120712 corporate finance mm+pt...

CORPORATECORPORATE FINANCEFINANCE

Corporate finance in theory and practiceDr. Petr Teplý

EEIP, a.s.Charles University in Prague

The College of Economics and ManagementPrague, Czech Republic

10 & 12 July 2012

AgendaAgenda

Introduction1.

Theoretical background2.

Capital budgeting3.

Case studies4.

2Corporate finance in theory and practice10 & 12 July 2012

CVCV PetrPetr TeplTeplýý

2000 – JKU in Linz, Austria

2006 – University of Otago, New Zealand

2006 – State University of New York, New Paltz, USA

2009 – Ph.D. in Finance, Charles University, Czech Rep.

� Research interests: banking, finance, risk management,

Education

1. 1. IntroductionIntroduction

3

� (Co)author of over 100 articles and 10 books

� Guest lectures in New Zealand, Turkey, USA

� Presentations at Harvard University, State University of New York, China, Dubai, Egypt, France, India, Nepal, Singapore, UK

� Research interests: banking, finance, risk management, financial stability, financial innovation, public finance, RIA

Job experience 2001-05 CSOB Bank, Czech Republic

2006 Spencer Clarke, New York, USA

2007+ EEIP, a.s., Czech Republic

2009+ Advisor to Jiri Havel,member of European Parliament

GlobalGlobal politicalpolitical corporatecorporate governancegovernance

PRINCIPAL AGENTSPRINCIPAL´S

TARGET


Growth forever! Sounds great!

Regulation

Source: Petr Teplý (2010)

I. I. IntroductionIntroduction

WhoWho willwill paypay thisthis game?game?

PoliticiansFinancial

firmsRegulators

5

Focus on voters/short-term targets

Focus on profit maximization

Lack of personal responsibility

The taxpayer will pay as usual!

Source:Petr Teplý (2011)

1. Introduction1. Introduction

UROBORUROBOROOSS for regulation, climate change and for regulation, climate change and crises = shortcrises = short--term distorted thinking resultterm distorted thinking resultss in in longlong--term term catastrophiccatastrophic consequencesconsequences

6Source: Petr Teplý (2011)


Many Many economieseconomies are are goinggoing to live on to live on debtdebt in in thethe futurefuture!!!!!!

7


Different debtsDifferent debts´́ structure in countriesstructure in countriesReal estate bubbles fueled by loans Real estate bubbles fueled by loans -- credit crunch?! credit crunch?!

8Source: McKinsey (2010)

1. 1. IntroductionIntroduction……itit isis not not sustainablesustainable --> > repeatingrepeatingsovereign sovereign defaultsdefaults

9


Fiscal Fiscal iimplicationsmplications of the of the ggloballobal ccrisisrisis waswas low low comparedcompared to to futurefuture agingaging--relatedrelated spendingspending!!

10

Tsunami Tsunami ofof sovereign sovereign bankruptciesbankruptcies in in thethe EMUEMUWhoWho and when and when willwill bebe the the nextnext??

1. Introduction1. Introduction

11Source: Petr Teplý (2011)

1) Bank runs (Argentina in 2001)

1. Introduction1. IntroductionFourFour steps to dictatorship in Greece, steps to dictatorship in Greece, the show has just began…the show has just began…

12

1) Bank runs (Argentina in 2001)

2) Street riots (Egypt in 2011)

3) Military putsch (Mali in 2012)

4) Dictatorship (Belarus 1994+)

1. Introduction1. IntroductionLLongong--term term futurefuture ofof thethe Eurozone Eurozone isis clearclear!!

13 13

AgendaAgenda

Introduction1.


Capital budgeting3.

Case studies4.


2. Theoretical background2. Theoretical background

DirectDirect vs. vs. indirectindirect financefinance

15


AssetAsset--classclass liquidityliquidity vsvs timetime horizonhorizon

16Source: World Economic Forum (2011)

1. World financial market1. World financial marketGlobal financial stock has surpassed preGlobal financial stock has surpassed pre--crisis crisis heights,heights, (USD (USD 212 trillion in 2010212 trillion in 2010))


2. 2. TheoreticalTheoretical backgroundbackground

FinancialFinancial market market shareshare by country (%)by country (%)

18Source: The Economist 7/1/2012


2008 was a severe test2008 was a severe test forfor sstockstocks andand modelsmodels(VAR (VAR etcetc.)!.)!

2010

2011

19

Source: McKinsey (2009), P.Teplý

2009


WhichWhich instrument instrument isis thethe most most profitableprofitable??

120,000

140,000

160,000

180,000

Valu

e in

$Value of Stocks, T-Bills, T-Bonds in the US

in the 1928-2011 (1927=$100)

Stocks$166,763

(2011)

T-Bonds

20Source: Petr Teplý based on www.damodaran.com

0

20,000

40,000

60,000

80,000

100,000

120,000

Valu

e in

$

Stocks T.Bills T.Bonds

T-Bills$1,970(2011)

T-Bonds$6,727(2011)


And what about riskAnd what about risk??

30%

50%

Stocks, T-Bills and T-Bonds Performance in the US in 1928-2011

Rate of return

RiskLiquidity

21Source: Petr Teplý based on www.damodaran.com

-50%

-30%

-10%

10%

Retu

rn p

.a.

