Accounting & Finance

Introduction to the Course

1/31/13






Overview
What would you say is the
broadest goal is for a (profit-
oriented) company; that
managers should primarily be
concerned with?
Overview - Basics
Overall goal should be
Value Creation
When this occurs obviously
other good things also happen
For example jobs are added,
factories and other assets are
put to productive use etc
Overview - Basics
We will use the first several
sessions to learn basic principles of
accounting and finance such that
you will gain an understanding of
how the Corporate financial
manager helps to participate in the
value creation process
Overview
After that we will primarily use
the Case Study approach
This is viewed as the optimal
method of application of the
Principles of Accounting and
Finance
Overview
Point is that we will do
Accounting and Finance not so
much for the academic
exercise but for understanding
the process of value creation /
preservation
Overview
What are some typical ways
to create / preserve value?
Overview
For example Innovation
but this is not so much a
Financial approach

Overview
Nonetheless who can think
of some companies with
significant Contrast in Value
Creation vs Value
Destruction by virtue of
contrasting approaches to
innovation
Overview
How about Apple vs RIM or
even HP?
What is a good metric to
measure value creation vs
value destruction?
Intro to the Course
What else?
More in the category of a
purely Financial approach?
Intro to the Course
Lowering the Cost of Capital?

In fact we will learn how can a
firm arrive at the lowest
possible cost of capital?
Intro to the Course
We will look at this in detail in several
case studies.
One of which is Dell Computer we
will see how through extremely
efficient management of working
capital they were able to minimize
and even eliminate the need for
Expensive External Capital
Funding!


Intro to the Course
What is Capital Structure /
Funding?
Intro to the Course
Mix of Long Term Debt vs
Equity
What would you say is more
expensive Debt or Equity
Funding?
Intro to the Course
Equity! Why? How so?
Intro to the Course
Investors in debt securities
issued by a company
receive a stated return on
their investment.
Whats this called?
Intro to the Course
The coupon or stated interest
rate.
What about investors in the
common stock issued by a
company i.e., the equity
investors? What are they
entitled to receive?
Intro to the Course
If you bought Facebook stock
what would you be entitled to
receive as a return on your
investment?
Intro to the Course
NOTHING
Hence what can you
deduce from this in terms
of risk to the investor?
Intro to the Course
Equity investing (funding to the company)
is a lot riskier to the investor (vs debt)
The natural consequence of this is that
equity funding is more expensive for the
company even though this seems
counterintuitive in terms of actual costs to
the company.
We will explore this in more detail.
Intro to the Course
Whats another reason
that debt funding is less
expensive than equity
funding?
Intro to the Course
TAXES!
What do you know about the
tax consequences of company
payments of interest to debt
investors vs dividends to
stockholders?
Intro to the Course
Interest is tax deductible but common
stock dividends are not.
Hence the after-tax cost of interest is
a lot lower than common stock
dividends paid to shareholders.
We will have applications where we
see this issue.


Intro to the Course
What is the dividend on
Facebook stock?
Intro to the Course
Nada!
Hence why would an
investor buy this stock?
Intro to the Course
Stock appreciation but right
now FB is doing what to
value?
Intro to the Course
Destroying it.
$38 at issuance vs roughly
$30 today.
On the other hand the
original investors in FB
made a fortune.
Intro to the Course
We will come back to these issues as part
of the case studies on IPOs
All this is consistent with idea that
investing in common stock is risky since
the company promises to return nothing to
investors
But the corollary is that investors in
common stock have a much higher
required rate of return to buy the stock.

Intro to the Course
We will come back to
these issues as we
review the various case
studies.

Intro to the Course
What about debt? What are
the problems that the company
might have with debt funding?
Intro to the Course
Debt issued by a corporation
creates firm obligations that a
corporation must pay or face
the prospect of Bankruptcy
Intro
Note debt does not CAUSE BP
but it can exacerbate problems in
a downturn or difficult time for the
companys products / services.
Why?
Intro
If company cant meet its
interest and / or maturing principal
payment obligations on maturing
debt
How do we refer to this type of
financial trouble?
Intro
Financial Distress
We will see case studies involving
such situations and how real
companies adopted the most
appropriate Financial
Strategies including
Special Security design
Intro
In order to be able to fully grasp and
understand these financial strategies
its critical to be able to understand
1. Accounting and
2. Finance concepts
And how to apply these to Financial
Stmt analysis
Intro
Hence first few classes will
cover important Accounting
and finance concepts
These will be critical to
success
Intro
Also be sure to be proficient in
EXCEL
Group presentations will need to be
done in PPoint with support for
conclusions using EXCEL
EG. In lieu of a company paying
dividends How do we perform
valuation?
Intro
Should understand percentage
of sales method of projecting
cash flows in order to do a
_discounted cash
flow______________
analysis?

Intro
Any idea what is the most
critical variable / aspect of
the DCF?

Intro
The discount rate
As level of risk increases what
should happen to the discount
rate?
Intro
As the discount rate
increases what happens to
value?

Intro
In lieu of dividends DCF is a
measure of the flow of cash
that should accrue to
shareholders on a PV(present
value ) basis
We will see cases involving
these elements.
Intro
What is another approach to
Value Creation
Intro
Expansion projects
What does this fall under?
Intro
Expansion Project(s) which
fall under category of
Capital Budgeting
And what are some ways to
fund expansion?
Intro
IPOS; i.e. stock
Or debt issuance
We will see this in case
studies
Intro
What other ways are
there to enhance value?
Intro
M & A
Who can name some recent
M & A deals?
Intro
What techniques are
often used for M & A
deals?
Intro
Stock Swaps.
Why?
Intro
Stock swaps are tax free
to the investor.
Whats another form of
M & A activity?
Intro
Leveraged Buyouts
We will see cases
involving all of the above.

Intro
Whats often important
driving force for M & A
activity?
Intro
Synergies. ()
Note the CAPM(capital asserts
pricing model) is important to
derive value.
We will use this including
EMRP, beta etc
Intro
CAPM is based in part on
the principle that there is a
Risk Free asset
namely US Treasury
Securities.
Why are they considered to
be risk free?
Intro
Other important basic
concepts to learn include:
Sustainable growth
What is it?
Intro
Rate at which the company (in theory)
can grow without resorting to
expensive external funding yet keep
its optimal capital structure
unchanged
The point is that GROWTH is a
Financial Strategy to create value

Intro to the Course
Note we will see that firms
growing too fast can be a reckless
even dangerous approach
Intro
Other related areas that we
will cover include:
Venture Capital and;
Security Design

Intro
Growing while protecting a
portfolio of assets falls under
category of Risk
Management
We will have a case covering
this area of Finance
Intro
By the time we are done you
should have a good sense of
the practical use of accounting
and finance for purposes of
understanding Corporate
Finance
Intro
In addition you should become a
more educated investor and be
able to discern where you would
like to invest all the money you
will be making
EG you may become devotees of
the Benjamin Graham school
of investing

Intro
Somewhat beyond the scope
of this course
Maybe a good foundation for
the discipline of Financial
Engineering
Intro
Finally what is another Financial
Strategy that we have seen
recently very prominently in the
news?
Intro
Business Law
Apple vs Samsung using
Patent or intellectual
property law
We may be able to squeeze
in?

Intro
Other current topics
In this all time low interest rate
environment we have seen
record debt issuance what
might be a financial strategy
related to this phenom?
Intro
Issue debt to buy back equity
we will have a case on LBOs
same principle
Other more advanced accounting
/ finance concepts such as FAS
157 = Fair Valuation one of the
cases will incorporate this
approach
Intro
For next time read Horngren
Chapters 15-17