Fins3625

Applied Corporate Finance

Week 1: Lecture Slides

Introduction

• About Lecturer: Asfandyar Uppal (Asfand)

 Investment Banking: ABN AMRO

 Private Equity: Lazard

 Entrepreneur: Alternative Debt Solutions

• Textbook: Investment Valuation: 3rd Edition, Aswath Damodaran

Lecture Slides from: http://people.stern.nyu.edu/adamodar/New_Home_Page/Inv3ed.htm#ch3
with relevant modifications made

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Course Structure / Assessments

• Learning theory and what we do in the ‘real world’

Assessment Task % Length Due Date

5 30 minutes Week 3 Tutorials

In class quiz

10 Ongoing Week 13
Tutorial Participation

30 minutes TBD
Case Study Presentation 5

Analyst Research Report and Financial Model 15 5 pages / 5 Sheets TBD

30 1.5 Hours Week 9

Mid Session Exam

Final Exam 35 2 Hours University Exam Period

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Financial Modelling

• Key Sheets are:

1. Assumptions – what are key revenue and cost drivers

that drive the business?

2. Financial Statements – P&L, BS and CF

3. Valuation – apply theory in DCF and comparable

companies. Provide an estimate for Market Cap and
Share Price (Market Cap divided by Shares on Issue)

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Forecasting Financial Statements

• In financial analysis, we are much more concerned about

– Cash flows to the firm or operating cash flows, which are

before cash flows to debt and equity)

– Cash flows to equity, which are after cash flows to debt

but prior to cash flows to equity

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Example Financial Statements: Qantas

• What is EBIT?

– Earnings before Interest and

Taxation

– $1,643m

• What is EBITDA?

– EBIT + D&A

– $1,643m + $1,224m =
$2,867m

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Example Financial Statements: Qantas

• What is market value of

assets?

• What is Net Debt?

– Total Interest bearing

liabilities/debt less cash on
hand

– $441m + $4,421m - $1,980 =

$2,882m

– Net Debt / EBITDA = 1x

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Example Financial Statements: Qantas

• Businesses do not tend to go

broke if they have plenty of

cash

• Always look at ‘Cash EBITDA’

not just EBITDA due to accrual

accounting

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Modifications to Income Statement

• There are a few expenses that consistently are mis-categorized in

financial statements. In particular,

 Operating leases are considered as operating expenses by

accountants but they are really financial expenses

 R &D expenses are considered as operating expenses by

accountants but they are really capital expenses.

• The degree of discretion granted to firms on revenue recognition and

extraordinary items is used to manage earnings and provide
misleading pictures of profitability.

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The Effects of Capitalizing Operating Leases

• Debt: will increase, leading to an increase in debt ratios used in the

cost of capital and levered beta calculation

• Operating income: will increase, since operating leases will now be

before the imputed interest on the operating lease expense

• Net income: will be unaffected since it is after both operating and

financial expenses anyway

• Return on Capital: will generally decrease since the increase in

operating income will be proportionately lower than the increase in
book capital invested

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The Effects of Capitalizing R&D

• Operating Income: will generally increase, though it depends upon

whether R&D is growing or not. If it is flat, there will be no effect since
the amortization will offset the R&D added back. The faster R&D is
growing the more operating income will be affected.

• Net income: will increase proportionately, depending again upon how

fast R&D is growing

• Book value of equity (and capital): will increase by the capitalized

Research asset

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Important Ratios

• Interest Cover

 EBIT / Interest Expense

 FCFF / Interest Expense

• Gearing Ratios

 Net Debt / BV of Equity

 Net Debt / Market Cap

 Net Debt / Market Value of Assets

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Tutorial Questions

• Questions 1, 2, 3, 5, 7, 8 and 10

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