Stocks T-Bills T-Bonds


Risk in Risk in ChineseChinese meansmeans……

22

‘danger’ and ‘opportunity’

2. 2. TheoreticalTheoretical backgroundbackgroundThe The riserise ofof BRICBRICss countriescountries

23

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentalsCorporate finance fundamentalsRecapitulation of Recapitulation of fin.statementsfin.statements (1/3)(1/3)

24Source: Teplý (2010)

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentalsCorporate finance fundamentalsRecapitulation of Recapitulation of fin.statementsfin.statements ((22/3)/3)


� Note: The figure is valid for the CzechAccountingStandards (CAS)

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentalsCorporate finance fundamentalsRecapitulation of Recapitulation of fin.statementsfin.statements (1/3)(1/3)

26Source: Das (2005)

� Note: This figure shows Loan from Bank Y to Company X

� A firm faces a fundamental problem which type of securities should be issued to investors for obtaining financing for its projects

� Capital structure = relative proportions of securities (equity, bonds, banking credit, options, warrants, etc.) that the firm has outstanding

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentals: Corporate finance fundamentals: leverelevered d firmfirm

27

the firm has outstanding

� debt: borrowing D -> repayment D(1+ r)

� equity (shares, stock): claim on residual value of a firm (dividends, capital gains)

� unlevered firm = equity in a firm with no debt

� levered firm = equity in a firm that has debt outstanding

Source: Dědek (2012)

� Financial leverage (gearing) shows how much debt the firm employs in its capital structure

� Other things remaining equal, an increase in financial leverage will increase the beta of the equity in a firm. Intuitively, we would expect that the fixed interest payments on debt result in high net income in good

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentalsCorporate finance fundamentalsFinancialFinancial leverageleverage ((1/1/66))

Assets Liabilities

Operating

leverage

Financial

leverage

Balance Sheet

28

payments on debt result in high net income in good times and low or negative net income in bad times.

� Higher leverage increases the variance in net income and makes equity investment in the firm riskier. If all the firm's risk is borne by the stockholders (i.e., the beta of debt is zero) and debt has a tax shield (benefit) to the firm, then:

Source: Teplý (2005)

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentalsCorporate finance fundamentalsFinancialFinancial leverageleverage (2(2//66))

unlevl *E

D)t1(1 ββ

−+=

29

where t = tax, D/E = debt/equity ratio

ßunlev = unlevered (asset) beta

ßl = levered (equity) beta


� Degree of financial leverage (DFL)DFL = % Change in EPS / % Change in EBIT

or DFL = EBIT/(EBIT – interest)

� Consider a new firm which expects an EBIT of $ 4 million, requires assets of $ 20 million, and has a zero tax rate -> ROA = ROE = 4/20 = 20%

� Now suppose the firm decides to change its capital structure by issuing $ 10 million of debt at kD=15%, substituting fund for $ 10 million of equity -> ROE would

2. 2. TheoreticalTheoretical backgroundbackgroundCorporate finance fundamentalsCorporate finance fundamentalsFinancialFinancial leverageleverage (3(3//66)) –– ExampleExample 11

30

substituting fund for $ 10 million of equity -> ROE would increase from 20% to 25%

� The use of debt would “levered up” the expected ROE from 20% to 25%

� Financial leverage increases risk as well as expected return to the equity investors


� Now suppose EBIT = $ 2 million, so ROA = 2/20 = 10%. If the firm used no debt, then ROE would decline from 20% to 10%. However, with debt financing, ROE would fall from 25% to 5% - see following table:


31Source: Teplý (2005) based on Brealey and Myers (2000)

� For a more complete analysis of the effects of leverage on this firm´s ROE see the following figure showing that the greater use of financial leverage, the more sensitive ROE is to changes in ROA


32Source: Brealey and Myers (2000)


33Source: Brealey and Myers (2000)

� In theory under lots of restricting assumptions by made Modigliani and Miller (1958) – a perfect capital market with no transaction costs connected to bankruptcy and no taxes


ModiglianiModigliani andand Miller (1958) Miller (1958)

34

and no taxes � The capital structure is not important – it does not influence the firm´s value and the firm´s cost of capital

� Standard equation forWACC:

� Proposition II:


WACC WACC undundeer r M&MM&M

EDWACC kED

Ek

ED

Dk

++

+=

35

� Proposition II:

� Therefore, the cost of equity increases with leverage (the ratio D/E). The rate of increase depends on the spread between the weighted average cost of capital and the cost of debt

9)(2 )( −−+=⇒+

++

=E

Dkkkkk

ED

Ek

ED

Dk DWACCWACCEEDWACC

� Thus, higher proportion of cheaper debt makes the remaining equity even more expensive, just enough to keep the weighted average cost of capital constant:


WACC WACC undundeer r M&MM&M

kkE

36

Leverage, D/(D+E)

kD

kWACC

� The firm´s dividend policy does not influence the firm´s value in a perfect capital market.

� The firm´s value is according to Miller-Modigliani set only by firm´s real assets or by cash flows generated by these assets in the future – i.e. it is not influenced by securities issued by a firm


MM&M&M theoremtheorem alias „Pizza alias „Pizza TheoryTheory

37

issued by a firm

� Consequence – possibility of separation of financial and investment decisions, co company may prepare its investment budget without taking into account the form of investment financing

� Reality: a financial manager has to consider the firm´s capital structure because of market imperfections and frictions as taxes, depreciation…

� Increasing leverage increases the risk of debt.


