Introduction to Financial Management FIN 102 - AndrewParkes.com

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9 Νοε 2013 (πριν από 3 χρόνια και 7 μήνες)

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Introduction to Financial
Management


FIN 102

Dr. Andrew L. H. Parkes


“A practical and hands on course on the valuation and
financial management of corporations”


Syllabus and Our Course


The syllabus provides an
outline of what we will do this
semester: Chapters 1
-

4 as
well as Chapters 12, 13 and
14 of the textbook.



This week we will talk about
Chapter 1 and some of 2;
The role of financial
management and the
business environment

The required textbook

Lectures and Practice Problems


Lectures:

2 hours per week I will introduce
the new material to you


Practice Problems:

2 hours we will do
assignments (@)from my slides and from
the textbook



You will have to prepare assignments
for every class; there is NO class
without
homework

(Hwk).



You will work on a group project
during the course and select a
S&P500 company that you would like
to work on with your team.



You will simulate your own
investments and learn about financial
markets (e.g. investopedia.com
-

Forbes).



Keep up to date with

Finance related issues

Grading



Mid
-
term test
-

20%


Final Exam


-

40%


Homework


-

30%


Quizzes



-

10%



Total



-

100%

Financial Management (ch.1)


What are the most admired
companies in the world?
(see
www.fortune.com
)


Innovative companies


High management quality
companies


High employee talent
companies


High product quality companies


High return on investment
value companies


Financial sound companies


Social responsible (ethical)
companies


Efficient use of assets
companies



http://money.cnn.com/galleries/2007/fortune/0704/gallery.f100_employers.fortune/2.html

Career Opportunities in Finance

1.
Money and capital
markets

2.
Investments

3.
Financial
management

Warren Buffett


The Oracle of Omaha
-

#2 Forbes


World’s Billionaires
-

$52 Billion

Responsibility of the Financial Staff


Maximize stock value by:


Forecasting and planning


Investment and financing decisions


Coordination and control


Transactions in the financial
markets


Managing risk

Who owns GEICO?

Role of Finance in a Typical
Business Organization

Board of Directors

President

VP: Sales

VP: Finance

VP: Operations

Treasurer

Controller

Credit Manager

Inventory Manager

Capital Budgeting Director

Cost Accounting

Financial Accounting

Tax Department

Sole proprietorships & Partnerships


Advantages


Ease of formation

(to start
-
up the company)


Subject to few regulations


No corporate income taxes


Disadvantages


Difficult to raise capital


Unlimited liability


Limited life


Stores along the Street

Corporation


Advantages


Unlimited life


Easy transfer of ownership


Limited liability


Ease of raising capital


Disadvantages


Double taxation


Cost of set
-
up and report filing
(difficult)


Setting up a Corporation…


The incorporators of the
corporation have to:


Create a charter of the company


Name of the company


Types of activities of the company


Amount of capital stock


Number and names/addresses of
directors


Define a set of so called bylaws for the
company


How directors are elected


Will shareholders have the first right
on newly issued shares (right of first
refusal)


The conditions for changing the
bylaws of the company


3 Main decisions of Financial
Management


Investment decision:

what assets
does the firm need to hold and in
what quantities?



Financing decision:

how should
these assets be financed? (debt or
equity/ short or long?)



Asset management decision:

how
should assets develop over time
with the growth/change of the
business?


Financial Goals of the Corporation


The primary financial goal is
shareholder wealth
maximization, which translates
to maximizing stock price.


Do firms have any responsibilities
to society at large?


Is stock price maximization good
or bad for society?


Should firms behave ethically?

Is stock price maximization the
same as profit maximization?


No, despite a generally high correlation
amongst stock price, EPS, and cash flow.


Current stock price relies upon current
earnings, as well as future earnings and
cash flow.


Some actions may cause an increase in
earnings, yet cause the stock price to
decrease (and vice versa).


