Financial Savvy For Quality Professionals

9/26/2018
The Faltin Group
A Corporate Perspective:
Financial Savvy for Quality
Professionals
by
Frederick W. Faltin and Donna M. Faltin, Ph.D.
ASQ CPID Webinar Series
Fall, 2018
Good Morning!
• Let us take a few minutes to introduce this CPID

webinar series
• Schedule and logistics

– Zoom basics
– Questions
• Availability of materials between webinars
Copyright The Faltin Group 2018 Advanced methods training from The Faltin Group www.FaltinGroup.com 2
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9/26/2018
A (Probably Unnecessary) Notice

• This webinar is being recorded for your, and others’, use
• No other recording of these events is permitted without
prior written approval from CPID and The Faltin Group
• The materials we’re using are the copyrighted property of
The Faltin Group
• Any other recording, reproduction, or use of this content
constitute a violation of the intellectual property rights of
ASQ and The Faltin Group
Your continued participation in or viewing of this event
constitutes your agreement to be bound by these terms
A (Probably Unnecessary) Disclaimer

• We’re here to discuss corporate finance & related issues
and structures
– to help you know more about how your organization functions
– so you’ll be more effective there and better manage your career
• We’ll talk about stocks, bonds, and markets – but this is

not about playing the stock or bond markets
• We’ll talk about why companies need investors, why
investment vehicles exist and why/how they’re used—
but not about any specific individual or their investments
So nothing in this course should be construed in any
way as financial or investment advice of any kind
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Ground Rules
• People’s existing familiarity with financial matters

varies widely—we’re assuming nothing other than
your mathematical skills as quality professionals
• Ask whatever you wish, however simple you think

the answer might be (it’s probably not all that simple
after all)
Objectives
At the end of the series, you’ll have an understanding of:
• Basic financial concepts, such as Present Value,
Rates of Return, and Annuities
• Types of investment vehicles and their returns
• The role of diversification in managing risk
• Types of corporate Financial Statements, what
they convey, and how to read them
• Basics of Corporate Finance
– Raising funds using, for example, stocks and bonds
– Options, hedging & risk management
• Financial analysis metrics and performance ratios
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Contents
• Fundamentals
• Present Value
• Investment Returns
• Portfolios, Diversification, & Risk
• Corporate Financial Statements
• Corporate Financing
– Raising funds
– Options, hedging & risk management
• Financial Planning & Analysis
• Some recent meltdowns
– How they happened, what we’ve learned
Introduction
Corporate Finance is about value

• Investment
• Financing
• Payouts
• Risk management
The central question of Finance:
How can we create value through investment

and financing decisions?
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Introduction
So we need to understand basic

elements of the capital markets . . .
• Pricing
• Risk and return
• Market efficiency
• How securities (stocks, bonds,
options, …) are traded
• International markets
Corporate Finance: Why Care?
• You and your management need to make sound

decisions when considering the wide range of business
opportunities, risks, and challenges facing your firm
• Corporate Finance is responsible for controlling

company assets, including cash, and therefore plays
major role in controlling the purse strings
• Without their buy-in or inclusion in a decision, you can

lose funding and find your projects continually short of
financial support
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So What is Corporate Finance?
In a nutshell . . .
• Financing and payout policies/practices—how the firm

obtains funds (through debt, equity, etc.) and disburses
cash
• Investment policy—how the firm allocates its monetary

resources (real and financial assets)
Finance in the Corporation

Board of Directors
Chairman of the Board and Chief

Executive Officer (CEO)
President and Chief Operating

Officer (COO)
VP of Sales/Marketing VP of Finance (CFO) VP of Manufacturing
Treasurer Controller
Financial Accounting Cost Accounting

Financial Planning Capital Expenditures
Manager Manager
Cash Manager Credit Manager Tax Manager Data Manager
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Finance in the Corporation

Board of Directors
Chairman of the Board and Chief

Executive Officer (CEO)
President and Chief Operating VP of Finance (CFO)

Officer (COO)
VP of Sales/Marketing VP of Manufacturing
Treasurer Controller
Financial Accounting Cost Accounting

Financial Planning Capital Expenditures
Manager Manager
Cash Manager Credit Manager Tax Manager Data Manager
A Company Needs Funds . . .
• To start up
• To grow
• To make acquisitions
• ...
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. . . So It Must Attract Investors