WACC WACC undundeer r M&M/risky debtM&M/risky debt

kkE

38

Leverage, D/(D+E)

kD

kWACC

� Required costs of equity (kE), deduced from that equation increase with increasing ratio of D/E linearly, but slower than in case of no tax that equation increase with increasing ratio


WACC WACC undundeer r M&M/tax shieldM&M/tax shield

( )( )E

Dt1kkkk DAAE −−+=

39

� WACC as minimal required rate of return, which company must generate in order to be able fulfill capital requirements of shareholders and creditors, is weakly decreasing with increase of D/E

E

( )ED

Dt1k

ED

EkWACC DE

+−+

+=


WACC WACC undundeer r M&M/tax shieldM&M/tax shield

40

�Direct costs (costs connected to bankruptcy)

� Indirect costs (costs before filing bankruptcy)


FinancialFinancial ddistressistress ccostsosts

41

bankruptcy)� Impaired ability to conduct business.

� Tendency to underinvestment


KKeyey differences between equity and debtdifferences between equity and debt

42Source: Dědek (2012)


Limited Limited liabilityliability = = importantimportant underunder distressdistress

43Source: Dědek (2012)

� The traditional theory has emerged in response to the M&M theory. It is based on the naive theory, refining some of its findings. The traditionalists assume that the required rate of return on equity rises in a lower degree than determined by M&M Proposition II when leverage of a firm is relatively low, but it rises faster than predicted by


TraditionalTraditional TheoryTheory = = TradeTrade--offoff theorytheory

44

firm is relatively low, but it rises faster than predicted by M&M Proposition II when leverage increases.

� Concerning the required rate of return on debt, they are in accordance with M&M. Therefore, the overall cost of capital decreases with increasing leverage for low values of leverage, reaching the minimum in some critical point and then rises with increasing leverage. Thus, there exists a leverage for which the weighted average cost of capital is minimized


TraditionalTraditional TheoryTheory

kkE

kWACC

45

Leverage, D/(D+E)

kD


World bond World bond marketsmarkets

46Source: The City UK (201!)


Rating Rating actionsactions: : emergingemerging vs. vs. developeddevelopedmarketsmarkets

47Source: FITCH (2011)

2. 2. TheoreticalTheoretical backgroundbackgroundDifferentDifferent debtsdebts´́ structurestructure in in countriescountries

(Q2 2011 data (Q2 2011 data forfor developeddeveloped countriescountries))


2. 2. TheoreticalTheoretical backgroundbackgroundDifferentDifferent debtsdebts´́ structurestructure in in countriescountries

(Q2 2011 data (Q2 2011 data forfor PIIGS PIIGS countriescountries))


2. Theoretical background2. Theoretical backgroundLow Low corporatescorporates’ ’ indebtednessindebtedness ofof thetheCzechCzech corporate sector (1/2)corporate sector (1/2)

50

2. Theoretical background2. Theoretical backgroundLow Low corporatescorporates’ ’ indebtednessindebtedness ofof thetheCzechCzech corporate sector (2/2)corporate sector (2/2)

51


……butbut averageaverage profitabilityprofitability

52

AgendaAgenda

Introduction1.

Capital budgeting


Capital budgeting3.

Case studies4.


33. . CapitalCapital budgetingbudgeting

FFinancialinancial managementmanagement processprocess

54Source: Tajiran (1997)


CapitalCapital BudgetingBudgeting

55Source: Dayananda et al (2009)


InvestmentInvestment decisionsdecisions

Assets Liabilities

Operating Financial

Balance Sheet


Operating

leverage

Financial

leverage

Financialdecisions

Investmentdecisions


TheThe capitalcapital investmentinvestment processprocess

57Source: Tan (2010)

� A form of financing projects, primarily based on claims against the financed asset or project rather than on the sponsor of the project.

� However, there are varying degrees of recoursepossible. Repayment is based on the future cash flows of the project.

3. 3. CapitalCapital budgetingbudgeting

BasicsBasics ofof projectproject financefinance

58

of the project.

� No collateral (just the project)!!! Other measure are important:� Cash-flow of the project

� Debt service coverage ratio (DSCR)

� Net present value (NPV)

� Internal rate of return (IRR)

� Payback period etc.Source: BBVA (2006), Comer and Bodnar (1996)


Project Project evaluationevaluation processprocess (NPV)(NPV)

59Source: Tan (2010)

1) payback period2) discounted payback period3) accounting/booking rate of return


NPV NPV competitorscompetitors//otherother criteriacriteria

60

3) accounting/booking rate of return4) internal rate of return5) profitability index

Source: Teplý (2005b)

� A project of International Mulch and Compost Company (“IM&C “) – a proposal for marketing guano as a garden fertilizer

� Investment of USD 10 million in plant and machinery (sold for USD 1 million in year 7)


Project Project evaluationevaluation –– case study (IM&C)case study (IM&C)

61

machinery (sold for USD 1 million in year 7)

� Straight-line depreciation: 1.583 million annualy (9.5/6)

