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Week 1 Slides

Week 1 Slides






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Week 1 Slides Week 1 Slides Presentation Transcript

  • Overview of Finance Week 1 – August 26 and 28, 2002
  • Financial Analysis, Functions, and Careers August 28, 2002
  • FBE 432 Objectives
    • Analyze and communicate implications of financial theory using cases
    • Understand finance careers and functions
    • Refine and expand specific financial analytical skills
    • Responsibility for learning is with you
    • Requirements are clear: review, prepare, and participate
  • Financial Analysis
    • Analyze performance of corporations (and projects)
      • What should be the objective of financial management?
      • How do we determine whether management is good or bad?
    • Focus in finance is on the future
      • Who knows what will happen in the future?
      • How can we deal with our uncertainty concerning the future?
  • Financial Functions
    • All finance is concerned with value
    • Corporate decision-making
      • Investments, including mergers and acquisitions and divestitures (disinvestment)
      • Growth and financing needs
      • Management of working capital
    • Chief financial officer is responsible for these decisions
      • Requires project analysts, treasury assistants
  • Investment Banking
    • Investment bankers assist corporations in their dealings with financial markets
      • Issuing securities
        • Initial public offerings (IPOs) or secondary offerings
        • Issuing debt or preferred stock to private investors (private placements) or to public markets
      • Mergers and acquisitions
      • Advising and valuing firms
    • This services are corporate finance or investment banking services
  • Investment Banking (continued)
    • Investment bankers also buy and sell securities
      • Brokers (retail and institutional)
      • Market makers
      • Asset management
      • Research
    • Investment banks are classified in a variety of ways
      • Full line
      • Boutique
      • Regional
      • “ Bulge bracket”
  • Investment Banking (continued)
    • Investment bankers need many types of financial skills
      • Analysts for research
      • Analytical support in doing deals
      • Traders
      • Marketing securities to retail and institutional markets
    • Investment banks hire junior analysts and associates at entry level
  • Investment Banking and Markets
    • Investment bankers assist corporations (and governments) in designing securities for sale to public or private markets
    • Employees of investment banks are usually called are said to work on the sell side of a securities firm, or are called sell side analysts or sell side traders or brokers
  • Investors
    • Individuals and institutions invest savings in securities (and other investments)
    • Individuals are usually divided into the retail market (small investors) and affluent investors (private banking)
    • Buying and selling securities in the retail market
    • Advising and investing for individuals is financial advising and asset management
    • Individuals often invest in mutual funds and save in pension plans
  • Institutional Investors
    • Pension funds, mutual funds, insurance companies, and specialized investment vehicles for wealthy investors (e.g. hedge funds) are called institutional investors
    • Institutional investors require analysts and portfolio managers to invest funds
    • Employees of institutional investors are usually said to be on the buy side , as for example a buy-side analyst or a buy-side trader
  • Specialized Investment Vehicles
    • Venture-capital firms provide financing to new firms, often firms in new technologies, requiring both technical and financial skills
    • Hedge funds are unregistered investment vehicles for wealthy investors’ or institutional funds, often using complex investment strategies requiring sophisticated financial analytical skills
  • Developments in Finance
    • Financial theory has developed to value financial instruments like options and swaps
    • Technology has developed to enable accounting and trading for complex financial claims like collateralized mortgage obligations (CMOs)
    • Trading and valuing these instruments and advising corporations on how to use them to manage risk demands highly developed research departments
  • Commercial Banking
    • Commercial banks make loans to corporations and individuals
    • Corporate commercial bankers provide a variety of services to corporations, including cash management and lending
    • Banks require financially trained individuals to call on corporations and analyze corporate customers
  • Finance Career Paths
    • Many individuals move between financial functions in corporations and investment banking, asset management, commercial banking, and financial advising over the course of their careers
    • Research, marketing (selling), deal-making, and advising require varying levels of interpersonal skills
    • Risk tolerance and energy requirements vary in different finance career paths
  • Next Time – August 28
    • Review valuation approaches
    • Read for practice, The Union Carbide Deal (Abridged)
      • Outline issues at issue in the case
      • What role do investment bankers play?
      • How are they compensated?
  • Introduction to Valuation and Review August 28, 2002
  • Value and Valuation
    • Finance objective function is to maximize owners’ value
    • Value is the present value of future cash flows at the risk-adjusted discount rate
    • Valuation principles are the same whether we are valuing stocks, bonds, real estate, or corporations
    • The challenge is to estimate the cash flows and choose a discount rate
  • Corporate Cash Flows
    • Corporate cash flows are similar to all firms’ cash flows, that is, they come from cash revenues minus cash costs
    • Because of tax laws and standard reporting conventions, corporate cash flows are more standardized
    • Value of claims on corporations can be calculated separately (e.g. stock and bond valuation) or in the aggregate (so-called entity approach )
  • Future Corporate Cash Flows
    • Since value comes from future cash flows and the future is unknown, future cash flows must be estimated
    • The future is usually divided into two or more parts
      • Forecast period and continuing value period
      • Rapid growth period and normal growth period
    • Choice of division depends on case and data available
  • Cash Flow Determination
    • Items From the Income Statement
      • Revenues (R)
      • Cash Expenses (W)
      • Non-Cash Expenses (Dep)
      • Capital Expenditures (Capex)
      • Cost of Goods Sold (CGS):
        • Excludes depreciation
      • Interest Expense (Int)
      • Taxes (T)
  • Cash Flow Determination
    • Other Items
      • Tax Rate (  )
      • Repayment of Principal (P)
      • Changes in Net Working Capital (  NWC)
      • Permanent Debt (D)
  • Definition of Earnings Components
    • Earnings Before Interest & Taxes [EBIT]
      • R-(W+Dep+CGS)
    • Earnings Before Interest, Taxes, Depreciation (and Amortization) EBITD(A)
      • EBIT+Dep+(Amort)
  • Definitions of Earnings Components
    • Pre-Tax Income
      • [EBIT-Int]
    • Tax Bill [T]
      •  (EBIT-Int)
    • Net Income
      • NI =Pre-Tax Income - T
  • Cash Flow Definitions
    • Levered Cash Flow [to equity] {LCF or FTE}
      • Money that goes to stockholders account
      • [R-(W+Dep+CGS+Int)](1-  )+Dep-Capex-P-  NWC
    • Unlevered Cash Flow {UCF}
      • Cash flow that would occur if there was no debt
      • (1-  )EBIT+Dep-Capex -  NWC
  • Next Week – September 4
    • Review valuation techniques and relate to case materials
    • Prepare Eskimo Pie Case
    • Form groups for group case analyses following Eskimo Pie