Corporate Finance A1

1. Corporate Finance A1 Vysokáškolafinanční a správní Summer Semester 2012 Jaromír R. Stemberg jaromir@mail.vsfs.cz

2. Course Layout • Twelve two-hour lessons • The course is to introducegeneralfinancial management problems, realtions, terminology, and solutions • EndswithCredit (zápočet)

3. Literature • Block, Stanley: FoundationsofFinancial ManagementMcGraw-Hill, 2009ISBN 978-0-07-128525-4

4. Grading • Pass / Fail • 50%: Fivemathematicalgroupexcercises • 50%: Written test • Minimum to pass: 70%

5. Contents • Introduction- history of finance- goalsoffinancial management- financialmarkets • ReviewofAccounting- the nature and role of the balance sheet - theories of balance and their development- creation of the second balance - third and fourth balance, their formation and construction

6. Contents • Concept of capital- preservation of the capital substance of a company- ways of addressing it • Accounting systems in the world- characteristics of accounting systems- process of accounting harmonization- US GAAP- IAS/IFRS, link to the directives of the European Union

7. History of Money and Accounting

8. Barter Trade • Exchange of personal possessions of value for other goods • From 9,000-6,000 B.C., livestock was often used as a unit of exchange; as agriculture developed, people used crops for barter • This kind of exchange started at the beginning of humankind and is still used today

9. Barter Trade Problems • Finding the other party: - interest - time • Establishing equal value of exchanged goods • Durability of the exchanged goods, potentiality to store it • Need for a common, durable, storable, non-decaying, generally accepted unit of exchange

10. Cowry Shells • The first money (or medium of exchange) • Began to be used at about 1200 B.C. in China • Accepted in some African regions till 1950s

11. Metal Coins • China, 1000 BC: Bronze and copper cowry imitations were considered the earliest forms of metal coins. They contained holes so they could be put together like a chain. • Lydia (Turkey), 500 BC:The first coins developed out of lumps of silver and were stamped with emperors to mark their authenticity. The techniques were quickly copied by the Greeks, Persians, and the Roman Empire. Unlike Chinese coins, these were made from precious metals such as silver and gold, which had more inherent value.

12. Banknotes • China, 100 BC:Leather money – pieces of painted white deerskin. • China, 800 AD:The first paper banknotes appeared. • China, 1450 AD:Printing money led to a soaring inflation so the use of paper money in China disappeared (this was still years to come before paper currency would be used in Europe).

13. Development of Accounting • Babylon, 18th century B.C.- first organized records kept to account for assets and loans- other ancient civilizations (Roman Empire, Greek Cities, Egypt) followed • Europe, 1st millennium A.D.fall of the Roman Empire caused serious setback in education • Italy, 13th century A.D. - growing trade in the Mediterranean and accumulation of wealth in Italy gave grounds to the development of banking- double-entry bookkeeping was invented by Luca Pacioli

14. Modern Times Accounting • 17th century France: - obligation to present bi-yearly balances of financial situation Italy:- complete theory of accounting Holland:- first corporation established, need for equity accounting • 19th century- massive increase of accounting operations- perfection of accounting principles- rules for asset evaluation

15. History of Accounting Standards • 1938: American Institute of Certified Public Accountants began to develop accounting standards (request of the Securities and Exchange Commission) • 1959: Accounting Principles Board established, introduction of GAAP • 1973:the International Accounting Standards Board (IASB) formed to develop International Accounting Standards (IAS) • 2001:end of IAS (41 issued so far, stillvalid); new standards are fromnow on called International FinancialReporting Standards (IFRS)thatquicklybecameacceptedworldwide

16. Principles of Accounting

17. Record Keeping • Information – a basic management tool needed for - past references and reporting- present registration and evidence - future planning and management decision making • Registered entries keep track of: - amount how much- count how many- time when- place where- person who

18. Double-Entry Accounting • Accounts- recognition of individual transactions- debit and credit to be recorded at the same time • General Ledger (hlavníkniha)- transactions recorded in accounts, total of both sides must be equal- can be extended by subsidiary ledgers • Journal (účetnídeník)- transactions recorded in order as they occurred- both sides of the record must be equal

19. Purpose of Record Keeping • Financial accounting- provides information for owners, investors and other stake holders- serves as a base for income tax due calculation- subject to regulations by accounting standards- must be true and honest • Managerial accounting- serves the managers as base for strategy planning and decision making- provides specified pieces of information - outcomes don’t have to be understood by the general public

20. Financial ReportsAnalysis

21. Balance Sheet AssetsLiabilities Current Assets Current Liabilities Cash and Equivalents Short-Term Accounts Payable Short-Term ReceivablesCurrent Tax Payable Inventory Short-Term Loans and Borrowings Accruals and Other S/T Assets Accruals and Other S/T Liabilities Long-Term AssetsLong-Term Liabilities Intangible Fixed Assets Long-Term Payables • Tangible Fixed AssetsProvisions • Long-Term Receivables • Owners’ Equity Share Capital Share Premium and Capital Funds Retained Earnings Y-T-D Profit (Loss)

23. Cash FlowStatement

24. StatementofChanges in Equity

25. Profitability Ratios • Profit margin • Return on assets (investments) • Return on equity

26. Profit Margin Net income / Sales = 200 / 4 000 = 5%

27. Return on Assets Net income / Totalassets = 200 / 1 600 = 12,5%

28. Return on Equity Net income / Stockholders‘ equity = 200 / 1 000 = 20%

29. AssetUtilizationRatios • Receivableturnover • Averagecollection period • Inventoryturnover • Fixedassetturnover • Totalassetturnover

30. ReceivableTurnover Sales / Accountsreceivable = 4 000 / 350 = 11,4 times

31. AverageCollection Period Accountsreceivable / (Sales / 365) = 350 / 11 = 32 days

32. FixedAssetsTurnover Sales / FixedAssets = 4 000 / 800 = 5 times

33. TotalAssetsTurnover Sales / Totalassets = 4 000 / 1 600 = 2,5 times

34. Inventury Turnover Sales / FixedAssets = 4 000 / 800 = 5 times

35. LiquidityRatios • Current ratio • Quick ratio

36. Current Ratio Currentassets / Currentliabilities = 800 / 300 = 2,67

37. Quick Ratio (Currentassets - Inventory) / Currentliabilities = 430 / 300 = 1,43

38. DebtutilizationRatios • Debt to totalassets • Timesinterestearned

39. Debt to TotalAssets Totaldebt / Totalassets = 600 / 1 600 = 37,5%

40. TimesInterestEarned EBIT / Interest = 550 / 50 = 11 times

41. Du Pont Analysis

42. Trend Analysis

43. Forecast and Budget

44. Budgetting • Systematic setting of future goals • Bottom-up or top-down • Identification of external influence and risks (such as customers, competition, macroeconomics) • Identification of external influence and risks (such as capacity of production and resources, human factor) • Setting of expected growth (reduction), pipeline, percent-of-sales, investment planning

45. Financial Forecasting • Pro forma income statement • Revenue (pipeline, funnel, percentage) • Expenses (variable, fixed) • Pro forma balance sheet • A/R, A/P, inventory • Fixed assets, liabilities, equity • Pro forma cash flow statement

46. Operational and Financial Leverage

47. Fixed and variableexpenses totalexpenses $ fixnedexpenses 0 No. ofunitsproduced

48. Fixed and variableexpenses totalexpenses $ fixnedexpenses No. ofunitsproduced

49. Break-Even Point revenue $ totalexpenses fixedexpenses No. ofunitsproduced

50. Break-Even Point revenue profit $ totalexpenses fixedexpenses No. ofunitsproduced