Source: Teplý (2005b)


IM&C: IM&C: ForecastedForecasted statementsstatements (no (no inflationinflation))

Period 0 1 2 3 4 5 6 7

1 Capital investment 10 000 -1000*

2 Accumulated depreciation 1 583 3 167 4 750 6 333 7 917 9 500

3 Year-end book value 10 000 8 417 6 833 5 250 3 667 2 083 500

4 Working capital 500 1 065 2 450 3 340 2 225 1 130

5 Total book value (3+4) 10 000 8 917 7 898 7 700 7 007 4 308 1 630

6 Sales 475 10 650 24 500 33 400 22 250 11 130

7 Costs of goods sold 761 6 388 14 690 20 043 13 345 6 678

8 Other costs** 4 000 2 000 1 000 1 000 1 000 1 000 1 000

Project of IMC - intial projections (in thousands USD)

62Source: Teplý (2005b)

9 Depreciation 1 583 1 583 1 583 1 583 1 583 1 583

10 Pretax profit (6-7-8-9) -4 000 -3 869 1 679 7 227 10 774 6 322 1 869 500***

11 Tax at 34% -1 360 -1 316 571 2 457 3 663 2 149 635 17012 Profit after tax (10-11) -2 640 -2 554 1 108 4 770 7 111 4 172 1 233 330

*Salvage value

**Start-up costs in years 0 and 1, and general and administrative costs in years 1 through 6.

***The difference between the salvage and the ending book value of 500$ is taxable profit.


Period 0 1 2 3 4 5 6 7

1 Capital investment 10 000 -1949*

2 Accumulated depreciation 1 583 3 167 4 750 6 333 7 917 9 500

3 Year-end book value 10 000 8 417 6 833 5 250 3 667 2 083 500

4 Working capital 550 1 289 3 261 4 890 3 583 2 002

5 Total book value (3+4) 10 000 8 967 8 122 8 511 8 557 5 667 2 502

6 Sales 523 12 887 32 610 48 901 35 834 19 717


8 Other costs 4 000 2 200 1 210 1 331 1 464 1 611 1 772

Project of IMC - intial idea reflecting inflation (in thousands USD)

IM&C: IM&C: ForecastedForecasted statementsstatements ((withwith inflationinflation))


8 Other costs 4 000 2 200 1 210 1 331 1 464 1 611 1 772

9 Depreciation 1 583 1 583 1 583 1 583 1 583 1 583

10 Pretax profit (6-7-8-9) -4 000 -4 098 2 364 10 143 16 509 11 148 4 532 1449**

11 Tax at 34% -1 360 -1 393 804 3 449 5 613 3 790 1 541 49312 Profit after tax (10-11) -2 640 -2 705 1 560 6 694 10 896 7 358 2 991 956

*Salvage value

**The difference between the salvage value and the ending book value of $500 is a taxable profit.


IM&C: IM&C: ForecastedForecasted statementsstatements ((withwith inflationinflation))

Period 0 1 2 3 4 5 6 7

1 Sales 523 12 887 32 610 48 901 35 834 19 717


3 Other costs 4 000 2 200 1 210 1 331 1 464 1 611 1 772

4 Tax on operations -1 360 -1 393 804 3 449 5 613 3 790 1 541

5 Cash flow from operations (1-2-3-4) -2 640 -1 121 3 143 8 278 12 479 8 941 4 575

6 Change in capital working 0 -550 -739 -1 972 -1 629 1 307 1 582 2 002

7 Capital investment and disposal -10 000 1456*

Calculation of NPV


7 Capital investment and disposal -10 000 1456*

8 Net cah flow -12 640 -1 671 2 405 6 305 10 850 10 248 6 156 3 4589 PV at 20% -12 640 -1 393 1 670 3 649 5 232 4 118 2 062 965

NPV=3,663 USD

* Salvage value of 1949 less tax of 493 on the difference between salvage value end ending cost book value.

Net cash flow

AgendaAgenda

Introduction1.

Capital budgeting


Capital budgeting3.

Case studies4.


1) Micro case study: notional credit application of Prague Airport

5. Case 5. Case studiesstudiesTwo case studiesTwo case studies

66

2) Macro case study: Credit crunch in Europe/the nexus between sovereign and bank crises

� This case study focuses on a notional credit applicationfrom Prague Airport (PA) (formerly Česká správa letišť, s.p. (CSL)/ Czech Airports Authority) to a bank

� Current year = 2003, i.e. past performance for 2001-2003, business plan for 2004-2008 (CAS)

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication (1)(1)Basic info Basic info

67

2003, business plan for 2004-2008 (CAS)

� PA intends to build a new terminal worth CZK 500 million that will increase PA´s sales by 3% p.a.


5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication (2)(2)Past Performance (P&L)Past Performance (P&L)

2001 2002 2003

+ Gross margin 88 18 20 814

II. Production 3 266 702 3 377 868 3 746 526

B.

Production related consumption 1 103 371 1 012 278 970 036

+ Value added 2 163 419 2 365 608 2 797 304

C. Personnel expenses 556 029 633 900 735 901

Amortization and depreciation of


E.

