The Concept
A stable strategy arises out of a basic perception by the management that the firm should concentrate on using its present resources for developing its competitive strength in particular market areas.
In simple words, stability strategy refers to the company’s policy of continuing the same business and with the same objectives
A firm pursues stability strategy when
1. It continues to serve the public in the same product or service, market, and function sectors as defined in its business definition.
2. Its main strategic decisions focus on incremental improvement of functional performance.
2. Corporate Restructuring is the process of redesigning one or more aspects of a company.
3. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, surviving a currently adverse economic climate, or acting on the self confidence of the corporation to move in an entirely new direction.
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
The Concept
A stable strategy arises out of a basic perception by the management that the firm should concentrate on using its present resources for developing its competitive strength in particular market areas.
In simple words, stability strategy refers to the company’s policy of continuing the same business and with the same objectives
A firm pursues stability strategy when
1. It continues to serve the public in the same product or service, market, and function sectors as defined in its business definition.
2. Its main strategic decisions focus on incremental improvement of functional performance.
2. Corporate Restructuring is the process of redesigning one or more aspects of a company.
3. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, surviving a currently adverse economic climate, or acting on the self confidence of the corporation to move in an entirely new direction.
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
This presentation covers Merchant Banking History; Categories; Services provided by them; Methods of placement; underwriting; Issue management & SEBI guidelines.
The Cadbury Committee was set-up in May 1991 by the Financial Reporting Council of the London Stock Exchange.
The committee published its report in December 1992.
Adrian Cadbury the chairman of the Cadbury committee.
The report sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures.
This presentation covers Merchant Banking History; Categories; Services provided by them; Methods of placement; underwriting; Issue management & SEBI guidelines.
The Cadbury Committee was set-up in May 1991 by the Financial Reporting Council of the London Stock Exchange.
The committee published its report in December 1992.
Adrian Cadbury the chairman of the Cadbury committee.
The report sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures.
1 the role of managerial finance(modified 4)Ahmed Elgazzar
1-The Role of Managerial Finance(Modified 4)
2-Time value of money(modified 1)
3-Capital Budgeting(Modified 1) [Repaired]
4-Stock Valuation(modified 1)
MBA Assignments
The first chapter introduces us to Corporate finance is essential .docxoreo10
The first chapter introduces us to Corporate finance is essential to all managers as it provides all the skills managers need to; Identify corporate strategies and individual projects that add value to the organization and come up with plans for acquiring the funds. The types of business forms are; sole proprietorship, corporation and partnerships. A sole proprietorship form of business possesses different advantages and disadvantages. A partnership maintains roughly similar pros and cons of a sole proprietorship. A corporation is a legal entity that is separate from its owners and managers. Advantages include a smooth transfer of ownership, limited liability, ease of raising capital. The disadvantages include; double taxation, and a high cost of set-up and report filing. The chapter then deals with Objective of the firm, which is to maximize wealth. The final topic is an in-depth look at Financial Securities, which are markets and institutions.
In the second chapter, we are introduced to financial statements, Cash flow and taxes. Financial statements include; the Income statement and the Balance sheet. An income statement is a financial statement that shows a company’s financial performance regarding revenues and expenses, over a particular period, mostly one year. A balance sheet, on the other hand, is a financial statement that states a company’s assets, liabilities and capital at a particular point in time. Under the cash flow, the chapter covers on the Statement of cash flows, indicates how various changes in balance sheet and income statement accounts affect cash and analyses financing, investing and operating activities. A free cash flow shows the cash that an organization is capable of generating after investment to either maintain or expand its database. Under taxes, Corporate and personal taxes are well explained and the scenarios under which they apply.
Chapter Three analyzes Financial Statements. This analysis is broken down into; Ratio Analysis, DuPont equation. The effects of improving ratios, the limitations of ratio analysis and the Qualitative factors. Ratios help in comparison of; one company over time and one company versus other companies. Ratios are used by; Stockholders to estimate future cash flows and risks, lenders to determine their creditworthiness and managers to identify areas of weaknesses and strengths. Liquidity ratios show whether a company can meet its short-term commitments using the resources it has at that particular time. Asset management ratios exemplify how well an organization utilize its assets. Debt management ratios, leverage ratios as well as profitability ratios are explained.
The DuPont equation focuses on several issues. These are; Debt Utilization, Asset utilization and the Expense Control. Consequently, Ratio analysis has various problems and limitations. These include; Distortion of ratios from seasonal factors, various operating and accounting practices can distort comparisons and also it i ...
Importance of financial management
Overview of Financial Management
Time Value Of Money
Cost of capital
International Financial Management
Return and Risk
Valuation of financial instruments
10
66 harvard business review | hbr.org
t’s become fashionable to blame the pursuit of
shareholder value for the ills besetting corporate
America: managers and investors obsessed with next
quarter’s results, failure to invest in long-term growth,
and even the accounting scandals that have grabbed head-
lines. When executives destroy the value they are sup-
posed to be creating, they almost always claim that stock
market pressure made them do it.
