Lessons Learned

Managerial Finance

Disclaimer

This is not intended to be a condensed outline of the course, but simply what I took as key takeaways. In some courses there are many areas discussed that aren’t contained in these slides, as they are items I was already familiar with and didn’t feel the need to document or felt they wouldn’t be useful to me in my current career. I think of these as my “cheat sheet” of material that can help me in my current & future roles and are DRAFT…like Google’s Beta are subject to change – Matt Crane

Scanlon, Bill. (2010). Course presented on Managerial Finance. Miami University, Oxford & Cincinnati, OH.

• Returns:

– Nominal: stated (e.g. APR)

– Real: nominal – inflation

• Coefficient of variation: std dev/exp rtn (how many units of risk per unit of return)

• Diversifiable risk: company unique, non-systematic

• Non-diversifiable risk: market, systematic

Bond yield

• CAPM/Rqd Return: Risk Free Rate + (Mkt RqdReturn – Risk Free Rate * Beta)

• Yield to Maturity (YTM): annual return (yield) % of bond if held until maturity– Current price: $1313.87 (PV)

– Coupon interest: 6.8% APR (6.8% x 1000 = 68 / 2 = 34 semi-annually = PMT)

– 1000 = FV

– 16 years until maturity (payments left = 32 - M)

– CPT I/Y = 2.05 (2.05 x 2 = 4.1 YTM)

Firm Cost of Capital

• Cost of long-term debt: YTM x (1 – tax rate)

• Cost of preferred stock: Dividend / Stock Price

• Cost of equity: Dividend / Stock Price x Growth

• CAPM: RF Rate + (Rqd Rtn Mkt - RF Rate)1 x Beta

• Find WACC

– Find Bond yield from FINRA

– Find avg corp tax rate from Income Statement

– Find current price of Preferred and dividend yield

– Calc avg dividend growth (5-10 years)

– Avg Bond Yield, CAPM, dividend growth = cost of equity

– LTD weight = LTD + current portion of LTD from BS

– Preferred Stock = preferred price x (# of shares)

– Common equity weight = price x (# of shares)

1 Add 4% to pretax bond yield to get market risk premium

Refunding process - Bonds

• Yes, if NPV > 0

• Float costs are capitalized and amortized as non-cash over life of bond (tax deduct)

• Unamortized floatation costs of old bond = write-off against income at refunding

IRR, NPV, Working Capital

• IRR: interest rate where NPV = 0– IRR > “hurdle rate” (WACC) = Accept

• NPV: present value of future cash flows

• Working Capital: management of Current Assets & Current Liabilities

• Net Working Capital: CA – CL

• Cash Conversion Cycle for working cap.:– Days Sales in Inventory + DSO – Days

Purchases Outstanding

Replacement Project

Example

Derivatives

• Warrants: call options written by company

• Swap: swapping floating for fixed debt, or vice versa