This document provides an introduction to corporate finance concepts including long-term investments, raising funds through debt and equity, managing short-term assets and liabilities, and the role of financial managers. It also discusses key concepts like agency problems, growth, and regulation. Accounting concepts like the accounting entity, matching principle, and full disclosure are defined. Financial statements including the balance sheet, income statement, and cash flow statement are also introduced.

1. Introduction to Corporate Finance
1
Corporate Finance
1. Long-term Investments in Fixed Assets (Tangible & Intangible)
2. Raise Funds via from Debt & Equity
3. Managing Short-term / current Assets & Liabilities
Financial Manager
1. Increase firm value @ shareholder wealth
2. Value projects
3. Smart financing decisions
Growth
Agency Problem
Agency Cost
Regulation
• Securities Acts
• Sarbanes-Oxley (“Sarbox”)
• Corporate Governance
Managing the Agents
• Compensation / Incentives
• Corporate Control
• Other Stakeholders
Business Forms Corporation Sole Proprietor General Partnership Limited Partnership (LLP)
Entity name SDN BHD or BHD Subject to ROB Subject to ROB PLT
Owner(s) Shareholders Sole proprietor Partners Partners
Legal entity Separate Not separate Not separate Separate
Voting Rights Each share = one vote. Sole proprietor General Partner is in charge. Limited voting rights.
Liabilities Company. Liabilities to extent of
unpaid shares.
Sole proprietors have
unlimited liability.
Unlimited liability. Limited, except own wrongful act to
extent of unpaid shares.
Liquidity Exchange of shares. None. Substantial restrictions. Substantial restrictions.
Capital
contribution
Share capital contribution by its
subscribers / members
Own contribution Partners contribution or according to
the agreement
Partners contribution or according to
the agreement
Succession Perpetual Limited life Limited life Perpetual
Management Board of Directors (BOD) Sole proprietor Partners by agreement Partners &/or agreement
Statutory Audit Required, except for dormant
company or small co’ with
revenue < RM300K or total
assets < RM500K.
No audit required No audit required Not compulsory unless provided by
partnership agreement.
Annual
compliance
File annual return & financial
statements every financial year.
Not required Not required Lodge annual declaration & solvency
statement every financial year.
Taxation Tax on Company. SME: 18% first
RM500K, & 24% thereafter. Non-
SME 24%.
Tax on sole proprietor. From
0% to 28%.
Tax on Partners. From 0% to 28%. Tax on LLP. SME: 18% first RM500K, &
24% thereafter. Non-SME 24%.
Returns,
Dividend Payout &
Retained Earnings
All net cashflow to partners.
BOD vote for reinvestments.
Profits Share of profits based on partners’
capital contributions’ & / or according
to the agreement
Share of profits based on partners’
capital contributions’ & / or according
to the agreement
Ch1

2. Accounting Concepts & Principles
Accounting Entity
Every economic entity can be
separately identified &
accounted for.
Unit of Measurement
Only transactions denominated
in dollars (currency) are
recorded in the accounting
records.
Going Concern Concept
The presumption that the entity
will continue to operate in the
future - it’s not being liquidated.
Now Future
Cost Principle
Transactions are recorded at
their original cost to the entity as
measured in dollars.
2
Matching Concept
All expenses incurred to
generate that period’s revenues
be deducted from the revenues
earned.
Accounting Period
The period of time selected for
reporting results of operations
& changes in financial position.
Objectivity
The accountants’ desire to have
a given transaction recorded in
the same way in all situations.
Accrual Accounting
Recognize revenue at the point
of sale & recognize expenses
when incurred, even though the
cash receipt or payment may
occur at another time.
Full Disclosure
Circumstances & events that
make a difference to financial
statement users should be
disclosed.
Consistency
Provides meaningful trend
comparisons over several years.
Materiality
The benefit of increased
accuracy should outweigh the
cost of achieving the increased
accuracy.
Conservatism
When in doubt, make
judgments & estimates that
result in lower profits & asset
valuations.
Ch2

3. Operating Profit
+ Depreciation / Amortization
+ Other Non-Cash Charges
- Increase in Inventory
- Increase in Acc Receivable
+ Increase in Acc Payable
= Operating Cashflow
- Net Interest Paid
- Tax Paid
= Net Operating Cashflow
- Capital Expenditure
- Dividends
± Change in Equity
± Change in Debt
= Change in Cash & Eqv.
Assets (A) = (L) + (E)
+ Cash & Cash Equivalent
+ Inventory
+ Account Receivable
+ Tangible Assets
:: Plant, Property & Eqp
+ Intangible Assets
:: Patent, Goodwill, IP, TM
+ Others
Liabilities (L)
+ Account Payable
+ Short-Term Debt
+ Long-Term Debt
+ Others
Shareholders Equity
Assets (A) = (L) + (E)
+ Cash & Cash Equivalent
+ Inventory
+ Accounts Receivable
+ Tangible Assets
:: Plant, Property & Eqp
+ Intangible Assets
:: Patent, Goodwill, IP, TM
+ Others
Liabilities (L)
+ Accounts Payable
+ Short-Term Debt
+ Long-Term Debt
+ Others
Shareholders Equity
Revenue
- Cost of Sales
= EBITDA (Gross Profit)
- SG&A Expenses
+ Other Income
- Other Expenses
= EBIT
+ Interest Income
- Interest Expenses
= EBT
- Tax
= Net Income
- Dividends
= Retained Earnings
 Total Asset = Current Assets + Non-Current Assets
 SH Equity Value = Share Capital – Treasury Shares + Retained Earnings + Other Stockholder Equity
 Enterprise Value = Market Capitalization + Preferential Shares + Minority Interest + Debt – Cash & Equivalent
 Market Cap = Share Price x NOSH
 Net Asset Value = Total Asset – Total Liability
 Net Worth = Net Tangible Asset – Liability
 Total Number of Shares = Common Shares + Preferred Shares + Minority Interests
 Non-Cash = Depreciation + Deferred Tax, i.e. NOT part of Net Income
Accounting Fact Sheet
3
Non-CurrentCurrentOpening Statement of
Financial Position
@ Balance Sheet
 Balance Sheet Identity
 Snapshot of firm’s accounting
value at specific time
Closing Statement of
Financial Position
@ Balance Sheet
 Liquidity
 Debt versus Equity
 Value versus Cost
Statement of
Comprehensive Income
@ Income Statement
 Income ≡ Revenue – Expenses
 Financial performance
over specific time period
Statement of
Cash Flow
@ Cash Flow Statement
 CF(Asset) ≡ CF(Creditors) + CF (Equity)
 Operating + Investing + Financing
Ch2
Market
Value
of
Net Debt
Market
Value of
Assets
=
EV
Market
Value
of
Equity