The reality is that the shareholder value principle has
not failed management; rather, it is management that has
betrayed the principle. In the 1990s, for example, many
companies introduced stock options as a major compo-
nent of executive compensation. The idea was to align the
interests of management with those of shareholders. But
the generous distribution of options largely failed to mo-
tivate value-friendly behavior because their design almost
guaranteed that they would produce the opposite result.
To start with, relatively short vesting periods, combined
with a belief that short-term earnings fuel stock prices, en-
couraged executives to manage earnings, exercise their
options early, and cash out opportunistically. The com-
mon practice of accelerating the vesting date for a CEO’s
Companies profess devotion to shareholder value but rarely follow the practices
that maximize it. What will it take to make your company a level 10 value creator?
by Alfred Rappaport
I
S
IM
O
N
P
E
M
B
E
R
T
O
N
Ways to Create
Shareholder Value
Y
E
L
M
A
G
C
Y
A
N
B
L
A
C
K
september 2006 67
Te n Wa y s t o C r e a t e S h a r e h o l d e r Va l u e
options at retirement added yet another incentive to
focus on short-term performance.
Of course, these shortcomings were obscured during
much of that decade, and corporate governance took a
backseat as investors watched stock prices rise at a double-
digit clip. The climate changed dramatically in the new
millennium, however, as accounting scandals and a steep
stock market decline triggered a rash of corporate col-
lapses. The ensuing erosion of public trust prompted a
swift regulatory response–most notably, the 2002 passage
of the Sarbanes-Oxley Act (SOX), which requires compa-
nies to institute elaborate internal controls and makes cor-
porate executives directly accountable for the accuracy of
financial statements. Nonetheless, despite SOX and other
measures, the focus on short-term performance persists.
In their defense, some executives contend that they
have no choice but to adopt a short-term orientation,
given that the average holding period for stocks in profes-
sionally managed funds has dropped from about seven
years in the 1960s to less than one year today. Why con-
sider the interests of long-term shareholders when there
are none? This reasoning is deeply flawed. What matters
is not investor holding periods but rather the market’s val-
uation horizon – the number of years of expec.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
NO1 Uk Divorce problem uk all amil baba in karachi,lahore,pakistan talaq ka m...Amil Baba Dawood bangali
Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
#vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore#blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #blackmagicforlove #blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #Amilbabainuk #amilbabainspain #amilbabaindubai #Amilbabainnorway #amilbabainkrachi #amilbabainlahore #amilbabaingujranwalan #amilbabainislamabad
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
Resume
• Real GDP growth slowed down due to problems with access to electricity caused by the destruction of manoeuvrable electricity generation by Russian drones and missiles.
• Exports and imports continued growing due to better logistics through the Ukrainian sea corridor and road. Polish farmers and drivers stopped blocking borders at the end of April.
• In April, both the Tax and Customs Services over-executed the revenue plan. Moreover, the NBU transferred twice the planned profit to the budget.
• The European side approved the Ukraine Plan, which the government adopted to determine indicators for the Ukraine Facility. That approval will allow Ukraine to receive a EUR 1.9 bn loan from the EU in May. At the same time, the EU provided Ukraine with a EUR 1.5 bn loan in April, as the government fulfilled five indicators under the Ukraine Plan.
• The USA has finally approved an aid package for Ukraine, which includes USD 7.8 bn of budget support; however, the conditions and timing of the assistance are still unknown.
• As in March, annual consumer inflation amounted to 3.2% yoy in April.
• At the April monetary policy meeting, the NBU again reduced the key policy rate from 14.5% to 13.5% per annum.
• Over the past four weeks, the hryvnia exchange rate has stabilized in the UAH 39-40 per USD range.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
1. CORPORATE FINANCE
The key responsibilities of the CFO
The two main parts of CF are allocation (investment) and financing, corresponding
to the A&L sides of the balance sheet. The ultimate objective is to maximize the
shareholders’ wealth: achieve the highest return on the projects and ensure the
cheapest financing. Evaluation of the investment projects is based on the discounted
cash flows, which are different from the accounting profits (e.g. because of
depreciation). The real options approach takes into account that managers can
influence the CFs after the beginning of the project. Applying similar methods, one
can value the company.
The company can be restructured from private to a public one via IPO, and vice
versa. Another type of structural change comes from M&As. The company’s goal is
to acquire the companies bringing synergy gains and those undervalued due to the
inefficient management. The best defence from the acquisition is to maximize its
own value.
The goal of corporate governance is to internalize the external effects, balance the
economic interests of all stakeholders. In well-functioning financial markets, this
maximizes shareholder value.
Typical CF questions:
How to measure the project’s worth for the company?
Are companies' market prices justified? (e.g., dot-coms)
How to choose among the projects given the budget constraint and external
effects?
How to account for risks associated with the project?
o Systematic vs company-specific risks
Are risks always bad?
Is it good to have volatile oil prices?
o Yes, if managers have flexibility in the future decisions.
