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Presentation
PhD-student with thesis on credit risk and portfolio analysis. Visiting scholar at UC Berkeley in 2010. Lectured for Statoil AS on the topic. Investment analysis for local companies real estate and project analysis. Teach MIN100 (Investment Analysis) and BIP190 (Bedriftskonomi).
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Literature
Corporate Finance Core Principles & Applications Global edition of 3rd edition ISBN: 9780071221160 Available at SIS Bok and online at Amazon.com etc. Will be covering most of the first 4 parts in addition to parts of chapter 17.
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Chapters / Topic
1-3 / Introduction and basic concepts. 4-5 / Net present value, bonds, markets 6-7 / Stocks, NPV and other investment rules 8-9 / Cash flow and capital budgeting, decision tree, sensitivity, Monte Carlo 10-11 / Return and Risk, expected return, CAPM 11-12 / CAPM, Risk, Cost of Capital
Note
Part 1: Overview Part 2: Valuation and Capital budgeting
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42 24.10.2011 43 31.10.2011 44 07.11.2011
Mandatory assignment
13-14 / Financing, capital structure, Modigliani & Miller 15-16 / Use of debt, leverage, dividends 17 / Financial and Real Options. Part 5: Special topics Part 4: Capital Structure and Dividend Policy
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Lectures
Lecture hours set from 12:15 to 16:00 on Wednesdays at KE E-101, and will usually finish the lecture around 15:00 or earlier Every presentation will be available at Its Learning. Schedule plan includes one backup date (week 41) in case of changes.
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Mandatory assignment
One mandatory assignment given after the 6th lecture, when we have finished part 1, 2 and 3. Will be exam examples , giving you feedback on your progress. Must pass in order to take the exam.
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Exam
3 hours Calculator allowed Date: Not set. Updates will be given, but check the student web prior to the exam.
Today
Introduction Motivation Quick review of chapter 1 3, introducing some business and economical terms.
Motivation
What is an investment?
When investing you are putting money into a project which will give you a future payoff. According to the risk of the project, you can be more or less certain of the outcome. Our goal in this course is to assess how much a project is worth, when addressing issues like:
Inflation/Interest (Net Present Value) Risk Capital structure Options (Real and Financial)
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What is an investment?
When purchasing a good you evaluate its cost and compare it to its future payoff. And basically, if you believe the cost is less than the future payoff, its a good purchase.
Is buying a book for around 600 NOK, when it gives you an edge in the job interview worth a yearly salary of 350 000 NOK, a good investment?
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What is an investment?
Investments are everywhere:
Fixed assets (1): A new house, new car, machinery, etc.. It is divided into:
Intangible assets (1): education, patents, franchises, goodwill, etc. Tangible assets (2): currencies, buildings, real estate, etc.
Current assets (2): Cash, cash equivalent, inventory, etc. (1) is difficult to sell/valuate, (2) is easier to sell/valuate.
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Chapter 1
Introduction to Corporate Finance
2011 McGrawHill/Irwin
1-16
Chapter Outline
1.1 What is Corporate Finance? 1.2 The Corporate Firm 1.3 The Importance of Cash Flows
The Balance Sheet offers insight into the array of decisions, activities and objectives of the Financial Manager
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2 Intangible
Shareholders Equity
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Current Assets
Shareholders Equity
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Current Assets
How should the firm raise funds for the selected investments?