4. Pyramid of Ratios Tiers
Primary Ratios: second
tier / lever of pyramid
Tax
Sales
Operating Income
Sales
Sales
Capital Assets
Sales
Working Assets
Total Liabilities
Equity
Gross Debt
Equity
Secondary Ratios: solvency
efficiency, profitability
Operating Cost
Sales
Gross Profit
Sales
Sales
Receivables
Sales
Other FA
Sales
Inventory
Net Debt
ES/TDA
Gross Debt
Equity
Net Debt
Equity
Admin
Cost
Sales
R&D
Sales
Labor
Cost
Sales
Material
Cost
Sales
Work
Overhead
Sales
Tertiary Ratios: how to cover interest
related expense
Sales
Plnt&
Eqp
Sales
Payable
Sales
Cash
Personnel
Cost
Sales
Selling
Cost
Sales
Sales
Land&
Buildgs
EBIT
Int.Ex.
EBITDA
Int.Ex.
Current
Ratio
Quick
Ratio
𝐑𝐎𝐄 =
→ ROE = × ×
→ ROE = ProfitMargin × TATO × Fin Leverage
→ ROE = ROA × Fin Leverage
365
𝐼𝑇𝑂
𝑆𝑎𝑙𝑒𝑠
𝐴𝑠𝑠𝑒𝑡
𝑁𝑒𝑡𝑃𝑟𝑜𝑓𝑖𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
𝐺𝑟𝑜𝑠𝑠𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠
𝐸𝐵𝐼𝑇
𝑆𝑎𝑙𝑒𝑠
𝑀𝑘𝑡𝑃𝑟𝑖𝑐𝑒
𝐵𝑜𝑜𝑘𝑃𝑟𝑖𝑐𝑒
𝑀𝑘𝑡𝑃𝑟𝑖𝑐𝑒
𝐸𝑃𝑆
𝑆𝑎𝑙𝑒𝑠
𝐴𝑅
𝐶𝑂𝐺𝑆
𝐼𝑛𝑣𝑛𝑡𝑟𝑦
𝑁𝑒𝑡𝑃𝑟𝑜𝑓𝑖𝑡
𝑁𝑂𝑆𝐻
365
𝑅𝑇𝑂
Operating Efficiency
Activity to Resources Used
Profitability
Profit to Resources Used
Market Prospects
Market to Asset/Earning
Financial Ratio Analysis
4
𝑆𝑎𝑙𝑒𝑠
𝑃𝑃&𝐸
𝐶𝑢𝑟𝐴𝑠𝑠𝑒𝑡
𝐶𝑢𝑟𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐶𝑢𝑟𝐴𝑠𝑠𝑒𝑡
−𝐼𝑛𝑣𝑡𝑟𝑦
𝐶𝑢𝑟𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐶𝑎𝑠ℎ + 𝐸𝑞𝑣
𝐶𝑢𝑟𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
Liquidity (ST)
Ability Pay Current Debt
Current
Ratio
Quick
Ratio
(Acid Test)
Cash
Ratio
Inventory
Turnover
Inventory
Days’ Sales
Total Asset
Turnover
ROE
Gross
Profit
Margin
Market
to Book
Ratio
P/E
Receivables
Turnover
Receivables
Days’ Sales
EPS
PP&E
Turnover
Ratio
Operating
Profit
MarginDuPont
DuPont
Identity
Company Policies &
Management Strategy
 PM
 Operating Efficiency
 Lean Management
 Reduce Expenditure
 TATO
 Asset Utilization
 Asset Availability
 Inventory Optimization
 Sale Optimization
 FL
 Debt Utilization
 Financial Leverage
𝑁𝑃 − 𝐷𝑣𝑑
𝑁𝑃
Retention
Ratio
𝐼𝑛𝑡𝐵𝑒𝑎𝑟𝑔𝐷𝑒𝑏𝑡
𝐴𝑠𝑠𝑒𝑡
𝐼𝑛𝑡𝐵𝑒𝑎𝑟𝑔𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
𝐴𝑠𝑠𝑒𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
Solvency (LT)
Long Term Debt
Debt
Ratio
Gearing
Ratio
Fin Leverage
or Equity
Multiplier
Ch3
𝐶𝑢𝑟𝐴𝑠𝑠𝑒𝑡 −
𝐶𝑢𝑟𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
= Inventory
+AR-AP
Working
Capital
𝐸𝐵𝐼𝑇𝐷𝐴
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Interest
Coverage
Ratio (TIE)
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐸𝑞𝑢𝑖𝑡𝑦
Liabilities
to Equity
Ratio
𝐸𝑉
𝐸𝐵𝐼𝑇𝐷𝐴
EV
Multiple
𝑁𝑒𝑡𝐼𝑛𝑐𝑜𝑚𝑒
𝑆𝑎𝑙𝑒𝑠
Net
Profit
Margin
𝑇𝑎𝑥𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝐸𝐵𝑇
Tax
Ratio
▌ Vertical analysis horizontal analysis, benchmarking
▌ Understand trend of Past performance to predict future success
Financial LeveragePerformance
𝑆𝑎𝑙𝑒𝑠
𝐴𝑃
365
𝑃𝑇𝑂
Payables
Turnover
Payable
Days’ Sales
𝐼𝑛𝑣𝐷𝑎𝑦𝑠
+𝐴𝑅𝐷𝑎𝑦𝑠
-APDays
WC
Funding
Gap
𝑁𝑒𝑡𝑃𝑟𝑜𝑓𝑖𝑡
𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡
ROA
𝐼𝑛𝑡𝐵𝑒𝑎𝑟𝑔𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦 − 𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒
Debt to
Tangible
Ratio