Should we invest now in a project, which seems unprofitable (has negative NPV)?
o Probably, yes. It may yield high profit in certain future scenarios (oil pipeline)
Should we invest now in a project, which is profitable (has positive NPV)?
o Probably, not. It may be even more profitable next period (gold extraction)
Should we give managers higher salaries or higher bonuses?
o Bonuses encourage higher performance, but may also lead to the
manipulations and excessive risk-taking.
Does it matter how to finance the project: by debt or by equity?
Would you like the company to have much debt?
o Yes, to minimize taxes and to discipline the managers. Not too much, to avoid
bankruptcy.
Should the company borrow money from banks or issue bonds?
o The company can renegotiate the terms of bank credit.
Would you like the company to pay high dividends? (e.g., Microsoft)
o Yes, if too much managerial discretion (Surgut). No, because of double
taxation and signalling that the company has no valuable inv projects.
How will the market react to the share buyback?
CORPORATE FINANCE NOTES
1
2. o The company signals that its shares are undervalued.
How will the market react to the new equity issue?
o Usually negatively: either the company’s shares are overvalued, or it needs to
finance a new inv project.
How should the company communicate with the market? Always provide precise
info in time?
What drives the company’s decision to go public? Why are there hardly any IPOs
in Russia?
Would you like the company to grow via acquisitions?
o Yes, if the main motivation comes form synergy gains, and not
empire-building.
Specifics of corporation
Do not take the current form of corporations and stock markets as given, it is an
endogenous outcome!
Advantages of corporation in comparison with sole proprietorship and partnership:
Ltd liability: lesser risks for investors
o Crucial for development of stock markets and diversification
Easy transfer of ownership
o Promotes liquidity
Unlimited life
o Makes it easier to attract financing
Disadvantages:
Separation of ownership and control, the agency conflict
o Solved in two ways: US vs Germany
Double taxation
History: 1811, general act of incorporation in NY, specifying that all investors of NY
corporations have limited liability
Not so obvious that limiting the freedom of contracts is good
Hot discussion at the time: could spur excessive risk taking
California was the last to copy in 1931
The Objective in Corporate Finance
“If you don’t know where you are going,
it does not matter how you get there”
The Classical Viewpoint:
Van Horne: "In this book, we assume that the objective of the firm is to maximize
its value to its stockholders"
Brealey & Myers: "Success is usually judged by value: Shareholders are made
better off by any decision which increases the value of their stake in the firm... The
secret of success in financial management is to increase value."
Copeland & Weston: The most important theme is that the objective of the firm is
to maximize the wealth of its stockholders."
Brigham and Gapenski: Throughout this book we operate on the assumption that
the management's primary goal is stockholder wealth maximization which translates
into maximizing the price of the common stock.
CORPORATE FINANCE NOTES
2
3. Why focus on maximizing stockholder wealth?
Stock price is easily observable and constantly updated (unlike other measures of
performance, which may not be as easily observable, and certainly not updated
as frequently).
If investors are rational (are they?), stock prices reflect the wisdom of decisions,
short term and long term, instantaneously.
The objective of stock price performance provides some very elegant theory on:
o how to pick projects
o how to finance them
o how much to pay in dividends
The Classical Objective Function
What can go wrong?
CORPORATE FINANCE NOTES
3
4. Traditional corporate financial theory breaks down when the interests/objectives
of the decision makers in the firm conflict with the interests of stockholders.
o Bondholders (Lenders) are not protected against expropriation by
stockholders.
o Financial markets do not operate efficiently, and stock prices do not reflect
the underlying value of the firm.
o Significant social costs can be created as a by-product of stock price
maximization.
Solutions:
Choose a different mechanism for corporate governance
Choose a different objective:
o Maximizing earnings / revenues / firm size / market share
o The key thing to remember is that these are intermediate objective
functions. To the degree that they are correlated with the long term health
and value of the company, they work well. To the degree that they do not,
the firm can end up with a disaster
Maximize stock price, but reduce the potential for conflict and breakdown:
o Making managers (decision makers) and employees into stockholders
o Providing information honestly and promptly to financial markets
Counter reaction
CORPORATE FINANCE NOTES
4
5. The strength of the stock price maximization objective function is its internal self
correction mechanism. Excesses on any of the linkages lead, if unregulated, to
counter actions which reduce or eliminate these excesses
managers taking advantage of stockholders has lead to a much more active
market for corporate control.
stockholders taking advantage of bondholders has lead to bondholders
protecting themselves at the time of the issue.
firms revealing incorrect or delayed information to markets has lead to markets
becoming more “skeptical” and “punitive”
firms creating social costs has lead to more regulations, investor and customer
backlashes.
The Modified Objective Function
For publicly traded firms in reasonably efficient markets, where bondholders
(lenders) are protected:
o Maximize Stock Price: This will also maximize firm value
For publicly traded firms in inefficient markets, where bondholders are protected:
o Maximize stockholder wealth: This will also maximize firm value, but
might not maximize the stock price
For publicly traded firms in inefficient markets, where bondholders are not fully
protected
o Maximize firm value, though stockholder wealth and stock prices may not
be maximized at the same point.