Creating Value…


For stakeholders of the company
like:


Customers (sustainable flow of
products and services)


Suppliers (sustainable flow of raw
material orders)


Employees (sustainable jobs with
career perspectives)


Shareholders (growing share value
and dividends)


Banks and Financial Institutions
(sustainable pay back of loans and
interest)


The Government … (more profit is
more tax income)


The Textbook approach…

In reality companies create value
by…


Increasing Free
Cash flow (FCF)


Reducing The
Weighted Average
Cost of Capital
(WACC%)



The Company Value =
Long Term FCF/ WACC%

Increasing FCF or lowering WACC%

Free Cash Flow is…


NOPAT

(
N
et
O
perating
P
rofit [Earnings before
Interest]
A
fter
T
ax)


+


Depreciation





The increase in Net
Working Capital (NWC)





Capital Expenditure
(CAPEX)


NOPAT

you will find in the income statement
of your company


Depreciation

you will find in the income
statement and cash flow statement of your
company


NWC
= Accounts Receivables plus Inventories
minus Accounts Payables; the change from
your to year you can calculate (a decrease in
NWC from one year to another is a Cash In
Flow so this adds to FCF)


CAPEX

you will find in the cash flow
statement it’s the amount spend on
investments…

Simple Valuation…


So if Google Inc. in the Long Term can
generate a FCF of $ 3 b. And the WACC
of Google Inc. is 10% then the value of
Google Inc. is (follow the formula)


Company Value (Google Inc.) =


$ 3 b/0.10 = $ 30 billion


Of course this is an example and I just
made up the estimated FCF and WACC.
We will learn during the course how to
estimate FCF and WACC to enable us to
calculate the value of any company …
under certain assumptions


This in fact is the core capability of
finance


Once we can calculate the value of a
company periodically, we can calculate
if the company is in fact creating value
for its stakeholders or destroying value

Assignment 1: Value your S&P company


You have picked a S&P500 company to work on during
the course:


Try to figure out what the Long Term Free Cash Flow is of your
company by reading its annual reports (1999
-
2005) Limit
yourself to the financial paragraph (5 years is fine).


Assume your companies’ WACC is anywhere in between 5% and
25%; 5% if your company is extremely financially solid and
rather low risk, 25% if your company has a very volatile
performance over the last 5 years and a bumpy road ahead and
is an extremely high risk business (you may pick any WACC in
between).


Step 1: Calculate the Company Value of your company
under these assumptions.


Step 2 in Valuing your S&P company


Now look up the Long Term debt from the latest
available Balance Sheet (sure you will find it
under liabilities)


Subtract this figure from the Company Value you
found in 1a)


Now you have the companies’ equity value


Divide that number by the number of common
shares outstanding


Now you find the equity value per share
outstanding or the calculated share price of your
company


Compare this share price with the current share
price of your company (take the latest closing
price for comparison)



Does the market value the share of your
company higher (over priced) or lower
(under priced) then what you calculated?


Why do you think there is a difference?


Help…


You can find your company’s
figures at
www.sec.gov



Go to Filings and Forms (EDGAR)


Search for company filings


Look up the ticker symbol of your
company at Yahoo Finance
(symbol lookup)


Plug in the found ticker symbol
at EDGAR


Try GOOG and you will find all
the filings of Google Inc.


Now search for the latest 8 and
10
-
K (annual reports) filings or
10
-
Q (quarterly reports)

More help…


Go to Yahoo Finance


Plug in the ticker of your company


See the left hand buttons “More
on…”


For a quick scan of your company


Click Profile, Key Statistics


For Historical Share Prices click…


Professional research on your
company…


Company events, news on your
company…


Everything is here…Use it!


So summarizing …


Your Homework is:


1) form a team 4
-
5 members max.


2) pick a S&P 500 company


3) download FY 2006 annual report
of the company you have chosen


4) Try to calculate Free Cash Flow


5) Assume that the Cost of Capital
is 10% (WACC%)


6) Calculate The Value of the
company by: Value= Free Cash
Flow/Cost of Capital

Who is this man?


Did he create value
in his companies?