5. Example of Pyramid Analysis
5

6. Long Term Planning
Pro forma Income Statement
 Economic Assumptions = explicit assumptions
for business environment
 Revenue driven by Sales & Gross Margin
 If Cost vary directly with sales, Profit Margin is constant
 If Depreciation & Interest do not vary directly
with sales, Profit Margin is NOT constant
Pro forma Balance Sheet
 Asset Requirements = additional fixed assets
to meet sales projections, vary directly with sales
 Financial Requirements = amount of financing
to pay required assets
 Accounts Payable vary directly with sales
 Short Run = Certain Resources are Fixed
 Long Run = All Resources are Variable
 Management Decisions on Capital Budgeting
do not vary directly with sales; i.e.
 Dividend Policy which affect Retained Earning
 Liquidity Requirement @ Net Working Capital (NWC)
= Current Assets – Current Liabilities
 Financial Leverage @ Gearing Ratio = Debt / Equity
 Plug Variable = extra-ordinary financing
to balance Statement of Financial Position
 Notes Payable, Long-term Debt, Equity
External Financing Needed (EFN)
 EFN = Forecast (Δ Asset – Δ Liability – Δ Equity)
 𝐸𝐹𝑁 = × ∆𝑆𝑎𝑙𝑒𝑠 − × ∆𝑆𝑎𝑙𝑒𝑠
− 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 × 1 − 𝑏
 First term = increase in assets (capital intensity ratio)
 Second term = increase in liabilities
 Third term = increase equity
Internal Growth Rate (IGR)
 IGR uses Retained Earnings as the only source of financing.
 𝐼𝐺𝑅 =
×
×
 Relying solely on internally funds decrease firm’s leverage &
may continue at lower growth levels
Sustainable Growth Rate (SGR)
 SGR uses both internally generated funds & issue debt (instead
of equity) to balance & optimize leverage. Hence, SGR > IGR.
 𝑆𝐺𝑅 =
×
×
Retention Ratio (b)
 Proportion of Net Profit reserved as Retained Earnings, rather
than paid as dividends.
 𝑏 =
Incremental Cash Flow
 Forecast Operating Cash Flow (OCF)
= EBIT – Tax + Depreciation + Amortization
 Matter: Incremental Cashflow, Opportunity Cost, Incremental
Tax, Inflation, Side Effects e.g. cannibalism, erosion, synergies
 Do Not Matter: Sunk Cost, Depreciation, Amortization
6Ch3

7. Interest Amt
Time Value of Money
7
Single
Cash Flow
Multiple
Cash Flow
N Annuity Period
= Period x Compounding M
i.e. 1 yr, 2 semi, 4 qtr
I/YR = Interest / M
PV +ve credit –ve debit
PMT
FV +ve credit –ve debit
CFj
Amt [Input] Yrs
[CFj]
NPV
IRR
Perpetuity
FV
N, I/YR, PV, FV
PerA [Input]
PerB [Amort]
Period
Ending Bal
PMT for Period
Principal Amt
Opening Bal
C
r
PV =
Amortization
/ Even CF
Uneven CF
NOM% Nominal Rate
Effective
Annual Rate
Constant
Perpetuity
Annuity
Growing
Annuity
C
r - g
PV =
Growing
Perpetuity
EFF% Effective Ann Rate
P/YR Payments per Year
𝑃𝑉 =
𝐶
𝑟 − 𝑔
1 −
1 + 𝑔
1 + 𝑟
Options / Checks
• Shift [DISP] 4 = 4 Decimals
• Shift [P/YR] 1 = 1 Period per Year
• Shift [Beg/End] = C/F Annuity
• Ordinary Annuity: Default End
• Annuity Due: Beginning
• RCL [*] to review value
• RCL [CFj] ± to review cashflow
• Clear Memory
Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 YrN
PV FV
OA PMT PMT PMT PMT PMT PMT
AD PMT PMT PMT PMT PMT PMT
𝐹𝑉 = 𝐶 × (1 + 𝑟)
𝑃𝑉 =
𝐶
(1 + 𝑟)
FV = C × e
Continuous
Compounding
Ch4