For private firms, maximize stockholder wealth (if lenders are protected) or firm
value (if they are not)
Relation to investment theory
Use of CAPM to estimate the cost of capital
Option pricing approach for valuing investment projects (real options), equity of
the firm, and bonds’ credit risk
CORPORATE FINANCE NOTES
5
6. Lecture 2. Analysis of financial statements
The Firm’s Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Functions: providing
current status and past performance information to owners and creditors
a convenient way for owners and creditors to set performance targets & to
impose restrictions on the managers of the firm
a convenient template for financial planning
Balance Sheet
Assets ≡ Liabilities + Shareholder’s Equity
Tabulates a company’s assets and liabilities at a specific point in time
o Info on value of the assets and the capital structure
Sorting of
o Assets by liquidity
o Liabilities by maturity
Assets and liabilities are represented by historical costs
o The original cost adjusted for improvements and aging = Book Value
o Avoid using market value, since is too volatile and easily manipulated
o Preference for underestimating value
Strict categorization into E or L: the liability must satisfy
o The obligation will lead to CF at some specified or determinable date
o The firm cannot avoid the obligation
o The transaction behind the obligation has already happened
However, important liabilities may be under-stated or omitted
Assets
Current Assets (Оборотные средства): will convert into cash within a year
o Cash
o Accounts Receivable (Счета к получению)
Recognizing not collectible ones: reserves (danger of manipulation!)
o Inventory (ТМЗ): valued by FIFO, LIFO, wdt-avg
LIFO increases costs and reduces taxes
LIFO reserve: difference between LIFO and FIFO valuations
Investments and Marketable Securities (Рыночные цб)
o Minority passive / active investment (<20% / 20-50% of the ownership): BV
or MV
o If majority active investment (>50%): include in the consolidated balance
sheet
Intangible Assets (Нематериальные активы): amortized over expected life (say,
40 years)
o Patents and trademarks: valuation depends on whether generated
internally or acquired
o Goodwill: the difference between BV and MV of the acquired firm (purchase
accounting)
CORPORATE FINANCE NOTES
6
7. Fixed Assets (Основные средства; Land, Plant and Equipment): BV with
adjustment for aging
o Depreciation: straight line or accelerated (improves the earnings in the first
years)
Liabilities and Stockholder’s Equity
Liabilities
Current Liabilities (Краткосрочные обязательства): valued as the amount due
o Accounts Payable (Счета к оплате)
o Short-term Borrowing
o Other: Accrued Wages, Benefits, and Taxes
Long-Term Debt: Bank Loans, Bonds
o Valued as PV of future obligations at the time of borrowing (usually at
par)
o The premium or discount over the par is amortized over the bond’s life
Other Long-Term Liabilities
o Leases
Capital lease (transfer of ownership): recognized as asset
(depreciated) and liability
If operating lease: balance not affected, lease payments treated as
operating expense
o Employee Benefits: Pension Plans, Healthcare Benefits
DC: fixed contribution each year;
DB: contributions change depending on whether the plan is over-
or underfunded
o Deferred Taxes
Difference between the taxes on income reported in fin
statements and actual taxes
Shareholder’s Equity (Акционерный капитал) = Total Assets - Total Liabilities
Preferred Stock
o Hybrid: fixed (cumulative) dividend, but cannot result in bankruptcy
o Valued at the original issue price + cumulated unpaid dividends
Common Stock at Par
Capital Surplus
o Results from earnings on buying and selling stocks
o Treasury Stock: repurchased shares, reduce BV of equity
Retained Earnings (Нераспределенная прибыль)
Income Statement
Revenue – Expenses ≡ Income
Summarizes the company’s profitability during a time period
o Records sales, expenses, taxes, and net income
Matching principle of the accrual accounting:
o Revenues and expenses are recognized when the good is sold
Becomes complicated for long-term contracts and buyers with credit
risk
o In contrast to the cash-based approach: recognizing revenues when
received and expenses when paid
A company’s accounting income and cash flow are two different
things
CORPORATE FINANCE NOTES
7
8. Categorization of expenses:
o Operating: provide benefits only for the current period (cost of labor and
materials)
Also included: depreciation (based on historical cost) and R&D
o Financing: arising from non-equity financing (interest expenses)
o Capital: generate benefits over multiple periods (buying land and
buildings), written off as depreciation
To improve forecasting, separately: nonrecurring items
o Income from discontinued operations, extraordinary gains & losses,
adjustments for changes in accounting principles
Retained earnings are not added to the cash balance in the balance sheet, but are
added to shareholder’s equity
Inflation distorts the measuring of income and the valuation of assets
Total operating revenues
- Cost of goods sold
- Selling, general, and administrative expenses
- Depreciation
Operating income
+ Other income
EBIT (Earnings before interest and taxes)
- Interest expense
Taxable income
- Taxes: Current + Deferred
Net income = Retained earnings + Dividends
The Statement of Cash Flows
CF(firm) ≡ CF(debt) + CF(equity)
Reports how much cash is generated during a period.
o Indicates where the cash comes from and what the firm did with that cash.