Amortization and depreciation of intangible and tangible fixed assets 536 278 562 120 585 764

* Profit or loss on operating activities 900 401 881 112 1 152 124

J.-P. Financial expenses 221 283 197 734 198 410

N. Interest expense 136 610 62 805 42 418

* Profit or loss on financial activities -147 821 -111 845 152 418

Q.

Tax on profit or loss on ordinary activities 181 575 241 824 372 099

**

Profit or loss on ordinary activies

after taxation 571 005 527 443 932 443

* Extraordinary profit or loss 1 505 1 314 1 369

*** Profit or loss for the year (+/-) 572 510 528 757 933 812

**** Profit or loss before taxation 754 761 771 172 1 305 911

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((33))Past Performance (Balance Past Performance (Balance sheetsheet//assetsassets))

2001 2002 2003

TOTAL ASSETS 24,902,448 25,413,244 26,456,109

A. Receivables for stock rec. 0 0 0

B. Fixed assets 23,628,695 23,466,238 23,828,578

B.I. Intangible fixed assets 19,830 28,387 27,529

B.II. Tangible fixed assets 23,608,725 23,437,711 23,800,849

B.III. Long-term financial investments 140 140 200


B.III. Long-term financial investments 140 140 200

C. Current assets 1,255,760 1,936,495 2,589,286

C.I. Inventories 21,216 23,721 22,886

C.II. Long-term receivables 0 286,122 280,416

C.III. Short-term receivables 530,038 652,913 753,514

C.IV. Financial assets 704,506 973,739 1,532,470

D. Other Assets 17,993 10,511 38,245

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((44))Past Performance (Balance Past Performance (Balance sheetsheet/L/L&E&E))

2001 2002 2003

TOTAL LIABILITIES AND EQUITY 24,902,448 25,413,244 26,456,109

A. Equity 21,453,836 21,753,326 22,665,790

A.I. Registered capital 17,655,722 17,641,102 17,624,835

A.II. Capital Funds 1,403,617 1,403,617 1,403,617


A.II. Capital Funds 1,403,617 1,403,617 1,403,617

A.III. Funds created from profit 303,722 362,720 421,244

A.IV. Retained earnings 1,518,265 1,817,130 2,282,282

A.V. Profit / (loss) for the year 572,510 528,757 933,812

B. External liabilities 3,155,016 3,625,029 3,721,721

B.I. Reserves 1,155,660 1,631,779 2,150,481

B.II. Long-term liabilities 0 249,876 200,501

B.III. Short-term liabilities 276,059 424,557 327,755

B.IV. Bank Loans and Overdrafts 1,723,297 1,318,817 1,042,984

C. Other liabilities 293,596 34,889 68,598

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((55))2a. Build the P&L forecast 2a. Build the P&L forecast –– growth ratesgrowth rates

2004 2005 2006 2007 2008

+ Gross margin 21 438 22 082 22 744 23 426 24 129

II. Production 3 896 387 4 052 243 4 214 332 4 382 906 4 558 222

B.

Production related consumption 970 036 1 018 538 1 069 465 1 122 938 1 179 085

+ Value added 2 947 789 3 055 786 3 167 612 3 283 394 3 403 266

C. Personnel expenses 772 696 811 331 851 897 894 492 939 217

Amortization and depreciation of


E. intangible and tangible fixed assets 615 052 645 805 678 095 712 000 747 600

* Profit or loss on operating activities 1 220 350 1 241 975 1 263 110 1 283 667 1 303 553

J.-P. Financial expenses 204 362 210 493 216 808 223 312 230 012

N. Interest expense 43 691 45 001 46 351 47 742 49 174

* Profit or loss on financial activities 156 991 161 700 166 551 171 548 176 694

Q.

Tax on profit or loss on ordinary activities 372 099 372 099 372 099 372 099 372 099

**


after taxation 1 005 242 1 031 577 1 057 562 1 083 116 1 108 148

* Extraordinary profit or loss 1 369 1 369 1 369 1 369 1 369

*** Profit or loss for the year (+/-) 1 006 611 1 032 946 1 058 931 1 084 485 1 109 517

**** Profit or loss before taxation 1 378 710 1 405 045 1 431 030 1 456 584 1 481 616

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((66))

2b. The P&L forecast (without the project)2b. The P&L forecast (without the project)

2002 2003 2004 2005 2006 2007 2008

I. Revenue from sale of goods -93.2% 104980.6% 3.0% 3.0% 3.0% 3.0% 3.0%

A. Cost of goods sold -95.9% 94427.8% 3.0% 3.0% 3.0% 3.0% 3.0%

+ Gross margin -79.5% 115533.3% 3.0% 3.0% 3.0% 3.0% 3.0%

II. Production 3.4% 10.9% 4.0% 4.0% 4.0% 4.0% 4.0%

B. Production related consumption -8.3% -4.2% 0.0% 5.0% 5.0% 5.0% 5.0%

+ Value added 9.3% 18.2% 5.4% 3.7% 3.7% 3.7% 3.7%

C. Personnel expenses 14.0% 16.1% 5.0% 5.0% 5.0% 5.0% 5.0%

D. Taxes and charges 10.4% -23.9% 5.0% 5.0% 5.0% 5.0% 5.0%

E.

Amortization and depreciation of intangible and tangible fixed assets 4.8% 4.2% 5.0% 5.0% 5.0% 5.0% 5.0%


III.

