Financial Management Lecture Notes
Financial Management
Corporations: Create money
Shareholders * board of directors * 7-10 people * corporate governance * monitor the manager’s performance * Sub committees * auditor commitee * compensation committee * buffer between shareholders and the managers
CFO * strategic financial decisions * Spending money: how the money is spent * financial investment projects * capital budgeting * Raising money: how to raise money * Investments that increase the firm value * How should the firm pay for those investments * Debt vs Equity? * Balance sheet * Assets * Current assets * Long-term assets * Debt * Debt ratio: typically 40% * Equity * Equity ratio: 60% * A=D+E * CFO oversee the work of the: * Treasurer * cash management, raising capital (debt or equity), banking relationships * financial decisions * Controller * preparation of financial statements, accounting, taxes
Time Value of Money
PV FV
FV PV
Rule 1: Only values at the same point in time can be compared
Rule 2: To move a cash flow forward in time, you must compound it FVn= C x (1+r)x(1+r)…. = C x (1+r)n
Rule 3: To move a CF back in time you must discount it PV= C/ (1+r)n
Valuing Streams of CF
NPV= ∑Cn/ (1+r)n
Perpetuity
Stream of equal CF that last forever
PV= C/r
Annuity
A stream of CF that occur at regular intervals for N periods
Growing Perpetuities
Stream of CF that occur at regular intervals and grow at a constant rate forever
(growing dividend)
NPV= C/ r – g
g= growth rate
Growing Annuities
PV= C x (1/(r-g)) (1-((1+g)/(1+r))N
What if g>r? * not possible for g to be greater than GDP growth rate –
Corporations: Create money
Shareholders * board of directors * 7-10 people * corporate governance * monitor the manager’s performance * Sub committees * auditor commitee * compensation committee * buffer between shareholders and the managers
CFO * strategic financial decisions * Spending money: how the money is spent * financial investment projects * capital budgeting * Raising money: how to raise money * Investments that increase the firm value * How should the firm pay for those investments * Debt vs Equity? * Balance sheet * Assets * Current assets * Long-term assets * Debt * Debt ratio: typically 40% * Equity * Equity ratio: 60% * A=D+E * CFO oversee the work of the: * Treasurer * cash management, raising capital (debt or equity), banking relationships * financial decisions * Controller * preparation of financial statements, accounting, taxes
Time Value of Money
PV FV
FV PV
Rule 1: Only values at the same point in time can be compared
Rule 2: To move a cash flow forward in time, you must compound it FVn= C x (1+r)x(1+r)…. = C x (1+r)n
Rule 3: To move a CF back in time you must discount it PV= C/ (1+r)n
Valuing Streams of CF
NPV= ∑Cn/ (1+r)n
Perpetuity
Stream of equal CF that last forever
PV= C/r
Annuity
A stream of CF that occur at regular intervals for N periods
Growing Perpetuities
Stream of CF that occur at regular intervals and grow at a constant rate forever
(growing dividend)
NPV= C/ r – g
g= growth rate
Growing Annuities
PV= C x (1/(r-g)) (1-((1+g)/(1+r))N
What if g>r? * not possible for g to be greater than GDP growth rate –