Introductory Lecture Analysis Of Financial Statements Time Value of Money Investment Appraisal Techniques... 20

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1 Table of Contents Introductory Lecture... 2 Analysis Of Financial Statements... 6 Time Value of Money Investment Appraisal Techniques Valuation Of New Ventures Term Sheets... 34

2 Introductory Lecture Introduction Decision rule for managers: only take actions that are expected to increase the share price. o Goal of the Firm: Maximize Shareholder Wealth Accounting involves telling stories with both numbers and words Other Stakeholders Stakeholders are groups such as employees, customers, suppliers, creditors, owners, & others who have a direct economic link to the firm. o Firm w/ a stakeholder focus consciously avoids actions that may prove detrimental to stakeholders.! Goal not to maximize stakeholder well-being but to preserve it.! Such a view = "socially responsible." Recent textbooks call CSR an investment, keeps stakeholders happy so they ll continue working with you, buying from you etc o Good business sense Business Ethics The standards of conduct or moral judgment that apply to persons engaged in commerce. o Violations usually involve a variety of actions:! creative accounting, earnings management, misleading financial forecasts, insider trading, fraud, excessive executive compensation, options backdating, bribery, and kickbacks. o Negative publicity often leads to negative impacts on a firm Investment/Financing Decision Investment decision o Also known as capital budgeting decision! Any payment we make in day to day decisions, have to determine whether value is greater than cost! Decision to invest in tangible (e.g. plants, machinery) & intangible (e.g. R&D, trademarks) assets

3 o Asset: Something that ll produce a future economic benefit Financing decision o A decision on the form (debt, equity) and amount of financing a firm s investments o Note that the mix of long-term debt and equity financing is called capital structure Two Kinds of Finance Available Debt or Equity o Getting a loan or getting direct investment Intermediaries People often don t want to risk investment, so just put their money in the bank & the bank then lends out money o Banks = modern day Robin Hoods in a sense: take poorer peoples money & lend it to richer investors o People can also buy direct if they want to! Intermediated vs. Disintermediated Intermediaries: Brokers & Dealers o Also: o Pension Funds (Kiwisaver) o Mutual Funds! Banks & Insurance Companies Financial Markets In many cases seeking more equity is easier than borrowing the money, usually a matter of simple arithmetic Traditional Financial Instruments Ordinary Shares o Become and owner of the business, a residual claimant who shares in business profits

4 ! But may not always get what you think Preference Shares Hybrid Capital o Subordinated Debt o Convertible Bonds o Optional Convertible Notes (OCNs) o Perpetual Floating Rate Notes Depending on stage business is at there ll be a different mix of which kinds of financial instruments are involved or used o E.g. Startups vs. Big Companies Less Traditional Investors Angel Investors o An Angel Investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Venture Capital (VC) Companies o VC companies specialize in financing new or growth ventures and may also provide expertise the venture is lacking, such as legal or marketing knowledge. Cash Flow Statement CFS shows the firm s cash receipts and cash payments over a period of time. o Three sections show cash flows from! Operating activities! Investing activities! Financing activities Free Cash Flow What s important to investors is the amount of cash in a firm that s theirs, after all necessary reinvestment in the firm has taken place. o Start with profits, subtract further cash payments and add back non-cash expenses, take away all the investments you ll have to make in the firm, just to keep it going

5 EBIT Tax + Depreciation Δ NWC CAPEX o Δ NWC = changes in working capital requirements o CAPEX = committed capital expenditure Bootstrapping Bootstrapping usually refers to the starting of a self-sustaining process that is supposed to proceed without external input. o I.e. Starting a business without external help or capital.! Such start-ups fund the development of their company through internal free cash flow and are cautious with their expenses Governance & Agency: Corporate Governance Corporate governance refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. o It defines the rights and responsibilities of the corporate participants such as the shareholders, board of directors, officers and managers, and other stakeholders, as well as the rules and procedures for making corporate decisions. Individual investors are investors who own relatively small quantities of shares so as to meet personal investment goals. Institutional investors are investment professionals, such as banks, insurance companies, mutual funds, and pension funds, that are paid to manage and hold large quantities of securities on behalf of others. o Unlike individual investors, institutional investors often monitor & directly influence a firm s corporate governance by exerting pressure on management to perform or communicating their concerns to the firm s board. A principal-agent relationship is an arrangement in which an agent acts on the behalf of a principal. For example, shareholders of a company (principals) elect management (agents) to act on their behalf. o Agency problems arise when managers place personal goals ahead of the goals of shareholders. o Agency costs arise from agency problems that are borne by shareholders and represent a loss of shareholder wealth.

Chapter 1. The Role of Managerial Finance. Copyright 2012 Pearson Prentice Hall. All rights reserved.

Chapter 1. The Role of Managerial Finance. Copyright 2012 Pearson Prentice Hall. All rights reserved. Chapter 1 The Role of Managerial Finance Copyright 2012 Pearson Prentice Hall. All rights reserved. COURSE DESCRIPTION Business Finance is an examination of the principles, theory and techniques of modern