Unlike the balance sheet and income statement, cash flow statements are
independent of accounting methods
o Accounting rules have a second-order effect on cash flows through taxes
Operating CF = EBIT + Depreciation - Taxes
- Capital Spending (net acquisitions of fixed assets)
- Additions to the Net Working Capital (current assets - current liabilities)
Cash Flow of the Firm
CF of debtholders = Interest – net long-term debt financing
CF of equityholders = Dividends– net equity financing
Financial Ratio Analysis
Trend Analysis
Cross-Sectional Analysis
Profitability Ratios
Return on Assets (ROA) = EBIT(1-tax) / Total Assets
Return on Equity (ROE) = Net Income / BV(equity)
CORPORATE FINANCE NOTES
8
9. Gross Profit Margin = Gross Profit / TA
Operating Profit Margin = EBIT / Sales
Net Profit Margin = Net Income / Sales
Activity Ratios: measuring the efficiency of working capital management
• Accounts Receivable Turnover = Sales / Avg Accounts Receivable
• Inventory Turnover = Cost of Goods Sold / Avg Inventory
• Total Asset Turnover = Sales / Total Assets
Liquidity Ratios: measuring short-term liquidity
Current Ratio = Current Assets / Current Liability
Quick Ratio = (Current Assets – Inventory) / Current Liability
Financial Leverage Ratios
Debt-to-Capital Ratio = Debt / (Debt + Equity)
Debt-to-Equity Ratio = Debt / Equity
o Can be based on BV or MV
o Similarly: long-term debt ratios
Interest Coverage Ratio = EBIT / Interest Expenses
Cash Fixed Charges Coverage Ratio = EBITDA / Cash Fixed Charges
Market Value Ratios
• Price-to-Earnings Ratio = PS / EPS
– Stock market price to earnings per share
• Dividend Yield = Div / PS
– Latest dividend to current stock price
• Market-to-Book Value = MV / BV
– Similarly: Market-to-Book Equity = ME / BE
• Tobin's Q = MV / Replacement Value
Links between the Ratios
ROA = Profit Margin * Asset Turnover
o Both for Net and Gross ROA and Profit Margin
o Increasing ROA: trade-off between Profit Margin and Asset Turnover
ROE = ROA * Equity Multiplier
o where Equity Multiplier = Assets / Equity
o Higher fin leverage magnifies ROE when ROA(gross) excess the interest on
debt
Non-Financial Measures of Operating Effectiveness
Innovation
Customer Service
Product Quality
Reputation
Good Employee Relations
Segmented Financial Statements
Reports revenues, operating profits, and identifiable assets for each line of
business
Allows managers and shareholders to identify cross-subsidization
CORPORATE FINANCE NOTES
9
10. The DCF approach to bond and stock valuation
Computing Present Value
Time value of money: discount rate R
Single cash flow at T: CFT
o
PV0 = CFT/(1+R)T
Perpetuity: Ct = C, t>0
o PV0 = C / R
Growing perpetuity (with const rate g): Ct+1 = (1+g)Ct
o PV0 = C / (R - g)
Annuity: Ct = C, t = 1,…,T
o PV0 = (C/R) [1 – 1/(1+R)T ]
Growing annuity (with const rate g)
o PV0 = (C/(R-g)) [1 – (1+g)T/(1+R)T ]
Computing Growth Rate of Dividends
Assume that the company does not grow unless a net investment is made. Then the
company needs to retain part of its earnings to grow:
Earningst+1 = Earningst + Retained_ Earningst * R
where R is the return on the retained earnings, usually estimated by ROE
Divide by Earningst to get Sustainable Growth Rate :
1 + g = 1 + Retention Ratio * ROE
where Retention Ratio = Retained Earnings / Earnings
Pricing Applications
Bond with coupon C and face value F (at T)
o
P0 = (C/R) [1 – 1/(1+R)T ] + FT/(1+R)T
Stocks with dividends growing with const rate g
o PV0 = Div1/(R-g)
Project: NPV = Σt CFt/(1+R)t
Value of the firm with Div=EPS:
o Discounted CF's: PV0 = EPS/R + NPVGO
EPS = earnings per share, GO = growth opportunities
o Multiples: P/E≡PV0/EPS = 1/R + NPVGO/EPS
P/E = price to earnings ratio
Lectures 3-6. Capital budgeting
Black-Scholes approach to the valuation of real options
Differences between real and financial options, which are crucial for the
Black-Scholes approach:
1. The underlying asset is not traded
Option pricing theory is built on the premise that a replicating portfolio can
be created using the underlying asset and riskless lending and borrowing.
2. The price of the asset may not follow a continuous process
CORPORATE FINANCE NOTES
10
11. If there are no price jumps, as it is with most real options, the model will
underestimate the value of deep out-of-the-money options.
o One solution is to use a higher variance estimate to value deep
out-of-the-money options and lower variance estimates for
at-the-money or in-the-money options.
o Another is to use an option pricing model that explicitly allows for price
jumps, though the inputs to these models are often difficult to estimate.