8. Pro Con
NPV
 Easy understand & comms
 All cash flows not earnings
 Discounts / TVM
 Usually consistent with IRR decision, except:
 Re-Investment / Non-Conventional Cash Flow (Sign
Change in Cashflow)
 Mutually Exclusive Projects
(Different initial investment or timing)
IRR
 Easy understand & comms
 Discount Rate when NPV=0
 Discounts / TVM
 All CF assumed reinvested at the IRR
 Do not distinguish between Borrowing & Lending
 Scale Problem >> Incremental IRR / NPV
 Timing Problem if Mutually Exclusive >> Crossover Rate
 IRR error when sign change or multiple IRRs >> MIRR
SPBP
 Easy understand & comms
 Biased toward Liquidity
commitments, e.g. bonds,
coupon repayment
 Ignores CF after PBP
 Ignores TVM
 Discriminate long-term projects
 Arbitrary acceptance criteria
 May not even have NPV>0
DPBP
 Discounts / TVM
 Biased toward Liquidity
commitments, e.g. bonds,
coupon repayment
 Ignores CF after PBP
 Discriminate long-term projects
 Arbitrary acceptance criteria
 May not even have NPV>0
PI  Easy understand & comms
 Useful for limited funds
 Correct decision for
independent projects
 Cannot rank Mutually Exclusive projects
Capital Budgeting | Project Evaluation
8
1. Timeline of Non-Discounted CFj
a. Inflow, Outflow, Cumulative
b. Calculate Simple PBP
2. Timeline Discounted CFj (PV)
a. Inflow, Outflow, Cumulative
b. Calculate Discounted PBP
c. Calculate NPV
3. Determine WACC = r of project
4. Calculate IRR
5. Calculate MIRR
6. Evaluate + Decision Making
Payback Period PBP
Simple: n + Cumulative CFj / CFj+1
Discounted: n + Cumulative PVj / PVj+1
Shortest / Minimum PBP or DPBP
Net Present Value, NPV
TVM with i/Yr & Multiple CFj
:: Total PV of future CF’s
+ Initial Investment
Internal Rate of Return, IRR
Multiple Cash Flow CFj
:: i/Yr when NPV = 0
Modified IRR @ MIRR
Sign Change in Cash Flow
:: 1st IRR Conventional :: 2nd IRR when
Investment PV = Return FV;
i.e. N = Period, PV Cash Out Flows,
PMT = 0, FV Cash In Flows, i/Yr = ?
Profitability Index, PI
PVs of CF or NPV
PV of CFs
Initial Cost PIPV > 1 PINPV > 0
Choose NPV if NPV & IRR conflicts due to
Initial Cost, Project Timing, or Cash Flow.
Mutually
Exclusive
Highest +ve NPV
Highest IRR
Independent
Decision
+ve NPV
IRR > WACC
Incremental / Crossover
:: Incremental CFj (Difference)
Ch5
Break Even
Financial BE @ sales :: NPV zero
[EAC+FixCost∗(1−Tax)−(Depreciation∗Tax)]
[(Revenue−VarCost)∗(1−Tax)]
Accounting BE @ sales :: Income zero
[FixCost+Depreciation]
[Revenue−VarCost]
Cash BE @ sale :: OCF zero

9. What-if Analysis (Base; Optimistic; Pessimistic)
1. Incremental cash flow in comparison to Business-
As-Usual (BAU) with No-Further-Action (NFA) where
zero capital investment is made.
• Incremental cash flow depicted in opportunity
cost, incremental tax, inflation, and side effects,
such as cannibalism, erosion, synergies.
• Other non-cash items such as sunk cost and
depreciation will not be considered.
2. NPV under different options / scenarios with
changes in underlying drivers (price, market
volume, var cost, fixed cost, CAPEX, tax, scale)
2. Tornado Chart
3. Worst-Case Scenario
NPVWCS = Base Case + Sum Min Variance
(Optimistic, Base, Pessimistic)
4. Best-Case Scenario
NPVBCS = Base Case + Sum Max Variance
(Optimistic, Base, Pessimistic)
Sensitivity Analysis
9
A. Gross Profit = Revenue - Variable Cost
B. EBITDA = Gross Profit - Fixed Cost
C. NonCash = Depreciation + Amortization
D. EBIT = Oper Profit = EBITDA - NonCash
E. EBT = EBIT - Cost of Debt
F. NOPAT = EBT (1-Tax)
G. OCF = NOPAT + NonCash ± ∆WorkingCap
H. FCF = OCF (PreInvest CF) + CAPEX
Sensitivity Analysis using Breakeven
1. Accounting Breakeven
= Sales Volume at which NI = 0

[FixCost+Depreciation]
[Revenue−VarCost]
2. Financial Breakeven
= Sales volume at which NPV = 0

[EAC+FixCost∗(1−Tax)−(Depreciation∗B10)]
[(Revenue−VarCost)∗(1−Tax)]
 Whereas, Equivalent Annual Cost,
EAC = Value of annuity repayment that has
the same PV as the original set of cash flows
 EAC = PMT(ReturnRate,Period,Init_Investmnt,0)
3. Cash Breakeven
= Sale Price or Volume at which OCF = 0
 Reverse Calculation using PMT
when OCF = FV = 0
Ch7
Monte Carlo Simulation
1. Specify Basic Business Model
(e.g. Revenue, Cost, Investment)
2. Specify Probability Distribution
for each Variable in all Options
3. Payoff = ∑ [Probability × NPV ]
4. Repeat for other Option
5. Evaluate from entire Project
M = NPVBasic w/o Options + Options
6. Construct Decision Tree
Real Options / Scenario
1. Expand: demand > expected
2. Abandon: demand < expected
3. Delay: underlying variables
show favorable trend
4. Others: Replace, Repair,
Refurbish, Rent, Purchase,
Expedite, Stage, Merger &
Acquisition, Spin-off, etc.

