THE FOUNDATIONS OF CORPORATE FINANCE:

INTRODUCTION TO THE FINANCIAL STATEMENTS

Lesson 1

Castellanza,21st September, 2011

Corporate Finance

Corporate Finance

The foundations of Corporate Finance: role and objective

What is Corporate Finance

The Financial Division in a company

Who is the Financial Manager

Financial Decision making

The objective function

The tools of Corporate Finance

Corporate Finance

What is Corporate Finance

Corporate Finance concerns the financing of

enterprises - that is, unique combination of

physical and human capital – and the investing

of financial resources.

Core of Corporate Finance: 3 principles

financing

investment

dividends

Corporate Finance

The Financial Manager stands between the firm’s operations and

the financial markets, where investors hold the financial

assets issued by the firm.

Firm’s operations Financial Managers Financial Markets

(Real assets) (Financ. Assets)

Chief Financial Officer (CFO): Treasurer / Controller

Treasurer: cash management/raising capital/banking

relationships

Controller: preparation of financial statements / accounting

/taxes

The Financial Manager

Corporate Finance

Financial decisions:

ordinary short term cash / working capital

medium-long term financing / investing

extraordinary floatation / M&A, …

maximize the value of the firm

but value for who?

stockholders firm

Financial Decision making

Corporate Finance

6

The classical objective function

Corporate Finance

The real world

Corporate Finance

8

The real world

Corporate Finance

The tools of Corporate Finance

Financial Statements

Time value of money

Valuation of companies

Corporate Finance

Introduction to the Financial Statements

Objective: to maximize the value of the firm

How can we check the objective?

financial analysis(financial anlysts, investment banks, …)

technical fundamental

candlestick, … Financial Statements

static dynamicratios analysis flows

analysis

Corporate Finance

Static financial analysis (ratio analysis)

picture of the financial position of the firm at a point in time

Dynamic financial analysis (flows analysis)

changes in year and why

Introduction to Financial Statements: tools

Corporate Finance

Introduction to Financial Statements

Static Analysis Dynamic Analysis

FlowsFlows

Flows from operations

Flows from investment and financing

Ratios

Corporate Finance

Introduction to Financial Statements

Static Analysis

Dynamic Analysis

Assets = Liabilities

Uses of funds = Sources of funds

Corporate Finance

Introduction to Financial Statements:the balance sheet

Fixed Assets

Financial Assets

Current Assets

Intangible Assets

LT fin. Debt

Other LT liabil. (ex. provisions)

Current Liabilit.

EquityNon

Cur

rent

Non C

urrent

Corporate Finance

Introduction to Financial Statements:the balance sheet

Fixed Assets

Financial Assets

Net Working Cap.

Intangible Assets

LT fin. Debt

Other LT obligat. (ex. provisions)

Equity

Corporate Finance

Introduction to Financial Statements: Net Working Capital

Accounts receivable

Inventories

Accounts payable

NWC

Cash and Marketable securities

Other current assets

Other current liabil. (ex: accrued income taxes)

Financ. s. term loans

Corporate Finance

Introduction to Financial Statements: Net Working Capital (operating or non cash)

Accounts receivable

Inventories

Accounts payable

NWC op.

Other current assets

Other current liabil.

Non

cas

h cu

rren

t ass

ets

Non cash current liabilities

Corporate Finance

18

Introduction to Financial Statements:the balance sheet

Non curr. Assets

(fixed, intang., fin.)

Other LT assets and liabil.

NWC NFP.

Equity

Corporate Finance

Introduction to Financial Statements:the income statement (Profit and Loss)

Sales- Operating expenses= EBITDA- Depreciation and Amortization= EBIT- Financial expenses/revenues- Extraordinary items= EBT- Taxes= Net Earning

Corporate Finance

Ex. Prepare a balance sheet for ABC co. from the following information. What is the equity?

Bank loans short term of 200Cash of 100Inventory of 800Building and fixtures of 1500Accounts receivable of 1200Mortgage loan of 1300

Corporate Finance

Ex. Prepare a balance sheet financial reclassification using the following data

Short-term Financial Debt 55,062Cash 40,419Long-Term financial debt 93,832Accounts receivable 80,214Other current liabilities 33,016Inventories 41,156Other current assets 31,660Employees' Termination Pay 14,087Equity 98,186Financial Assets 5,281Fixed Assets 67,893Intangible Assets 66,114Allowance for doubtful receivable accounts 2,519Marketable Securities 14,039Trade accounts payable 50,074