2: Corporate finance

What is corporate finance?

Corporate finance involves assessing investment opportunities and deciding how to finance investments. It applies theory to real-world scenarios, providing a big picture view on corporate finance decision-making and understanding what happens in the real financial world.

Objectives of the course

1. Investment
2. Financing
3. Dividend

The course aims to maximize the value of the enterprise. In finance, cash flows (not earnings) are king.

Financial balance sheet

Assets

• In place investments: Investments already made that generate cash today.
• Growth assets: The value that will be created by future investments.

Liabilities

• Debt: Fixed claim on cash flows. No risk for non-payment.
• Equity: The amount depends on corporate governance.

Financing decisions

Financing decisions depend on the nature of the business (industry) and the life cycle of the firm. Banks do not tend to realize bad returns before the firm should be generating profits.

• Share capital
• Reserves
• Retained earnings (self-financing)

Maximizing enterprise value

Decisions aim to maximize the value of the enterprise using the formula: MAX EV = ^{∑ CF_t}/_(1+i)^t. Finding out the capital structure (E)/(F) that minimizes the WACC is crucial. Cash flows, not earnings, are king in finance, and timing (right rate) is important.

Balance sheet perspective

Reordering the parts of a balance sheet according to liquidity:

• Current: < 1 year
• Long term: > 1 year

This provides a perspective on the past performance of the firm.

Assets

• In place investments: Investments already made that generate cash flows today.
• Growth assets: The value that will be created by future investments (expectations).

Liabilities

• Debt: Fixed claim on cash flows, fixed maturity, no role for management.
• Equity: The amount depends on corporate governance and the stage of the life cycle of the firm.

Financing decisions factors

Financing decisions depend on:

• Nature of the business (industry)
• Life cycle of the firm

Banks do not tend to finance businesses before the firm shows significant profits. More capital reserves and equity retained earnings (self-financing) are important.

Balance sheet

Current assets

• Cash
• Accounts receivable
• Inventory
• Marketable securities
• 12 months

Non-current assets

• Fixed assets
• Tangible
• Intangible
• Financial

Current liabilities

• Accounts payable
• Short term debt

Long term debt

Non-current liabilities

• Capital
• Reserves
• Retained earnings

Income statement

• Revenues
• - Cost of goods sold
• - Marketing & administrative expenses
• EBITDA
• - Depreciation
• - Amortization
• EBIT Operating Income
• + FIN INCOME
• - FIN EXPENSES
• + Accessory INC
• - Accessory EXP
• Profit before tax
• - Tax
• Net income

Earnings per share (EPS) = NET INCOME / # of shares

Book value (BVPS) = NET INCOME PER SHARE / # of shares

Re-invested and returned to owners → Dividends (payout policy) → Payout ratio

Profitability and default

1. ↑ Liquidity
2. Opportunity cost ↑
3. Debt vs equity
4. Debt service
5. Different provisions on the credit for assets
6. Accounting vs market value (book value)
7. Stock price vs BVPS
8. Price to book value

Price to book value → BVPS → The latest value available

Income is different from cash flows. Working capital change, capital expenditures, financial policy, and dividend policy are important.

Cash flow statement

It explains the difference between CF and CF_t+1.

Accounts receivable

108

Other current assets

186

Cash

272