10. Cost of Capital
10
rP =
rP =
re/rre/rs = + g = + g
re/rre/rs = rrf + (rm – rrf). β
re/rre/rs = rd + RP
D1
(P0 – F$)
D1
P0 (1– F%)
Growth
Model
/ DCF
CAPM
:: Depends on given variable
PP = Preferred Share Price
LT Debt
Senior Debt
• Revolver
• Term Loan
Subordinated Debt
• High Yield Bonds
• Mezzanine Fin
• Pay-In-Kind
• Vendor Notes
Cost of Debt after Tax; or
Required Rated of Return
on Debt after Tax; or
Interest on Debt after Tax
rdAt = rdBt .(1-T)
= YTM.(1-T)
Bonds are Tax Deductible
& Lower Risk
F$= Include Flotation cost
% by reduced PV.
Funding Life Cycle Debt Repayment Profiles
Floatation Cost, F$ or F%: Cost for issuance of Bonds, Preferred Stocks or New Common Stocks.
Weighted Average Cost of Capital, WACC = Wd.rdAT + WP.rP + Wre.rre + Ws.rs
Debt Capacity PE Exit Strategy
 Total exit
• Trade Sale
• LBO
• Share Repurchase
 Partial exit
• Flotation
• Private Placement
• Corporate Venturing
• Corporate Restructuring
Equities
• SH loans
• Preferred shares
• CCPPO shares
• Ordinary shares
Preferred Stock
Cost of Preferred Stock; or
Required Rated on
Preferred Stock; or Interest
on Preferred Stock; or
Dividend per Preferred
Stock
DP
(PP – F$)
DP
PP (1– F%)
Retained Earnings
Cost of Retained Earnings; or
Required Rated of Return on
Retained Earnings; or Interest
on Retained Earnings
Common Stock
Cost of New Common Stock;
or Required Rated of Return
on New Common Stock; or
Interest on New Common
Stock

11. Risk & Return
11
PORTFOLIO Investment
Expected
Return
= Σ Ri Pi
^
R σ = √ Σ(Ri - R )2.Pi
Expected
Risk
^
SINGLE Investment
Analysis
Finding on Analyst
Estimated Return
Potential
Investor
Current
Investor
Ȓ > R
> Required Return
⇒ Under Value
⇒ Expect Higher Return
BUY HOLD
Ȓ < R
< Required Return
⇒ Over Value
⇒ Expect Lower Return
AVOID SELL
CV = =
σ
^
R
Risk
Return
Coefficient of Variation
Best Solution = Lowest CV
Invi
Invtot
βP = Σ x Pi
SML / CAPM
Ri = Rrf + (Rm – Rrf). βP
ri Required Rate of Return
rm Market Risk / Return
rrf Risk Free Rate
rm-rrf Market Risk Premium
β Stock’s volatility factor
relative to the market
β(rm-rrf) Risk Premium
Portfolio Beta, βP = Weighted
Avg of Individual Risks, βi
UR = DR
SR = MR
SML
Higher Risk compensated by Higher Return
SM represents FV Fair / Intrinsic / Properly Valued
 UV Under Value ⇒ Analyst Estimated Return > FV ⇒ Expect Higher Return ⇒ Buy
 OV Over Value ⇒ Analyst Estimated Return < FV ⇒ Expect Lower Return ⇒ Sell
nb. Market Mispricing is Short Term, eventually reach Fair-value in Long Term
Rf
σ
Re
Total Risk
/ Std Dev
nb. StDev, ŝ = Sqrt (Variance, σ2)
σ = Investment Risk
= probability of poor returns
Total Risk = Systematic Risk
+ Unsystematic Risk
Total Risk = Manual calculation + annualized;
Not arithmetic weighted avg of individual stock StdDev.
Systematic Risk = Β-risk of Portfolio
x Annualized StdDev of Market
Non-Systematic Risk =
Total Risk - Systematic Risk
OV
Rm
Rf
β, Systematic
Risk
Re, Return
β = 1
FV
UV

12. Interest
Rate Risk
Purchasing
Power Risk
Business /
Liquidity Risk
Financial /
Credit Risk
Operational
Risk
Systematic Risk (Macro)
 @ Non-diversifiable Risk, Undiversifiable Risk, Market
Risk, Economic Risk, Volatility, Beta Risk
 Inherent & associated to entire market,
not just a particular stock or industry
 Underlies all other investment risks
 Impossible to mitigate by Portfolio Diversification
 Reduce exposure through hedging
 Higher Undiversifiable Risk
rewarded by Higher Return
 Beta = volatility compared to overall market
 > 1 means more systematic risk than the market
 < 1 means less systematic risk than the market
 = 1 means the same systematic risk as the market
Unsystematic Risk (Micro)
12
 @ Non-systematic Risk, Unsystematic Risk,
Diversifiable Risk, Company Specific Risk, Portfolio
Risk, Residual Risk
 Very broad group or individual securities, as stocks
of particular jurisdiction tend to move together
 Mitigation through Diversification – mix / different
companies, industries, uncorrelated assets,
securities, time frame, required rate of return & risk
tolerance
Total Risk
Absolute Relative
Directional
Non
Directional
Volatility
Exchange
Rate
GDP
Industrial
Growth
Price
Reinvestme
nt Rate
Political
Governme
nt Policies
Scams
War Like
Situation
Monsoon
Natural
Calamities
Internation
al Events
Dem&
Inflation
Cost
Inflation
Internal External
Cash Flow Default
Portfolio
Exposure
Rate
Recovery
Rate
Credit
Event
Sovereign
Settlement Borrowings
Model People
LegalRecession
New
Competitor
Product
Recall
Policy
Political
Political
Market
Risk