Revenue from sale of intangible and tangible fixed assets and materials 23.2% -26.2% 5.0% 5.0% 5.0% 5.0% 5.0%

F.

Net book value of intangible and tangible fixed assets and materials sold 18.9% -19.9% 5.0% 5.0% 5.0% 5.0% 5.0%

IV. - V. Other operating revenues 122.3% 65.4% 5.0% 5.0% 5.0% 5.0% 5.0%

F.-I. Other operating expenses 71.6% 13.2% 5.0% 5.0% 5.0% 5.0% 5.0%

* Profit or loss on operating activities -2.1% 30.8% 5.9% 1.8% 1.7% 1.6% 1.5%

VI.-XII. Financial income 16.9% 308.5% 3.0% 3.0% 3.0% 3.0% 3.0%

J.-P. Financial expenses -10.6% 0.3% 3.0% 3.0% 3.0% 3.0% 3.0%

N. Interest expense -54.0% -32.5% 3.0% 3.0% 3.0% 3.0% 3.0%

* Profit or loss on financial activities -24.3% -236.3% 3.0% 3.0% 3.0% 3.0% 3.0%

Q. Tax on profit or loss on ordinary activities 33.2% 53.9% 3.0% 3.0% 3.0% 3.0% 3.0%

** Profit or loss on ordinary activies after taxation -7.6% 76.8% 7.8% 2.6% 2.5% 2.4% 2.3%

XIII. Extraordinary gains -26.2% -34.4% 0.0% 0.0% 0.0% 0.0% 0.0%

R. Extraordinary losses -71.8% -99.5% 0.0% 0.0% 0.0% 0.0% 0.0%

S. Tax on extraordinary profit or loss -12.6% -100.0% 0.0% 0.0% 0.0% 0.0% 0.0%

* Extraordinary profit or loss -12.7% 4.2% 0.0% 0.0% 0.0% 0.0% 0.0%

*** Profit or loss for the year (+/-) -7.6% 76.6% 7.8% 2.6% 2.5% 2.4% 2.3%

**** Profit or loss before taxation 2.2% 69.3% 5.6% 1.9% 1.8% 1.8% 1.7%

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((77))3. The BS forecast (without the project)3. The BS forecast (without the project)

2004 2005 2006 2007 2008

TOTAL ASSETS 27 025 870 27 584 687 28 181 524 28 819 395 29 501 581

A. Receivables for stock rec. 0 0 0 0 0

B. Fixed assets 24 304 605 24 790 153 25 285 412 25 790 576 26 305 845

B.I. Intangible fixed assets 27 529 27 529 27 529 27 529 27 529

B.II. Tangible fixed assets 24 276 866 24 762 403 25 257 651 25 762 804 26 278 060

B.III. Long-term financial investments 210 221 232 243 255

C. Current assets 2 683 020 2 756 290 2 857 867 2 990 574 3 157 492

C.I. Inventories 23 801 24 753 25 744 26 773 27 844

C.II. Long-term receivables 280 416 280 416 280 416 280 416 280 416

C.III. Short-term receivables 783 655 815 001 847 601 881 505 916 765

C.IV. Financial assets 1 595 148 1 636 119 1 704 107 1 801 879 1 932 466



D. Other Assets 38 245 38 245 38 245 38 245 38 245

2004 2005 2006 2007 2008

TOTAL LIABILITIES AND EQUITY 27 025 870 27 584 687 28 181 524 28 819 395 29 501 581

A. Equity 22 943 946 23 185 906 23 438 298 23 701 578 23 976 223

A.I. Registered capital 17 624 835 17 624 835 17 624 835 17 624 835 17 624 835

A.II. Capital Funds 1 473 798 1 547 488 1 624 862 1 706 105 1 791 410

A.III. Funds created from profit 442 306 464 422 487 643 512 025 537 626

A.IV. Retained earnings 2 396 396 2 516 216 2 642 027 2 774 128 2 912 834

A.V. Profit / (loss) for the year 1 006 611 1 032 946 1 058 931 1 084 485 1 109 517

B. External liabilities 4 013 326 4 330 184 4 674 628 5 049 219 5 456 760

B.I. Reserves 2 365 529 2 602 082 2 862 290 3 148 519 3 463 371

B.II. Long-term liabilities 208 521 216 862 225 536 234 558 243 940

B.III. Short-term liabilities 344 143 361 350 379 417 398 388 418 308

B.IV. Bank Loans and Overdrafts 1 095 133 1 149 890 1 207 384 1 267 754 1 331 141

C. Other liabilities 68 598 68 598 68 598 68 598 68 598

� New terminal worth CZK 500m

� Depreciation period = 30 years (i.e. annual depreciation = CZK 16.667m

� Book value after 30 years = 0 (the terminal will be fully depreciated)

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((88))4a. Project 4a. Project detailsdetails ((investmentinvestment))

74

depreciated)


Year 2004 2005 2006 … 2033 2034

Annual depreciation 16 667 16 667 … 16 667 16 667

Cumulative depreciation 16 667 33 333 … 483 333 500 000

Netto value of investment 500 000 483 333 466 667 … 16 667 0

� Face value = CZK 500m

� Interest rate = 4% p.a.

