The financial manager is first and foremost a salesman

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1 CONTENTS Contents Preface Foreword Symbols Chapter 1 What is corporate finance? The financial manager is first and foremost a salesman of financial securities valued continuously in the financial markets. Most importantly, he is a negotiator and he remembers to do an occasional reality check! SECTION 1 FINANCIAL ANALYSIS Part 1 FUNDAMENTAL CONCEPTS IN FINANCIAL ANALYSIS Chapter 2 Cash flows Oerating and investment cycle Financial resources Chapter 3 Earnings Additions to wealth and deductions to wealth Different income stratement formats Chapter 4 Capital employed and invested capital The balance sheet: definitions and concepts The capital-employed analysis of the balance sheet A solvency-and-liquidity analysis of the balance sheet A detailed exemple of a capital-employed balance sheet

2 Chapter 5 Walking through from earnings to cash flow Analysis of earnings from a cash flow perspective Cash flow statement Chapter 6 Getting to grips with consolidated accounts Consolidation methods Consolidation-related issues Technical aspects of consolidation Chapter 7 How to cope with the most complew points in financial accounts Accrual in the income statement Construction contracts Convertible bonds or loans Currency translation adjustments Deferred tax assets and liabilities Dilution profits or losses Exchangeable bonds Goodwill Intangible fixed assets Inventories Leases Mandatory convertible bonds Off-balance sheet commitments Preference shares Perpetual subordinated loans or notes Provisions Stock option Tangible fixed assets Treasury shares Part 2 FINANCIAL ANALYSIS AND FORECASTING Chapter 8 How to perform a financial analysis 2

3 What is financial analysis? Economic analysis of companies An assessment of a company's accounting policy Standard financial analysis plan The various techniques of financial analysis Ratings Section 7 Scoring techniques Section 8 Expert systems Chapter 9 Margin analysis: structure How operating profit is formed How operating profit is allocated Financial assessment Pro forma income statements (individual and consolidated accounts) Case study: Ericsson Chapter 10 Margin analysis: risks How the operating leverage works A more refined analysis provides greater insight From analysis to forecasting: the concept of normative margin Case study: Ericsson Chapter 11 Working capital and capital expenditures The nature of working capital The working capital turnover ratios Reading between the lines of working capital Analysing capital expenditures Case study: Ericsson Chapter 12 Financing A dynamic analysis of the company's financing A static analysis of the company's financing Case study: Ericsson 3

4 Chapter 13 Return on capital employed and return on equity Analysis of corporate profitability Leverage effect Uses and limitations of the leverage effect Case study: Ericsson Chapter 14 Conclusion of financial analysis Solvency Value creation Financial analysis without the relevant accounting documents Case study: Ericsson SECTION TWO INVESTMENT ANALYSIS Chapter 15 The financial markets Section 7 The rise of capital markets The functions of a financial system The relationship between banks and companies From value to price (1): financial communication From value to price (2): the efficient markets Limitations in the theory of efficient markets Investors behaviour Part 1 INVESTMENT DECISION R ULES Chapter 16 The time value of money and net present value (NPV) Capitalisation Discounting Present value and net present value of a financial security The NPV decision rule What does net present value depend on? Some examples of simplification of present value calculations 4

5 Section 7 Special NPV topics Chapter 17 The internal rate of return (IRR) How is internal rate of return determined? Internal rate of return as an investment criterion The limits of the internal rate of return Some more financial mathematics: interest rate and yie ld to maturity Chapter 18 Incremental cash flows and other investment criteria The predominance of NPV and the importance of IRR The main lines of reasoning Which cash flows are important? Other investment criteria Chapter 19 Measuring value creation Accounting criteria Economic criteria Market criteria Putting things into perspective Chapter 20 Risk and investment analysis A closer look at risk The contribution of real options Part 2 THE RISK OF SECURITIES AND THE COST OF CA PITAL Chapter 21 The risk and return of securities 5

6 Section 7 Section 8 Section 9 Sources of risk Risk and the fluctuation in the value of a security Tools for measuring return and risk How diversification reduces risk Portfolio risk Measuring how individual securities affect portfolio risk: the beta coefficient Choosing among several risky assets and the efficient frontier Choosing between several risky assets and a risk-free asset: the capital market line How portfolio management works Chapter 22 The cost of equity Return required by investors: the CAPM 1 Properties of the CAPM The limits of the CAPM model Multi-factor models The cost of equity based on historical returns The cost of equity based on current market prices Chapter 23 From the cost of equity to the cost of capital The cost of capital and the? of assets Alternative methods for estimating the cost of capital Some practical applications Can corporate managers influence the cost of capital? Cost of capital: a look at the evidence Chapter 24 The term structure of interest rates Fixed-income securities and risk The different interest rates curves Relationship between interest rates and maturities The stochastic approach to modelling the rate structure A flashback 1 See also the appendix of this chapter for a formal derivation of the CAPM. 6