Shareholders Equity
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Current Assets
Long-Term Debt
Shareholders Equity
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Time
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Other factors
Any measure which implies immediate payment should be included in the initial investment (e.g., marketing activities)
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Corporate goals
Shareholder approach Stakeholder approach
Management Owners Banks Employees
The company
Germany
Germany
Japan 0 50 100
Japan 0 50 100
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Company
Dividends to shareholders
Invest
Investment opportunity
(financial asset)
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Chapter 2
Financial Statements and Cash Flow
2011 McGrawHill/Irwin
Chapter Outline
2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes
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2 Intangible
Shareholders Equity
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Obviously cash and A/R are more liquid than property plant and equipment. Liabilities are listed in the order in which they come due
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Accounting Liquidity
Refers to the ease and quickness with which assets can be converted to cash without a significant loss in value Current assets are the most liquid. Some fixed assets are intangible. The more liquid a firms assets, the less likely the firm is to experience problems meeting short-term obligations. Liquid assets frequently have lower rates of return than fixed assets. 2-43
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Net Working Capital Current Assets Current Liabilities In 2009: NWC = $707 - $455 = $252 In 2010: NWC = $761 - $486 = $275 Here we see NWC grow to $275 million in 2010 from $252 million in 2009.
CF(B)
Loanholders receive interest
CF(S)
Stockholders receive dividend
Note:
Operating cash flow is generated by business activities, including sales of goods and services. It reflects payment, not financing, capital spending or changes in net working capital. From the income statement we find operating cash flow: Earnings before interest and taxes (EBIT) + depreciation + current taxes = $ 219 + $ 90 - $ 71 2-51 = $ 238
Capital spending involves changes in fixed assets, including acqusition of fixed assets and sales of fixed assets. USCC bought/acquired new assets worth $ 198 and sold assets of $ 25 in 2010. This gives us: Capital spending = Acquisiton of fixed assets sales of fixed assets = $ 198 - $ 25 = $ 173 Note that this number can be found in the balance sheet: Change in net fixed assets + depreciation = ($ 1 118 - $ 1 035) + ($ 90) = $ 173
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We have previously calculated Net Working Capital Current Assets Current Liabilities In 2009: NWC = $ 707 - $ 455 = $ 252 In 2010: NWC = $ 761 - $ 486 = $ 275 The difference equals additions to NWC = $ 275 - $ 252 = $ 23
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The cash flow to the creditors are the sum of interest paid plus changes in net borrowing, which can be found by substracting new debt from repaid debt during the last year. USCC paid $ 49 in interest, repaid $ 73 in old debt and acquired new long-term debt of $ 86: Interest + repaid debt - new debt = $49 + $ 73 - $86 = $ 36. It can also be calculated by using interest paid from the income statement, and changes in long-term debt found in the balance sheet.
Interest paid Net new borrowing = Interest paid (End LT Debt Beg LT Debt) 54 = $ 49 ($ 471 - $ 458) = $ 36
The cash flow to the stockholders are the sum of dividends paid plus repurchase of equity, minus new equity financing. In the case of USCC in 2010, dividends paid to stockholders (found in income statement) were $ 43, and the firm repurchased stock of $ 6. In total this provides $ 49 in cash to the stockholders. In addition the firm issued/sold stocks for $ 43, which makes the total cash flow to stockholders: ($ 43 + $ 6) - $ 43 = $ 49 - $ 43 = $ 6.
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The cash flow received from the firms assets must equal the cash flows to the firms creditors and stockholders: CF(A) CF(B) + CF(S) = $ 42 = $ 36 + $ 6 = $ 42
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Chapter 3
Financial Statements Analysis and Financial Models
2011 McGrawHill/Irwin
3-58
Chapter Outline
(3.1 Financial Statements Analysis) (3.2 Ratio Analysis) 3.3 The Du Pont Identity
The book covers several methods to analyze the progress of a company, by looking at numbers in its financial statements. The Common-Size Balance Sheet compute all accounts as a percent of total assets. Common-Size Income Statements compute all line items as a percent of sales. Ration analysis Standardized statements make it easier to compare financial information, particularly as the company grows. They are also useful for comparing companies of different sizes, particularly within the same industry.
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Profit margin = Net income / sales = 363 / 2311 = 15,7% EBITDA Margin = EBITDA / Sales = 967 / 2311 = 41,8%
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Lecture summary
Chapter 1 Introduction to Corporate Finance
Business organization Goal of financial management Agency problems
Chapter 3 Financial Statements Analysis and Financial Models Common-Size evaluation and ratio analysis. Du Pont Identity
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