13. Intrinsic Value = Fair / Expected Value
FA Indicator IV > MP  Under-Valued
IV = MP  Fairly Valued
IV < MP  Over-Valued
Terminal Value
Super Normal Growth
Dividend & Cap Gains Yld not constant. Cap Gains Yld ≠ g.
1. Company Strategic Analysis
2. Establish Key Assumptions / Strategy
3. Tabulate FCF = NOPAT – Net Capital Investment
4. TV = Stock Price when dividend growth constant
5. NPV = ΣPV(FutDiv + FCFs - Debts - PrefShrs) - InitOutlay
6. Market Value (MV) = NPV / NOSH (common stock)
Yr1 Yr2 Yr3 Yr4 to forever
13
Non-Fixed Income: Stocks
rs = rrf + (rm – rrf). Β Growth, g Price, Pn+1 = Pn (1+gn)
Div Yield = Dn+1/Pn Div, Dn+1 = Dn (1+gn)
4. Precedent Transactions
1. Define M&A transaction same profile
• Business activity, geo-location, transaction
/ buyer, scale, growth, recent time period
2. Find Past Transactions
• Price paid
• Consideration (cash / shares)
• Takeover premium (implied or explicit)
• Synergies (if available)
• Other terms / conditions
3. Build Table & Ratios at transaction time
4. Calc Avg Multiples (Median if outliers)
5. Work backward towards EV
• Earning, EBITDA, EBIT, Sales, CF, CE, BV
2. Discounted Cash Flow / Present Value
Best Method = Represent Expected Cashflows & Arbitrages.
Problem: Intrinsic value subject to quality of forecast.
Value of Returns = PV of future benefits
= PV of Dividends + Free Cash Flow (e.g. Capital Gains) 1. Book Value / Asset-Based
Useful when firm has high tangible assets + liabilities,
or low proportion intangible assets,
or deteriorating business (worst-case).
1.Statement of Comprehensive Income
or Balance Sheet
2.Book Value of assets & liabilities
3.Value of additive parts
4.Equity = Assets – Liabilities – PrefShares; or
Equity = Share Capital – Treasury Shares +
Retained Earnings + Other Stockholder Equity
5.Divide by NOSH
Problem:
1. Difficult to determine MV of Asset (PPE)
2. Intangibles not on balance sheet,
e.g. IP, synergies, reputation
3. If intangibles significant, use floor value or fwd CF
4. Difficult to estimate in hyper-inflation environment
𝑃𝑉 =
𝐷
(1 + 𝑟)
Dividend Discount
Model (DDM)
Present Value of all future
dividends generated
𝑃𝑉 =
𝐹𝐶𝐹
(1 + 𝑟)
Corporate Value Model
or Free Cash Flow (FCF)
or Operating Cash Flow
Subject to growth rate.
Constant Growth
g constant forever, rs > g
𝑃 =
𝐷
𝑟 − 𝑔
=
𝐷 (1 + 𝑔)
𝑟 − 𝑔
Zero Growth
Dividend is Perpetual, g=0
𝑃 =
𝐷
𝑟
CF1 CF2 CF3 CF4
Growth g1 g2 G3 gt
Div D1 D2 = D1(1+g) D3 = D1(1+g) D4 = D3
Price 𝑇𝑉, 𝑃 =
𝐷
𝑟 − 𝑔
NPV
𝐷
(1 + 𝑟 )
𝐷
(1 + 𝑟 )
𝐷
(1 + 𝑟 )
+
𝑃
(1 + 𝑟 )
3. Comparable / Relative Value
1. Select COMPS Universe / Peers same profile
• Industry, activity, geo-location, scale, growth,
profitability, acc’ policies, capital structure
2. Download Historical / Trailing Data
• Revenue, GrossProfit, EBITDA, EBIT, NPAT
• NOSH, SharePrices, Cash, Debt, Minority interest
3. Download Forecast Metrics
• Revenue, Gross profit, EBTIDA, EBIT, net income
4. Build Forward Table
• MarketCap, EV, Ratios, Growth, Margins, etc
5. Calc Average Multiples (Median if outliers)
Enterprise Value Ratio (Before Interest Paid)
– EV to EBITDA
(Common for DCF analysis = core revenue)
– EV to EBIT
– EV to Revenue = EV/EBIT x EBIT/Sales
– EV to CE = EV/(BVDebt+Equity)
Equity Value Ratio (After Interest Paid)
– Price to Earning (P/E) = MC/NetEarnings
– Price to Book Value = MC/BookValue
– Price to Cash Flow
6. Work backward towards Market Cap or EV
• Earning, EBITDA, EBIT, Sales, CF, CE, BV
Multiple Characteristics Stage
EV /Sales • No cash or profit
• Pattern of sales clear
• Ignores operating
economics
• Ignores capital structure
• Early sign
growth
• Rapid growth
EV/EBITDA • Operating cash flow
positive
• Incorporates profitability
• Ignores capital structure
• Ignores tax differences
• Rapid growth
• Slowing
growth
EV/EBIT • Operating profit
• Ignores capital structure
• Ignores tax differences
• Slowing
growth
• Maturity
P/E • Stable operating
economics
• Stable capital structure
• Profit & cash flow similar
• Early maturity
• Late maturity
Gross Profit = Revenue - Variable Cost
EBITDA = Gross Profit - Fixed Cost
EBIT = Oper Profit = EBITDA - NonCash
EBT = EBIT - Cost of Debt
NOPAT = EBT (1-Tax)
OCF = NOPAT + NonCash ± ∆WorkgCap
FCF = OCF (PreInvest CF) + CAPEX
EV = MarketCap + NetDebt
Net Debt = Interest Bearing Debt – Cash Eqv

