Introduction to Financial Management FIN 102 – 9 th Week of Class

1. Introduction to Financial ManagementFIN 102 – 9th Week of Class Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations” 卜安吉

2. Funds and Cash Flow Financial Management Fall 2007 Shanghai Chapter 7a: Funds Analysis and Planning

3. Sources and Use of Funds • Funds are Cash and Cash equivalents • We already know that understanding the cash inflow – and - outflow of a business is extremely important. • Remember: V= FCF/WACC ? Intro. to Financial Managment - 10th Week of Class

4. Changes in the Balance Sheet • We first noticed this flow of funds when calculating FCF on Week 1! Four Key Points: • Increasing assets consume cash (cash out) • Decreasing assets create cash (cash in) • Increasing liabilities or shareholder’s capital (equity) creates cash • Decreasing liabilities or shareholder’s capital (equity) consumes cash Intro. to Financial Managment - 10th Week of Class

5. Example…Net Working Capital (Johnson & Johnson) • In FY 2003, the inventories of J&J increased (the difference between the inventories per the end of FY2003 and FY2002) by $285m. A cash out for the company during FY2003. • Also the accounts receivable of J&J increased in FY2003 by $1,175m. Another largecash out for the company in FY 2003. • The accounts payable (bills to be paid to the suppliers) increased by $1,375m. A largecash infor the company in FY2003. Intro. to Financial Managment - 10th Week of Class

6. Example … Liabilities and Equity (Johnson & Johnson) • Long term debt increased in FY 2003 by $ 933m. A cash in for J&J. • Shareholders equity increased by $4,192m. Another cash in. • If we include all the other cash effects from the balance sheet, the net cash increase in FY2003 was $2,048m. Intro. to Financial Managment - 10th Week of Class

7. Example … OVERALL (Johnson & Johnson) • The cash position on the balance sheet at the end of FY2002 was $ 7,475 m. • The cash position at the end of FY2003 was $ 9,523m. • Thus the cash increase was $ 2,048m. • The increased cash is the result of: Cash from Operations, Cash changes from Investments and Cash changes from Financing activities… Intro. to Financial Managment - 10th Week of Class

8. Remember – Overall, if … Intro. to Financial Managment - 10th Week of Class

9. So now you can do it… • FOR YOUR company (or any company) you can calculate per item of the balance sheet the cash in and cash out. • The result is the change in cash (the net cash generated during the year). • Let’s use the example… Intro. to Financial Managment - 10th Week of Class

10. Cash increased $ 2,483 Mln. Current assets excl. cash increased with $ 1,246 Mln. So cash out as a result of increased assets $ 5,224 m. Total assets excl. cash increased $ 5,224 Mln. Intro. to Financial Managment - 10th Week of Class

11. A total cash in of $ 7,707 m. due to Increased liabilities. Current liabilities increased with $ 1,999 Mln. Long term liabilities increased with $ 1,536 Mln. Shareholders Equity increased with $ 4,172 Mln. Intro. to Financial Managment - 10th Week of Class

12. Concluding • Total Cash In $ 7,707 m. • Total Cash Out $ 5,224 m. • Net Cash In: $ 2,483 m. • Cash position at the end of FY 2002: $ 2,894 m. • Net Cash In in FY 2003: + $ 2,483 m. • Cash position at the end of FY 2003: $ 5,377 m. • Note the balance sheet FY 2003. Intro. to Financial Managment - 10th Week of Class

13. The Income Statement (P&L) Net Income to Cash Flow Statement Intro. to Financial Managment - 10th Week of Class

14. Operational Cash Flow Statement Net Income See Income Statement Depreciation Change in NOWC Intro. to Financial Managment - 10th Week of Class

15. Cash Flow from Investing Activities • Capital Expenditures (CAPEX) Net CAPEX Intro. to Financial Managment - 10th Week of Class

16. Cash Flow from Financing Activities Net Cash Flow – See above! Here is where the capital comes FROM that is, from DEBT or EQUITY (Stock). Intro. to Financial Managment - 10th Week of Class

17. End of the Section – Chapter 7a Go Get ‘em Tiger! Intro. to Financial Managment - 10th Week of Class