3. The variance may change over the life of the option
The assumption that option pricing models make, that the variance is known
and does not change over the option lifetime, is not unreasonable when
applied to listed short-term options on traded stocks.
When option pricing theory is applied to long-term real options, there are
problems with this assumption, since the variance is unlikely to remain
constant over extended periods of time and may in fact be difficult to
estimate in the first place.
4. Exercise is not instantaneous
The option pricing models are based upon the premise that the exercise of an
option is instantaneous. This assumption may be difficult to justify with real
options, where exercise may require the building of a plant or the
construction of an oil rig, actions which are unlikely to happen in an instant.
The fact that exercise takes time also implies that the true life of a real option
is often less than the stated life.
Valuing Natural Resource Options/ Firms
Input Estimation Process
Expert estimates (Geologists for oil..); The
1. Value of Available
present value of the after-tax cash flows
Reserves of the Resource
from the resource are then estimated.
2. Cost of Developing Past costs and the specifics of the
Reserve (Strike Price) investment
Relinqushment Period: if asset has to be
relinquished at a point in time.
3. Time to Expiration
Time to exhaust inventory - based upon
inventory and capacity output.
based upon variability of the price of the
4. Variance in value of
resources and variability of available
underlying asset
reserves.
5. Net Production Revenue Net production revenue every year as percent
(Dividend Yield) of market value.
6. Development Lag Calculate PV of reserve based upon the lag.
Example: A gold mine
Consider a gold mine with an estimated inventory of 1 million ounces, and a
capacity output rate of 50,000 ounces per year.
The price of gold is expected to grow 3% a year.
The firm owns the rights to this mine for the next twenty years.
The present value of the cost of opening the mine is $40 million, and the average
production cost of $250 per ounce. This production cost, once initiated, is expected
to grow 4% a year.
CORPORATE FINANCE NOTES
11
12. The standard deviation in gold prices is 20%, and the current price of gold is $350
per ounce. The riskless rate is 9%, and the cost of capital for operating the mine is
10%. The inputs to the model are as follows:
Inputs for the Option Pricing Model
Value of the underlying asset = Present Value of expected gold sales (@ 50,000
ounces a year) = (50,000 * 350) * (1- (1.0320/1.1020))/(.10-.03) - (50,000*250)* (1-
(1.0420/1.1020))/(.10-.04) = $ 42.40 million
Exercise price = PV of Cost of opening mine = $40 million
Variance in ln(gold price) = 0.04
Time to expiration on the option = 20 years
Riskless interest rate = 9%
Dividend Yield = Loss in production for each year of delay = 1 / 20 = 5%
o Note: It will take twenty years to empty the mine, and the firm owns the rights for
twenty years. Every year of delay implies a loss of one year of production.
Valuing the Option
Based upon these inputs, the Black-Scholes model provides the following value for
the call:
d1 = 1.4069, N(d1) = 0.9202
d2 = 0.5124, N(d2) = 0.6958
Call Value= 42.40 exp(-0.05)(20) (0.9202) -40 (exp(-0.09)(20) (0.6958)= $ 9.75
million
The value of the mine as an option is $ 9.75 million, in contrast to the static capital
budgeting analysis which would have yielded a net present value of $ 2.40 million
($42.40 million - $ 40 million). The additional value accrues directly from the mine's
option characteristics.
Example: Valuing an oil reserve
Consider an offshore oil property with an estimated oil reserve of 50 million barrels
of oil, where the present value of the development cost is $12 per barrel and the
development lag is two years.
The firm has the rights to exploit this reserve for the next twenty years and the
marginal value per barrel of oil is $12 per barrel currently (Price per barrel -
marginal cost per barrel).
Once developed, the net production revenue each year will be 5% of the value of the
reserves. The riskless rate is 8% and the variance in ln(oil prices) is 0.03.
Inputs to the Black-Scholes Model
Current Value of the asset = S = Value of the developed reserve discounted back the
length of the development lag at the dividend yield = $12 * 50 /(1.05)2 = $ 544.22
o If development is started today, the oil will not be available for sale until two
years from now. The estimated opportunity cost of this delay is the lost
production revenue over the delay period. Hence, the discounting of the reserve
back at the dividend yield
Exercise Price = Present Value of development cost = $12 * 50 = $600 million
Time to expiration on the option = 20 years
Variance in the value of the underlying asset = 0.03
Riskless rate =8%
Dividend Yield = Net production revenue / Value of reserve = 5%
CORPORATE FINANCE NOTES
12
13. Valuing the Option
Based upon these inputs, the Black-Scholes model provides the following value for
the call:
d1 = 1.0359, N(d1) = 0.8498
d2 = 0.2613, N(d2) = 0.6030
Call Value= 544 .22 exp(-0.05)(20) (0.8498) -600 (exp(-0.08)(20) (0.6030)= $
97.08 million
This oil reserve, though not viable at current prices, still is a valuable property
because of its potential to create value if oil prices go up.
Valuing product patents as options
Input Estimation Process
PV of Cash Inflows from taking project
1. Value of the Underlying
now
Asset
This will be noisy, but that adds value.