14. EXTERNAL
PESTLE Macro
Porter 5F Micro
OPPORTUNITY
THREAT
INTERNAL
People
Process
Technology
STRENGTH
WEAKNESS
Company Strategic Analysis
14
Boston Consulting Group Matrix
Relative Mkt Growth vs Relative Mkt Share
SWOT
Porter’s Generic Competitive Model
Porter’s 5 forces
External Micro Environment / Industry Competition
O
T
S
W
PESTLE
External Macro Environment
Political
Economical
Social
Technological
Legal
Environmental
Factors which are contingent events, subject to firm's intention and ability to take
advantage of opportunity and /or avoid threat.
Factors which currently exist and have contributed to the current position
and may continue to exist.

15. Drivers of Value in Mergers & Acquisition
15
Strategic Buyers
• Horizontal or vertical expansions
• Involves identifying and delivering operating synergies
 Hard synergies – cost synergies
1. economies of scale
2. factory overhead reduction
 Soft synergies – revenue synergies
1. cross selling
2. geographic expansion
3. corporate overhead reduction
Financial Buyers
• Private equity
• Leverage for maximum equity returns

16. Valuation Metrics Lions Gate Trading Precedents Warner**
EV/EBITDA* 13.7x / 11.4x 7.4x – 18.1x 8.3x – 27.6x 10.1x
EV/Sales* 1.8x / 1.7x 1.8x – 3.6x 1.2x – 5.3x 2.7x
P/E* 27.1x / 18.9x 13.3x – 40.9x 21.2x 17.1x
EBITDA Margin 9.5% 23% – 30% 3% – 55% 23.2%
Net Income Margin 8.5% 8% – 15% 26% 12.7%
16
Sample Valuation Summary
Broker Estimates (M/D/Y) Results Period Revenues ($mm) EBITDA($mm) EBITDA Margin (%) EV/EBITDA P/E
RBC (11/18/2013)
Target Price $38.00 2014E 2,791 359 12.9% NA NA
EV ($mm) NA 2015E 2,887 407 14.1% NA 26.1x
J.P. Morgan (05/31/2013)
Target Price $32.00 2014E 2,651 345 13.0% 13.9x 24.7x
EV ($mm) $4,795 2015E 2,851 408 14.3% 11.8x 18.2x
Evercore (11/10/2013)
Target Price $42.00 2014E 2,877 375 13.0% 13.2x 30.7x
EV ($mm) $4,945 2015E 3,049 471 15.4% 10.5x 20.2x
0
200
400
600
800
1000
1200
1400
1600
1800
2000
$0
$5
$10
$15
$20
$25
$30
$35
$40
LGF
Current: $31.64 52wk High: $15.26 52wk Low: $37.81
*P/E & EV/EBITDA are based on FY14 & FY15 to reflect imminent growth; **based on FY14
 GUY appears to be valued fairly relative to peer group but peer group valuation has
come down recently
 Current Price low relative to Two-Year Trading Range due to recent drop in sector &
overall market index
 One-year Analyst forecasts are optimistic due to:
– Expected de-risking of asset priced into target
– Expected resource update (Q1 2012)
 There may be benefit to further de-risking as current valuation may not be optimal
time to sell
 Stock has outperformed based on strong cashflows from Twilight & Hunger Games in
2012
 Current multiples are high but compress in FY14 / FY15 as growth is realized
 Industry multiples support share price but only if Hunger Games meets its forecast
 Further upside could be possible if another hit is produced but downside risk is more
significant
 Lions Gate produced limited or no free CF in 2007-2011 despite big successes
Football Field Analysis
Factors to Stock Price Performance
Stock chart - Open-high-low-close

