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    Egmp 01 - FM 1 - C 1

    Uploaded by

    Sumedh Wasnik

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    © All Rights Reserved
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    Egmp 01 - FM 1 - C 1

    Uploaded by

    Sumedh Wasnik
    4 views22 pages

    Original Title

    EGMP-01_FM-1_C-1

    Copyright

    © © All Rights Reserved

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    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4 views22 pages

    Egmp 01 - FM 1 - C 1

    Uploaded by

    Sumedh Wasnik

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 22

    Financial Management

    WHAT TO EXPECT?
    What is Finance
    • Every decision that a business makes has financial implications and any
    decision that affects the finances of a business is a corporate finance
    decision.
    • Defined broadly, everything that a business does can be viewed with a
    corporate finance lens—Its all about Cost and Benefits AND Risk Return
    Trade offs
    The Traditional Accounting Balance Sheet

    Assets Liabilities

    Long Lived Assets –Fixed Assets Short term liabilities – Current Liabilities

    Short Lived Assets – Current Assets Debt obligations of firms - Debt

    Investment in Securities and other assets- Other Long Term Obligations – Other
    Financial Investments Liabilities

    Assets that are not physical- Intangible Equity Investments In Firms - Equity
    assets
    Why must companies have
    assets and Liabilities? What
    purpose should they serve?
    Real Assets and Financial Assets
    Investment =Purchase Real
    Assets
    Financing= Sell Financial Assets
    The Objective in Decision Making
    • In traditional corporate finance, the objective in decision making is to maximize the value of the firm.
    • A narrower objective is to maximize stockholder wealth or the Valuation of the firm. When the stock is
    traded and markets are viewed to be efficient, the objective is to maximize the stock price.

    Maximize equity Maximize market


    Maximize value estimate of equity
    firm value
    value
    Assets Liabilities
    Existing Investments Fixed Claim on cash flows
    Generate cashflows today Assets in Place Debt Little or No role in management
    Includes long lived (fixed) and Fixed Maturity
    short-lived(working Tax Deductible
    capital) assets

    Expected Value that will be Growth Assets Equity Residual Claim on cash flows
    created by future investments Significant Role in management
    Perpetual Lives
    How do we do it?
    Measuring Returns Right: The Basic Principles
    and the Metrics used
    • Use cash flows rather than earnings. You cannot spend earnings.
    • Use “incremental” cash flows relating to the investment decision, i.e.,
    cashflows that occur as a consequence of the decision, rather than
    total cash flows.
    • Use “time weighted” returns, i.e., value cash flows that occur earlier
    more than cash flows that occur later.
    The Return Mantra: “Time-weighted, Incremental Cash Flow Return”
    From Forecasts to Accounting Earnings
     Measure only Incremental cash flow
     Separate projected expenses into operating and capital expenses: Operating expenses, in
    accounting, are expenses designed to generate benefits only in the current period, while
    capital expenses generate benefits over multiple periods.
     Depreciate or amortize the capital expenses over time: Once expenses have been
    categorized as capital expenses, they have to be depreciated or amortized over time.
     Allocate fixed expenses that cannot be traced to specific projects: Expenses that are not
    directly traceable to a project get allocated to projects, based upon a measure such as
    revenues generated by the project; projects that are expected to make more revenues
    will have proportionately more of the expense allocated to them.
     Consider the tax effect: Consider the tax liability that would be created by the operating
    income we have estimated
     Consider the duration for which projected
    From Earnings to Cash Flows
    • To get from accounting earnings to cash flows:
    • you have to add back non-cash expenses (like depreciation and amortization)
    • you have to subtract out cash outflows which are not expensed (such as
    capital expenditures)
    • you have to make accrual revenues and expenses into cash revenues and
    expenses (by considering changes in working capital).
    • Free cash Flow to FIRM = EBIT(1-T) +Depreciation/amortization – capex –
    change in NWC
    • FCFF WILL BE DISCOUNTED AT WACC
    INVESTMENT CRITERIA

    Investment Criteria

    Discounted Cash Flow Criteria Non Discounted Cash Flow Criteria

    Net Present Value Benefit Cost Ratio Internal Rate of Return Pay Back Period Accounting Rate of return

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