� Maturity = 10 years (31.12.2004 – 31.12.2014)

� Annuity (CZK 5.062m monthly or CZK 60.747m annually) – just for teaching reasons! Usually a different payment structure (postponed principal payment, quarterly payments etc.)

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication (9)(9)4b. Project details (bank loan)4b. Project details (bank loan)

75

principal payment, quarterly payments etc.)


Year Installment

Interest

expense

Principal

paid Principal left

1 60 747 083 19 244 607 41 502 476 458 497 524

2 60 747 083 17 553 732 43 193 351 415 304 174

3 60 747 083 15 793 969 44 953 114 370 351 059

4 60 747 083 13 962 509 46 784 574 323 566 486

5 60 747 083 12 056 434 48 690 649 274 875 837

6 60 747 083 10 072 701 50 674 381 224 201 455

7 60 747 083 8 008 149 52 738 934 171 462 5218 60 747 083 5 859 483 54 887 599 116 574 922

9 60 747 083 3 623 278 57 123 805 59 451 117

10 60 747 083 1 295 966 59 451 117 0

Total 607 470 829 107 470 829 500 000 000 0

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((1010))4c. Project details (bank loan in fin. statements)4c. Project details (bank loan in fin. statements)


� + 3% additional growth in sales (Production)

� Higher cost of sales (Production related

� consumption)

� Higher personnel expenses

� Depreciation

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((1111))4d. Project details (P&L of the project)4d. Project details (P&L of the project)

77

� Depreciation

� Financial expenses


5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((1212))4e. Project details (P&L of the project)4e. Project details (P&L of the project)

2004 2005 2006 2007 2008

I. Revenue from sale of goods

A. Cost of goods sold

+ Gross margin 0 0 0 0 0

II. Production 81 045 84 287 87 658 91 164

B. Production related consumption 27 374 28 469 29 608 30 792

+ Value added 0 53 671 55 818 58 050 60 372

C. Personnel expenses 972 1 021 1 072 1 125


E.

Amortization and depreciation of intangible

and

tangible fixed assets 16 667 16 667 16 667 16 667

* Profit or loss on operating activities 0 36 032 38 130 40 312 42 581

J.-P. Financial expenses 19 245 17 554 15 794 13 963

* Profit or loss on financial activities 0 -19 245 -17 554 -15 794 -13 963

Q. Tax on profit or loss on ordinary activities 0 4 365 4 938 5 884 6 868

**


after taxation 0 12 423 15 638 18 634 21 750

* Extraordinary profit or loss 0 0 0 0 0

*** Profit or loss for the year (+/-) 0 12 423 15 638 18 634 21 750

**** Profit or loss before taxation 0 16 788 20 577 24 518 28 618

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((1313))4f. Project details (BS of the project)4f. Project details (BS of the project)

2004 2005 2006 2007 2008

TOTAL ASSETS 500 000 531 871 527 261 518 314 506 301

A. Receivables for stock rec. 0 0 0 0 0

B. Fixed assets 0 483 333 466 667 450 000 433 333

B.I. Intangible fixed assets 0 0 0 0 0

B.II. Tangible fixed assets 0 483 333 466 667 450 000 433 333


C. Current assets 500 000 48 537 60 595 68 314 72 968

C.I. Inventories 0 0 0 0 0

C.II. Long-term receivables 0 0 0 0 0

C.III. Short-term receivables 0 13 148 16 292 17 454 16 854

C.IV. Financial assets 500 000 35 390 44 303 50 860 56 114


C.IV. Financial assets 500 000 35 390 44 303 50 860 56 114

D. Other Assets 0 0 0 0 0

2004 2005 2006 2007 2008

TOTAL LIABILITIES & EQUITY 500 000 531 871 527 261 518 314 506 301

A. Equity 0 12 423 15 638 18 634 21 750

A.I. Registered capital 0 0 0 0 0

A.II. Capital Funds 0 0 0 0 0

A.III. Funds created from profit 0 0 0 0 0

A.IV. Retained earnings 0 0 0 0 0

A.V. Profit / (loss) for the year 0 12 423 15 638 18 634 21 750

B. External liabilities 500 000 519 448 511 623 499 681 484 552

B.I. Reserves 0 0 0 0 0

B.II. Long-term liabilities 0 0 0 0

B.III. Short-term liabilities 0 6 848 10 594 7 592 9 019

B.IV. Bank Loans and Overdrafts 500 000 512 600 501 029 492 089 475 533

thereof bank loan 500 000 458 498 415 304 370 351 323 566

C. Other liabilities 0 0 0 0 0

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((1414))5a. The P&L forecast (with the project)5a. The P&L forecast (with the project)

2004 2005 2006 2007 2008

+ Gross margin 21 438 22 082 22 744 23 426 24 129

II. Production 3 896 387 4 133 287 4 298 619 4 470 564 4 649 386

B. Production related consumption 970 036 1 045 912 1 097 934 1 152 546 1 209 877

+ Value added 2 947 789 3 109 457 3 223 429 3 341 444 3 463 639

C. Personnel expenses 772 696 812 303 852 918 895 564 940 342

Amortization and depreciation of intangible


E. and tangible fixed assets 615 052 662 471 694 762 728 666 764 266

* Profit or loss on operating activities 1 220 350 1 278 008 1 301 241 1 323 980 1 346 134

