Investment and Finance

Transcription

1 Lecture Investment and Finance Fundamentals of Investments & Finance Investment and Finance Chapter 1 Slide 1

2 Structure and Contents Introduction 1 Fundamentals of Investments & Finance 2 Methods of Investment Analysis I: Net Present Value and Internal Rate of Return 3 Methods of Investment Analysis II: Modified Internal Rate of Return and Payback Period 4 Special Issues of Investment Analysis 5 Introduction to Internal and External Financing 6 Equity Financing 7 Long-term Credit Financing 8 Short-term Credit Financing 9 Mezzanine Financing Investment and Finance Chapter 1 Slide 2

3 Stakeholders of the Firm Investment and Finance Chapter 1 Slide 3

4 Stakeholders versus (?) Shareholders I Stakeholder groups hold specific claims / objectives. Goal conflicts inevitable appropriate to objective of the company? Stakeholder approach: Integration of any justified interest maximize total stakeholder value Practicability? Appropriateness? Alternative: Shareholder value approach. Investment and Finance Chapter 1 Slide 4

5 Stakeholders versus (?) Shareholders II Shareholders = owners of the firm interested in appropriate return (e.g. net profit NP) on the capital they contributed (= equity): NP RoE = 100 Equity Enhanced practicability, but: appropriateness? Common criticism: onesidedness / favoritism of the SV-approach. Considerations: Goal harmony instead of conflict? First in line to take economic risk. Last in line to take economic profit. Investment and Finance Chapter 1 Slide 5

6 Accounting Systems I Meaning of accounting: Management renders an account of its actions. Systems with a primary documentation purpose (esp.: informing investors, mostly defined / standardized by law): in terms of individual and group accounts; important special function for shareholder/equity investors: individual account limits profit distribution; tax balance sheet with additionally measures for profit tax encumbrance; external reporting / accounting. Investment and Finance Chapter 1 Slide 6

7 Accounting Systems II Systems serving internal information, planning, control and supervision: strategic and operational cost accounting; investment analysis / financial planning. Internal accounting systems mostly management-induced, not defined by law; support (coordination and control of) delegation of decision-making. Internal systems based on / using specific financial information: Investment and financial analysis are cashflow-based. Investment and Finance Chapter 1 Slide 7

8 Cashflows / Liquidity of the firm Any firm must be liquid / solvent / able to meet any payment obligations due at any time ( liquid funds / liquidity of the firm). (Imminent) Illiquidity constitutes 1st of main reasons (2nd: over-indebtedness) for opening insolvency proceedings (Germany: 17 ff. InsO). Liquidity constraint expressed as (in-)equation: Initial cash balance + cash inflows cash outflows 0 Thus, financial management of liquid funds (planning, control and supervision) constitutes an essential management task. Principle: As much return as possible, as much liquidity as necessary. Investment and Finance Chapter 1 Slide 8

9 Trade-off: Return vs. Liquidity Safety Zone for Liquidity Investment and Finance Chapter 1 Slide 9

10 Financial Plan The (complete) financial plan includes all future activities of the firm which have consequences for the means of payment. Consequently, net inflows can be invested at the financial markets (in a profitable way) and net outflows can be funded at the financial markets (at competitive costs of capital). Investment and Finance Chapter 1 Slide 10

11 Layout of a Financial Plan End of the year year 1 year 2 year 3 year 4 year 5 I. Cash on hand items (cash on hand, bank accounts)... II. Cash inflows Market coverage (cash sale, accounts receivable) Branch of production (e.g. licence sales, capital equipment sales) 3. Financial dept. (increases of capital, credit intakes, repayments/interest received, dividends, sales of financial assets) Total III. Cash outflows... IV. 1. Market coverage (salaries, commissions, advertising) Branch of production (sages, operating resources) Procurement dept. (salaries, raw materials) Financial dept. (salaries, dividends payed,... repayments/interest payed, taxes) Total... Requirements / excess of liquid funds: I+II-III Investment and Finance Chapter 1 Slide 11

12 Investment / Financial Analysis In addition to the total financial plan on the company level, firms compile financial plans for single transactions as well. Financial plans deliver the series of cashflows an investment or financing decision is about to cause financial information / knowledge. Financial information is to be translated into financial actions by corporate decision makers requirement of appropriate evaluation techniques. To be continued, starting with Chapter 2. Investment and Finance Chapter 1 Slide 12

13 Recommendations Introductions of Most Textbooks Besley/Brigham (2014): Principles of finance, 6 th ed., Fort Worth et al. Brealey/Myers/Allen (2016): Principles of Corporate Finance Global Edition, 12th ed., Boston et al. Brigham/Ehrhardt (2013): Financial management theory and practice, 14th ed., Fort Worth et al. Hillier/Grinblatt/Titman (2011): Financial Markets and Corporate Strategy, 2 nd ed., Boston et al. Van Horne/Wachowicz (2008): Fundamentals of Financial Management, 13th ed., Harlow (GB) et al. Investment and Finance Chapter 1 Slide 13