7 SECTION THREE CORPORATE FINANCIAL POLICIES Part 1 FINANCIAL SECURITIES Chapter 25 Enterprise value and financial securities A completely different way of looking at things Debt and equity Overview of how to compute enterprise value Valuation by discounting free cash flow Chapter 26 Debt Securities Basic Concepts The yield to maturity Floating-rate bonds Other debt securities The volatility of debt securities Default risk and the role of rating Chapter 27 Other Debt Products General features of corporate financing Marketable debt securities Bank Debt products Leasing Project financing Investment of cash Chapter 28 Equity Basic concepts P/E Key market data Adjusting per share data for technical factors 7

8 Chapter 29 Options Definition and theoretical foundation of options Mechanisms used in pricing options Analysing options Parameters to value options Methods for pricing options Tools for managing an options position Chapter 30 Hybrid securities Warrants Convertible bonds Preference shares Other hybrid securities Chapter 31 Selling securities Section 7 Ggeneral principles in the sale of securities Initial public offerings Capital increases Block trades of shares Bonds Convertible and exchangeable bonds Syndicated loans 8

9 Part 2 CAPITAL STRUCTURE POLICIES Chapter 32 Value and corporate finance The purpose of finance is to create value Value creation and markets in equilibrium Value and organisation theories How can we create value? Value and taxation Chapter 33 Capital structure and the theory of perfect capital markets The evidence from the real-world The capital structure policy in perfect financial markets Chapter 34 The trade-off model The benefits of debt The costs of debt The trade-off model Chapter 35 Debt, Equity and options theory Analysing the firm in light of options theory Contribution of the options theory to the valuation of equity Using options theory to analyse a company's financial decisions Resolving conflicts between shareholders and creditors 9

10 Chapter 36 Working out details: the design of the capital structure The major concepts Competitors, life cycle and the extended trade-off model Other factors affecting the capital structure choice Effects of the financing choice on accounting and financial criteria Working out details of the capital structure Capital structure policies: a look at the evidence Part 3 EQUITY CAPITAL AND DIVIDEND POLICIES Chapter 37 Internal Financing:Reinvesting cash flow Reinvested cash flow and the value of equity Internal financing and the various stakeholders Internal financing and return criteria Chapter 38 Returning value to shareholders: dividend policies Dividends and market value Dividend distribution in practice Share buy-backs and capital reduction Taxation of dividends, share buy-backs and capital reduction Chapter 39 Capital Increases A definition of capital increase Capital increases and finance theory Old and new shareholders Capital increases and financial criteria 10

11 SECTION FOURTH FINANCIAL MANAGEMENT Part 1 VALUATION AND FINANCIAL ENGINEERING Chapter 40 Valuation Overview of the different methods Premiums and discounts Valuation by discounted cash flow Multiple approach or peer-group comparisons The sum-of-the-parts method and restated net asset value (RNAV) Comparison of valuation methods Chapter 41 Choice of Corporate Structure Shareholder structure Initial Public Offerings (IPO) and corporate governance How to strengthen control over a company Financial securities discounts Orga nising a diversified group Chapter 42 Taking control of a company The Rise Of Mergers And Acquisitions Choosing a negotiating strategy Taking over a listed european company Chapter 43 Mergers And Demergers All-Share Deals The mechanics of all-share transactions Demergers and Split-offs 11

12 Chapter 44 LBOs LBO structures The players LBOs and financial theory Chapter 45 Bankruptcy and Restructuring Why companies go bankrupt? Bankruptcy and financial theory An illustrative example of financial restructuring Part 2 MANANGING NET DEBT AND FINANCIAL RISKS Chapter 46 Managing cash flows Basic tenets Cash management Cash management within a group Investment of cash Chapter 47 Off Balance Sheet Financing Reasons For Using Off-balance sheet products Main techniques Accounting treatment Consequences for financial analysis 12

13 Chapter 48 Managing Financial risks The various sources of financial risk Measuring financial risks Principles of financial risk management Organised markets versus OTC Markets Appendices Glossary Index Detailed table of contents 13

Advanced Company Analysis Valuation & Financial Modelling. 5-9 March 2017 Manama, Bahrain. euromoneylearningsolutions.

Advanced Company Analysis Valuation & Financial Modelling 5-9 March 2017 Manama, Bahrain euromoneylearningsolutions.com/learnmore Advanced Company Analysis Valuation & Financial Modelling Accelerate your