17. Proposition Weak form EMH Semi-strong form EMH Strong form EMH
Market is
Efficient
 Efficiently priced wrt
historical info
⸫ Exploit public info using FA
 Efficiently priced wrt
historical & public info
⸫ Exploit private / insider info
 Efficiently priced wrt to
historical, public & insider info
⸫ Cannot consistently beat mkt
Market is
NOT Efficient
 Inefficiently priced wrt
historical info
 Exploit by BF
 Inefficiently priced wrt
historical info
 Exploit by BF
 Inefficiently priced wrt
historical info
 Exploit by BF
17
Efficient Market Hypothesis (EMH)
Fama (1969) States that mkt tend to be correctly & efficiently priced. Most mkts including Malaysia, US, China, Singapore
are in the Semi-Strong Form. Under developed countries exist in the Weak Form. No country in Strong Form.
 Fundamental Analysis (FA) = Fair Value or Intrinsic Value Indicator
 Technical Analysis (TA) = Buy / Hold / Sell or Entry / Exit Signal
 Behavioral Finance (BF) = Market Sentiments / Speculation
Speculators & traders still make money from small + short term mispricing opportunities, due to:
 Different method for stock valuation (DCF, comparable, dividend)
 Different source of information
 Different frequency
 Market delays / response
However, FA & TA & BF is an art & not science  Paralysis of Analysis = Complicated Decision
Historical Analysis Scenario Analysis
Return
RA = (SR)/n = AVERAGE
RG = [P(Return Relatives)]1/n – 1 = GR
E(R) = S Pi Ri
Risk
s2 = [S(Rt-RA)2]/n-1
s = √{[S(Rt-RA)2]/n-1} = STDEV
s2 = SPi[Ri-E(R)]2
s= √ {SPi[Ri-E(R)]2}
CV CV = s/RA CV = s/E(R)
Pot Return Rpot= w1 R1 + w2 R2 E(Rpot) = w1 R1 + w2 R2
Pot Risk
σpot
2 = w1
2σ1
2 + w2
2σ2
2 + 2W1W2 Cov(r1r2)
σpot
2 = w1
2σ1
2 + w2
2σ2
2 + 2W1W2 Correl(1,2)*σ1σ2-VARp
σpot = √σpot
2
(STDEVp)
σpot
2 = w1
2σ1
2 + w2
2σ2
2 + 2W1W2 Cov(r1r2)
σpot = √σpot
2
Arithmetic Mean = Simple avg of series of returns. Calculated by summing all of returns in the series & dividing by the number of values.
Geometric Mean = Return that if earned in each of n years of an investment’s life, gives same total dollar result as the actual investment.

18. Fixed Income | Bonds 18
Expected Total Return = Expected CY + Expected CGY
CY = Current Yield = Annual PMT / (PV or Current Price)
CGY = Capital Gains Yield = Total Yield – Current Yield = P1/P0 – 1
Factors affecting Bond Yield, R = Rfr + Rinf + Rprem
•Macro Economic Factors: Real Growth, Expected
Inflation, Capital Market Liquidity, Supply Demand
•Bond Characteristics: Bond Rating (Credit Quality,
Terms to Maturity, Indentures, Foreign Bond Risk
•Coupon Rate: inverse relationship to sensitivity
•Maturity Duration: direct relationship to sensitivity
Price
Volatility
P
V
Macaulay Duration
• Economic life of Bond or Maturity Term when traded at Par
• Duration = Weighted Avg to maturity of bond
= Sum (Period Number x PV Cash Flow)
Sum (PV Cash Flows)
Modified Macaulay Duration
• Modified Duration = Macaulay Duration
1 + YTM
ΔPrice
Price0
x 100% = - Dmod x ΔYield (basis pts per 100)
Debt Instrument requires issuer / borrower / debtor to repay
investor / lender / creditor amount borrowed plus interest
over specific period. Investor has no voting rights.
Moody’s S&P Definition
InvestmentGrade
Aaa AAA
• Prime
• Maximum Safety
Aa1
Aa2
Aa3
AA+
AA
AA-
• High grade
• High quality
A1
A2
A3
A+
A
A-
• Upper med grade
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
• Lower med grade
HighYield/Junk
Ba1
Ba2
Ba3
BB+
BB
BB-
• Non-investment
grade
• Speculative
B1
B2
B3
B+
B
B-
• Highly speculative
Caa1
Caa2
Caa3
CCC+
CCC
CCC-
• Substantial risk
- D
Price ∝ Duration
Yield
Bond Strategy Portfolio Duration vs Interest
• Passive: Buy + Hold | Indexing
• Active: Forecast, Valuation Analysis & Credit Analysis (Altman Z-Score)
Immunization Strategy
• Address Interest Rate Risk (Price Risk vs Reinvestment Risk)
Zero Coupon
Large discount no coupon payment
Fixed Term & Coupon Rate
N = Maturity Period
Years to Maturity x Compounding M
i.e. 1 yearly, 2 semi annual, 4 quarterly
I/YR = YTM, Yield to Maturity
/ Interest / Promised Yield against FV
(If Nominal divide by M)
PV = Present Value
@ Price of Bond Sold / Purchased
Inc. Floatation Cost at PVf = PV0 (1-FC)
PMT = Coupon Payment
/ Periodic Payment @ Coupon Rate
(If Nominal times with M)
FV = Face Value Rm1000
/ Par / Nominal / Principal Value
@ Redeem at Maturity Date
Callable
Declining premium. Helps issuer, hurts investor.
PMT & PV = same
YTC = I/YR x M
Yield to Call (YTC)
PV1 = PV0 + (Penalty RM or %)
n = Reduced by Lapsed Years
Realized Rate of Return
FV1 = FV0 + (Penalty RM or %)
n = Lapsed Years
Floating Rate & Inflation Linked
Adjusted by interest or inflation rate.
Convertible
Payable by Warrants / Stocks.
Actual Price Paid
= Dirty Price
Coupon
payment
Time
Underlying Price Quoted
= Clean Price
Bond Cash Flow
Coupon
payment
BondPrice
Yield
Premium if CR > MY
Par if CR = MY
Discount if CR < MY
Bond Price Curve
YTM
Yield(%)
B
AA
AAA
T-Bills
Bond Yield Curve