Variance in cash flows of similar assets or
2. Variance in value of firms
underlying asset Variance in PF from capital budgeting
simulation.
Option is exercised when investment is
made.
3. Exercise Price on Option Cost of making investment on the project;
assumed to be constant in present value
dollars.
4. Expiration of the Option Life of the patent
Cost of delay
Each year of delay translates into one less
5. Dividend Yield
year of value-creating cashflows
Valuing Equity as an option
A simple example
Assume that you have a firm whose assets are currently valued at $100 million and
that the standard deviation in this asset value is 40%.
Further, assume that the face value of debt is $80 million (It is zero coupon debt
with 10 years left to maturity).
If the ten-year treasury bond rate is 10%, how much is the equity worth? What
should the interest rate on debt be?
Model Parameters
Value of the underlying asset = S = Value of the firm = $ 100 million
Exercise price = K = Face Value of outstanding debt = $ 80 million
Life of the option = t = Life of zero-coupon debt = 10 years
Variance in the value of the underlying asset = 2 = Variance in firm value = 0.16
Riskless rate = r = Treasury bond rate corresponding to option life = 10%
Valuing Equity as a Call Option
CORPORATE FINANCE NOTES
13
14. Based upon these inputs, the Black-Scholes model provides the following value for
the call:
d1 = 1.5994, N(d1) = 0.9451
d2 = 0.3345, N(d2) = 0.6310
Value of the call = 100 (0.9451) - 80 exp(-0.10)(10) (0.6310) = $75.94 million
Value of the outstanding debt = $100 - $75.94 = $24.06 million
Interest rate on debt = ($ 80 / $24.06)1/10 -1 = 12.77%
Applicability in valuation
Input Estimation Process
Cumulate market values of equity and debt (or)
Value of the
Value the firm using FCFF and WACC (or)
Firm
Use cumulated market value of assets, if traded.
If stocks and bonds are traded,
2firm = we2 e2 + wd2 d2 + 2 we wd ed e d
where e2 = variance in the stock price we = MV weight of
Variance in Equity
Firm Value
d2 = the variance in the bond price wd = MV weight of debt
If not traded, use variances of similarly rated bonds.
Use average firm value variance from the industry in
which company operates.
Maturity of Face value weighted duration of bonds outstanding (or)
the Debt If not available, use weighted maturity
Monte-Carlo approach to the valuation of real options
Stochastic Processes for Oil Prices
Geometric Brownian Motion Simulation
The real simulation of a GBM uses the real drift a. The price at future time t is given
by:
Pt = P0 exp{ (a - 0.5 s2) Dt + s N(0, 1) }
s is the volatility of P
With real drift use a risk-adjusted (to P) discount rate
The risk-neutral simulation of a GBM uses the risk-neutral drift a’ = r - d . The
price at t is:
Pt = P0 exp{ (r - d - 0.5 s2) Dt + s N(0, 1) }
d is the convenience yield of P
With risk-neutral drift, the correct discount rate is the risk-free interest rate.
Mean Reversion Process
Consider the arithmetic mean reversion process
The solution is given by the equation with stochastic integral:
CORPORATE FINANCE NOTES
14
15. Where h is the reversion speed. The variable x(t) has normal distribution with
We want a mean reversion process for the oil
prices P with lognormal distribution with mean E[P(T)] = exp{E[x(T)]}
Risk-Neutral Mean Reversion Process for P
The risk-neutral process for the variable x(t), considering the AR(1) exact
discretization (valid even for large Δt) is:
The variable x(t) reverts to a long run mean
Prices reverts to a long run equilibrium level, say $20/bbl
In order to get the desirable mean is necessary to subtract from x the half of
variance Var[x(t)], which is a deterministic function of the time: P(t) = exp{
x(t) - (0.5 * Var[x(t)])}
This is necessary due the log-normal properties
Using the previous equation relating P(t) with x(t), we get the risk-neutral
mean-reversion sample paths for the oil prices.
