Lecture Note for the Course

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Lecture Note for the course

Prepared by Chatuporn Tangkathach

No matter what your role in a corporation, an understanding of why and how financial decisions are made is essential. The focus of this book is how to make optimal corporate financial decisions.

Jonathan Berk, Peter DeMarzo (Corporate Finance)

Table of Contents
Financial Statements Models Financial Basis for Valuation: Time Value of Money Financial Modelling for Project Analysis Net Present Value and Other Investment Rules Cash Flow and Capital Budgeting Risk Analysis in Capital Budgeting Portfolio Models The Cost of Capital Firm Valuation: Free Cash Flows Model Financial Analysis of Leasing Working Capital Management International Financial Management page 3 page 20 page 26 page 42 page 55 page 58 page 72 page 81 page 85 page 88 page 96

759425 Financial Modelling 2/2550


Chatuporn Tangkathach

10 Principles that Form the Foundations of Financial Management Principle I: THE RISK-RETURN TRADE-OFF We won’t take on additional risk unless we expect to be compensated with additional return Principle II: THE TIME VALUE OF MONEY A dollar received today is worth more than a dollar received in the future. Principle III: CASH IS KING Cash – not profits – is king. Principle IV: INCREMENTAL CASH FLOWS Incremental cash flows – It’s only what changes that count. Principle V: THE CURSE OF COMPETITIVE MARKETS Why it is hard to find exceptionally profitable projects. Principle VI: EFFICIENT CAPITAL MARKETS The markets are quick and the prices are right. Principle VII: THE AGENCY PROBLEM Managers won’t work for the owners unless it’s in their best interest. Principle VIII: TAXES BIAS BUSINESS DECISIONS

Principle IX: ALL RISK IS NOT EQUAL Some risk can be diversified away, and some cannot. Principle X: ETHICAL BEHAVIOUR IS DOING THE RIGHT THING … and Ethical dilemmas are everywhere in finance.

759425 Financial Modelling 2/2550


Chatuporn Tangkathach

Financial Statement Models

Answer the following questions:
1. What are three most recognised financial statements? What are main differences between these three financial statements? 2. Name some important accounting principles. 3. What are sources and uses of funds? 4. What is contra account? 5. How many methods are there for deprecating the fixed assets? 6. How many methods are available to take into account the inventory? 7. What is Financial Shenanigan? 8. What are the roles of accountant and auditor? 9. Briefly describe the accounting cycle. 10. What is financial management?

759425 Financial Modelling 2/2550


Chatuporn Tangkathach

11. How finance is related to other areas of a company? 12. What is the relationship between finance and accounting? 13. Give some examples of financial ethical issues. 14. Why financial accounting is required prior to first finance course? 15. Which skills are intensely required for finance people, how about accountants?


US Composite Corporation: For Years Ending 31st December (US$ in millions) 2006 Total operating revenues Cost of goods sold Gross profit Selling, general and administrative expenses Earnings before interest, taxes, depreciation, and amortisation (EBITDA) Depreciation expenses Amortisation Operating profit Other income / expense Earnings before interest, and taxes (EBIT) Interest expense Earnings before taxes (EBT) Current Deferred Total taxes Net income before preferred dividends Preferred stock dividends Net income to common equity Common stock dividends Per share data: Earnings per share (EPS-common) Dividends per share (DPS-common) Price per share Common shares outstanding 15.25 14.50 280 90 0 190 29 219 49 170 71 13 84 86 4 82 39 230 85 0 145 82 227 48 179 75 14 89 90 4 86 41 2,262 1,655 607 327 2005 2,110 1,610 500 270

759425 Financial Modelling 2/2550


Chatuporn Tangkathach


US Composite Corporation: at 31st December (US$ in millions) 2006 140 294 269 58 761 873...
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