But investors have choices…
• Money market & short-term debt instruments
• Bonds – fixed-rate investments companies issue to
raise money
• Common stock – units of ownership
• Preferred stock, Convertibles and other hybrids – a
form of ownership that combines feature of both
debt and common stock.
• Options & derivatives
• Index funds and Exchange Traded Funds (ETFs)
First Principles
Objective: Maximize the Value of the Firm
• Invest in projects that yield a return greater than the

minimum acceptable hurdle rate
• Returns on projects measured based on cash flows

generated and the timing of these cash flows
• Consider both positive and negative side effects of these

projects
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First Principles
• Choose a financing mix that matches the assets being

financed
• Pay cash, issue debt, obtain a bank loan or LOC, etc.
• If there are not enough investments that earn the hurdle

rate, return the cash to stockholders
• Address ethical and compliance issues such as taxes,

environmental, health/safety, . . .
Recurring Themes
1. All other things being equal, if there are lots of people

who want to buy something, its price will increase
2. All other things being equal, if there are lots of people
who want to sell something, its price will decrease
3. The future entails risk
Generally, whoever assumes risk wants to be compensated for it
Generally, assuming higher risk carries with it the opportunity for
higher reward
4. The price of any interest-bearing investment moves
inversely to its interest rate
5. A dollar today is worth more than a dollar tomorrow
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The Time Value of Money

A dollar today is worth more than a dollar tomorrow—WHY?
• People prefer present consumption to future consumption. To get
people to defer consumption you have to offer them more in the
future.
• Opportunity cost: having money now presents you with options.
You can choose to wait to spend tomorrow a dollar you have
today, but you can’t choose to spend today a dollar you won’t
have until tomorrow
• Money you have now can be invested and will be worth more in
the future
• Because of inflation, the value of money decreases over time.
The greater the inflation, the greater the difference in value
between a dollar today and a dollar tomorrow.
• The future is uncertain, so cash flow in the future is worth less
(this is the notion of a risk premium).
Present Value
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The Role of Time Value in Finance
SO,
 The value of a dollar depends on when you have it
THEREFORE,
• In the aggregate, the value of a continuing flow of lots of dollars
over time depends on when how much comes in (or goes out)
• And it makes sense to normalize this flow of cash over various
times to calculate what it’s value is today
That’s what’s called the Present Value Principle, and the

resulting number is called just Present Value
Present Value
Present Value Principle: Cash flows at different points in

time cannot be directly compared or aggregated. All cash
flows have to be normalized to the same point in time,
before accurate comparisons/aggregations can be made.
Present Value (PV) is the value in today's dollars of an

amount of money to be realized in the future, based on
some estimated or hypothesized rate of return over the
long term.
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Discounting and Compounding
• Discount Rate: rate at which present and future cash

flows are traded off
• A higher discount rate will lead to a lower value for cash
flows in the future
• Discounting future cash flows converts them into cash
flows in present value dollars
• Just as discounting converts future cash flows into
present value, compounding converts present cash flows
into future value
Present Value
• Determining the appropriate discount rate is key to

properly valuing future cash flows, whether they are
earnings or obligations.
• Present Value is a critical concept in many financial

calculations, including Net Present Value, bond
yields, spot rates, and pension obligations.
• Similarly, compounding allows one to estimate the future

value of assets held today in order, for example, to
assess what funds will be available to meet future
obligations
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Simple Cash Flows

A simple cash flow is a single cash flow in a specified future
time period. For time period t and discount rate r:
• The present value of the cash flow (CF) is
(PV of Simple Cash Flow @ Time t) = CFt / (1 + r)t

= CFt * (1 + r)-t
• The future value of a cash flow is
(FV at Time t of a Simple Cash Flow at Time 0) = CF0*(1+ r)t
Present Value
Consider two cases of Present Value:
Case 1: A single sum that stays invested over time.
Case 2: A cash stream that is paid regularly over

time (e.g., rent payments), and requires you to
calculate, say, the effect of inflation, or of an interest
rate being paid.
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Present Value
Case 1: The amount that must be invested today in order
to have a specified amount at some future time.
We need to know what that future amount is worth today,
given the rate of return we expect to earn over the time
between now and that point in the future.
That is, we must invest the Present Value today at the
specified rate of return, to have the desired future value
some number of years from now.
• This only considers the raw dollars, not purchasing power
• The latter entails consideration of the “real interest rate”,
which we’ll discuss later
So we discount the future value
by the expected rate of return.
Present Value
Example:
I need to have $1000 in 5 years. The present value of $1000
assuming an 8% annually compounded rate of return is $681.
That is, $681 will grow to $1000 in 5 years at 8%.
(future value)
In this case, PV = ------------------- = (1 + r)-t * (future value) .
(1 + r)t
where r is the rate of return per unit time as a decimal, and t is the
number of time units until the future sum is required.
1000
So PV = --------------- = 681 .
(1 + .08)5
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Present Value
Case 1 (continued): Present value of a sum that remains

invested over time
This formulation can also be used to estimate the effects of

inflation, that is, to compute real purchasing power of
present and future sums of money.
Simply use an estimated rate of inflation for the discount
rate r in the equation above.
Mini-exercise:
In 30 years I am to receive $1,000,000. What is that
amount of money worth today, assuming a rate of inflation
of 3%? (Answer: about $412,000)
Present Value
Case 2: Present value of a cash payment stream. This
tells you the cost in today's dollars of money that you pay
over time. Basically, the money you pay in 10 years is
worth less than that which you pay today, and this
equation lets you compute just how much. In general,
N
PV = S (1 + r)-t * CFt ,
t=1 *
( )
where r is the discount rate per period as a decimal, and

