The Importance of Corporate Finance in a Business Plan

Topics: Revenue, Generally Accepted Accounting Principles, Investment Pages: 9 (2222 words) Published: March 16, 2008

The research is done by the request of the potential investors in the "5 Aces" business club on the basis of the business plan provided.

Problem faced: The importance of corporate finance in a business plan.

The author of the paper is a 3rd year bachelor student in corporate finance Olga Jegorova.

The aim of the paper is to elaborate the recommendations on the corporate finance importance when faced with a business plan analysis based on the theory and particular cases. To achieve the aim following tasks to be solved:

•Generalize professional literature on corporate finance importance •To analyze the "5 Aces" fitness club business plan
•To show specific examples of Corporate Finance importance •To show the implication of certain corporate finance indicators for the business plan users The work consists of two parts :
1.theoretical part;
2.practical part respectively.

Following instruments of analysis were used:
real business plan analysis
calculation in order to prove certain assumptions
rigorous information search

Corporate Finance Indicators

Who is to read a business plan? These will be first of all huge investors and second of all small investors. Corporate Finance certainly provides a base for investors to finalize their choice on. This is the criteria that are of most importance to them – estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows. It is very important to come to promising figures, so that the viability of the project would be perceived as higher than positive. There are several Corporate Finance and Accounting indicators that are of great importance to the investors: 1.Discounted cash flow

2.Working capital
3.Capital Returns
4.Profit margin
5.Return on assets
6.Return on equity
7.Debt to equity
8.Sales forecast

Now it shall be explained in details what each of the indicators stands for and be shown on an example how these are calculated and what do the figures represent.

1.Discounted cash flow [4]
Approach describes a method to value a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value. The discount rate used is generally the appropriate cost of capital, and incorporates judgments of the uncertainty (riskiness) of the future cash flows.

DPV = FV/ (1+d)^n
n= number of discounting periods used
d= discount rate, which is the opportunity cost plus risk factor

2.Working capital [4]
A financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.

WC = current assets – current liabilities

3.Capital Returns [4]

Calculation used to assess a company's potential to be a quality investment by determining how well (i.e.. profitably) a company's management is able to allocate capital into its operations. Comparing a company's ROIC with its cost of capital (WACC) reveals whether invested capital was used effectively.

The general equation for ROIC is as follows:

Total capital includes long term debt, common and preferred shares. Since some companies receive income from other sources or have other conflicting items in their net income, net operating profit after tax (NOPAT) will be used instead When the return on capital is greater than the cost of capital (usually measured as the weighted average cost of capital), the company is creating value; when it is less than the cost of capital - value is destroyed.

4.Profit margin [4]

A measure of profitability. Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause profit margin to vary among...
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