N. Interest expense 43 691 45 001 46 351 47 742 49 174

* Profit or loss on financial activities 156 991 142 456 148 998 155 754 162 732

Q. Tax on profit or loss on ordinary activities 372 099 376 464 377 037 377 983 378 967

**


after taxation 1 005 242 1 043 999 1 073 201 1 101 750 1 129 898

* Extraordinary profit or loss 1 369 1 369 1 369 1 369 1 369

*** Profit or loss for the year (+/-) 1 006 611 1 045 368 1 074 570 1 103 119 1 131 267

**** Profit or loss before taxation 1 378 710 1 421 832 1 451 607 1 481 102 1 510 234

5. Case 5. Case studiesstudiesPrague Prague AirportAirport –– creditcredit applicationapplication ((1515))5b. The BS forecast (with the project)5b. The BS forecast (with the project)

2004 2005 2006 2007 2008

TOTAL ASSETS 26 956 109 27 557 741 28 111 949 28 699 838 29 325 696

A. Receivables for stock receivables 0 0 0 0 0

B. Fixed assets 23 828 578 24 787 938 25 256 819 25 735 412 26 223 910




C. Current assets 3 089 286 2 731 558 2 816 884 2 926 181 3 063 541

C.I. Inventories 22 886 23 801 24 753 25 744 26 773






D. Other Assets 38 245 38 245 38 245 38 245 38 245

2004 2005 2006 2007 2008


A. Equity 22 665 790 22 956 369 23 201 544 23 456 932 23 723 328





A.V. Profit / (loss) for the year 933 812 1 019 034 1 048 584 1 077 565 1 106 235


B.I. Reserves 2 150 481 2 365 529 2 602 082 2 862 290 3 148 519





5. Case studies5. Case studies

The interconnected banks and sovereignsThe interconnected banks and sovereigns

Source: BIS (2012)

5. Case studies5. Case studies1. 1. Boom in corporate and/or household Boom in corporate and/or household lendinglending

Source: BIS (2012)

5. Case studies5. Case studies2. 2. Bust in corporate and/or household Bust in corporate and/or household lendinglending

Source: BIS (2012)

5. Case studies5. Case studies3. 3. Bust in corporate and/or household Bust in corporate and/or household lending leading to credit crunchlending leading to credit crunch

Source: BIS (2012)

5. Case studies5. Case studies4. 4. Bust in corporate household and/or lending Bust in corporate household and/or lending leading to government leading to government recapitalisationrecapitalisation of of banksbanks

Source: BIS (2012)

5. Case studies5. Case studies5. 5. Banks as source of weakness to Banks as source of weakness to sovereignsovereign

Source: BIS (2012)

5. Case studies5. Case studies6. 6. Sovereign as source of weakness to Sovereign as source of weakness to banksbanks

Source: BIS (2012)

5. Case studies5. Case studies7. 7. Sovereign and banks as twoSovereign and banks as two--way way sources of weaknesssources of weakness

Source: BIS (2012)

5. Case studies5. Case studies8. 8. Sovereign and banks as twoSovereign and banks as two--way sources of way sources of weakness leading to credit crunchweakness leading to credit crunch

Source: BIS (2012)

5. Case studies5. Case studies9. 9. MultiMulti--sovereign backstop for sovereign and sovereign backstop for sovereign and banksbanks

Source: BIS (2012)

DiscussionDiscussion

TThanks for your attentionhanks for your attention..LetLet´́s discuss it now!s discuss it now!

93

UsefulUseful sourcessources II� Brealey R.A., Myers S.C. (2000). Principles of Corporate Finance, Mc

Graw-Hill, New York, 2000

� CharteredWest LB (1995). Infrastructure projects

� Comer, M., Bodnar, G.M. (1996). Project Finance Teaching Note, TheWharton School

� Dědek, O. (2012). Corporate finance, lectures´ handout at Charles University in Prague

� Dayananda, D. et al. (2009). Capital Budgeting: Financial Appraisal of Investment Projects, Cambridge University Press

94

Investment Projects, Cambridge University Press

� Tajiran, A. (1997). Capital budgeting process

� Tap, L. (2010). Capital Budgeting, Asian Institute of Management, Franklin Baker Co. of the Phils.

� Teplý, P. (2005a). Operating Leverage, Financial Leverage and Beta, lecture at Charles University in Prague on 8 May 2005

� Teplý, P. (2005b). Project evaluation, lecture at Charles University in Prague on 15 April 2005

� Teplý, P. (2007). Credit Application, lecture at Charles University in Prague on 12 October 2007

UsefulUseful sourcessources IIII

95

ContactContact

Petr TeplýSenior LecturerInstitute of Economic StudiesFaculty of Social SciencesCharles University

Petr TeplýAssociate DirectorEEIP, a.s.Narodni 981/17110 00 Prague 1

96

Charles UniversityOpletalova 26110 00 Prague Czech RepublicE-mail: [email protected]://ies.fsv.cuni.cz/en/staff/teply

110 00 Prague 1Czech Republictel: +420 224 232 754e-mail: [email protected]://www.eeip.cz/

120712 corporate finance mm+pt...

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