CFt is the cash outflow of the tth time payment, with time
“0” being the present and “N” the final period.
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Present Value
Special Case: If all of the cash flow amounts CFt are the
same (that is, CFt equals a constant, CF, for all times t),
then using a common algebraic simplification, we can write
N
PV = S
t=1
(1 + r)-t * CFt ( )
*
N
PV = CF * [ S (1 + r)-t ]
t=1
PV = CF * r-1 * [ 1- (1 + r)-N ] (
**)
or, alternatively,
PV = CF * r-1 * [ 1- ( 1/(1 + r)N ) ] .
Present Value
Example:
You pay $500/month in mortgage payments on your
home over 10 years. The lender's rate is 6% per
annum. Although your payments total $500 x 12 x 10
= $60,000, the PV of that loan to the lender is $45,037.
Here CFt = $500 for all t from 1 to 120. The discount
rate is 0.005 (0.5% per month). From the preceding
page,
PV = $500 * (.005)-1 * [ 1 - (1 + 0.005)-120 ]
= $500 * 200 * [ 1 – 0.5496 . . . ]
= $45,037
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Present Value
• You can do all of these computations in Excel, of course. For
example, use the PV function with a rate of 6%/12, number of
periods =120, a payment of -$500, future value of $0, and
payment at the end of each period [type =0].
• Conversely, use the PMT function with these same arguments

but a Present Value of $45,037 to conclude that a payment of
$500/month is required.
• You really have to be careful of whether entries are in percent

or decimals, whether you want the first payment to be at time
0 or time 1, and the sign of your payment (outflows are
negative numbers, incomes positive).
17

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9/26/2018

The Faltin Group

ASQ CPID Webinar Series

• Let us take a few minutes to introduce this CPID

• Schedule and logistics

• Availability of materials between webinars

A (Probably Unnecessary) Notice

A (Probably Unnecessary) Disclaimer

• We’ll talk about stocks, bonds, and markets – but this is

• People’s existing familiarity with financial matters

• Ask whatever you wish, however simple you think

Corporate Finance is about value

The central question of Finance:

How can we create value through investment

So we need to understand basic

Corporate Finance: Why Care?

• You and your management need to make sound

• Corporate Finance is responsible for controlling

• Without their buy-in or inclusion in a decision, you can

So What is Corporate Finance?

• Financing and payout policies/practices—how the firm

• Investment policy—how the firm allocates its monetary

Finance in the Corporation

Chairman of the Board and Chief

President and Chief Operating

VP of Sales/Marketing VP of Finance (CFO) VP of Manufacturing

Financial Accounting Cost Accounting

Cash Manager Credit Manager Tax Manager Data Manager

Finance in the Corporation

Chairman of the Board and Chief

President and Chief Operating VP of Finance (CFO)

Financial Accounting Cost Accounting

Cash Manager Credit Manager Tax Manager Data Manager

A Company Needs Funds . . .

. . . So It Must Attract Investors

Objective: Maximize the Value of the Firm

• Invest in projects that yield a return greater than the

• Returns on projects measured based on cash flows

• Consider both positive and negative side effects of these

• Choose a financing mix that matches the assets being

• If there are not enough investments that earn the hurdle

• Address ethical and compliance issues such as taxes,

1. All other things being equal, if there are lots of people

The Time Value of Money

The Role of Time Value in Finance

That’s what’s called the Present Value Principle, and the

Present Value Principle: Cash flows at different points in

Present Value (PV) is the value in today's dollars of an

Discounting and Compounding

• Discount Rate: rate at which present and future cash

• Determining the appropriate discount rate is key to

• Present Value is a critical concept in many financial

• Similarly, compounding allows one to estimate the future

Simple Cash Flows

• The present value of the cash flow (CF) is

(PV of Simple Cash Flow @ Time t) = CFt / (1 + r)t

• The future value of a cash flow is

(FV at Time t of a Simple Cash Flow at Time 0) = CF0*(1+ r)t

Consider two cases of Present Value:

Case 1: A single sum that stays invested over time.

Case 2: A cash stream that is paid regularly over

Case 1 (continued): Present value of a sum that remains

This formulation can also be used to estimate the effects of