Risk-Neutral Simulation vs Real Simulation
For the underlying asset, you get the same value:
Simulating with real drift and discounting with risk-adjusted discount rate r = a
+d
Or simulating with risk-neutral drift (r - d) but discounting with the risk-free rate
(r)
For an option/derivative, the same is not true:
Risk-neutral simulation gives the correct option result (discounting with r) but
the real simulation does not gives the correct value (discounting with r)
Why? Because the risk-adjusted discount rate is “adjusted” to the underlying
asset, not to the option
Risk-neutral valuation is based on the absence of arbitrage, portfolio replication
(complete market)
Excerpt from Dias-Rocha (2001)
One practical “market-way” to estimate is taking the net convenience yield ( time
series (calculated by using futures market data from longest maturity contract with
liquidity)1, together with spot prices series, estimating by using the equation: (t)
(t) ( – P(t)). Here is just the difference between the discount rate (total
1
The known formula for a commodity futures prices is F(t) = e (r ) t P. This equation is deduced by
arbitrage and assumes that is deterministic, so it looks contradictory with our assumption of
systematic jump and with our model that implies that is as uncertain as P. But we want an implicit
value for and so for , to get a market reference for . It is only a practical “market evaluation” for
CORPORATE FINANCE NOTES
15
16. required return) and the expected capital gain E(dP/P), like a dividend. The
parameter is endogenous in our model and, from a market point of view, is used
in the sense of Schwartz’s (1997b, p.2) description: “In practice, the convenience
yield is the adjustment needed in the drift of the spot price process to properly price
existing futures prices”. High oil prices P in general mean high convenience yield
(positive correlation), and for very low P the net convenience yield can even be
negative. There is an offsetting effect in the equation (even though not perfect), so
we claim as reasonable the approximation of constant. As compensation, we do
not need to assume constant interest rate (because it does not appear in our model)
or constant convenience yield (this implicitly changes with P). The time series (P, r, )
generate the time series. In this way, the value of depends of the assumed
values for and . Using 10-year oil futures data (from July/89 to June/99) and
12-month T-Bond interest rates, we found the time series for both and , and the
standard deviation of was about the half of the , confirming our intuition of more
stability for . The simple regression P x permits us to estimate “market” values
for and . We found 9.3% and = 0.03 (used in the base case). We get the
same value 9.3% p.a. at the equilibrium level $20/bbl (for P = = using the
equation of regression.
the discount rate that is assumed constant in our model.
CORPORATE FINANCE NOTES
16
17. Lectures 7-9. Capital structure
Treatment of Warrants and Convertibles
Warrants and conversion options (in convertible bonds, for instance) are long term
call options, but standard option pricing models are based upon the assumption
that exercising an option does not affect the value of the underlying asset. This may
be true for listed options on stocks, but it is not true for warrants and convertibles,
since their exercise increases the number of shares outstanding and brings in fresh
cash into the firm, both of which will affect the stock price. The expected negative
impact (dilution) of exercise will make warrants less valuable than otherwise similar
call options. The adjustment for dilution in the Black-Scholes to the stock price
involves three steps:
Step 1: The stock price is adjusted for the expected dilution from warrant exercise.
Dilution-adjusted S = (S ns+W nw) / ns
where,
S = Current value of the stock
nw = Number of warrants outstanding
W = Market value of warrants outstanding
ns = Number of shares outstanding
When the warrants are exercised, the number of shares outstanding will increase,
reducing the stock price. The numerator reflects the market value of equity,
including both stocks and warrants outstanding.
Step 2: The variance used in the option pricing formula is the variance in the value
of the equity in the company (i.e., the value of stocks plus warrants, not just the
stocks).
Step 3: The call is valued with these inputs.
Dilution-adjusted value = Call Value from model
Lecture 10. Payout (dividend) policy
Lecture 11. IPOs
Lecture 12. Mergers and acquisitions
Example on the accounting for acquisitions
Assume that there are firms A and B with the current value and number of shares
given in the first columns of the table. Together, firms A and B are worth 700. The
shareholders of B require half of the synergy gain, i.e., at least 150 for their shares.
A B A* after the A+B after the
merger merger
Market value, $ 500 100 550 700
# shares 25 10 25 31.818
Share price, $ 20 10 22 22
1. The purchase method: A makes a cash offer of 150 for B’s shares.
In this case, the combined firm A* is worth 700-150=550 or $22 per share after the
merger.
2. Pooling of interest: A issues n new shares in exchange for 10 shares of B, such
that n shares of the combined firm are worth 150.
CORPORATE FINANCE NOTES
17
18. Solving the equation 150/700 = n/(25+n), we find n=6.818. Naturally, the share
price is the same as in the previous case: $22, as A’s shareholders must be
indifferent between the two methods given a fixed premium for B’s shareholders.
Given the probability of merger q, say, equal to 0.6, one can compute the
pre-merger price of A:
Pre-merger P(A) = 0.6P*(A) + 0.4P0(A) = 0.6*20 + 0.4*22 = $20.8.
Lecture 13. Corporate governance
Enron & WorldCom
Энергокомпания Enron завысила прибыль более чем на $1 млрд и скрывала
долги на $8 млрд на счетах офшорных структур. В декабре 2001 г. Enron
стала крупнейшим банкротом США с активами $63,4 млрд.
В июле 2002 г. обанкротился телекоммуникационный гигант WorldCom с
активами $107 млрд. Масштабы махинаций с бухгалтерской отчетностью в
WorldCom достигли $11 млрд.
В конце прошлой недели было объявлено о двух громких соглашениях, в
рамках которых члены советов директоров поступились личными деньгами,
чтобы отвести от себя обвинения акционеров. Десять независимых
директоров WorldCom согласились в рамках внесудебного соглашения
выплатить $18 млн, а 10 директоров Enron — $13 млн.
С 2002 г. введена персональная ответственность генерального и финансового
директоров публичных компаний за достоверность бухгалтерской отчетности.
Если они сознательно завизируют поддельную отчетность, им грозит до
20 лет тюрьмы и штраф в $5 млн; неумышленная подпись под недостоверным
документом грозит 10 годами и $1 млн.
CORPORATE FINANCE NOTES
18