Contents
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Principles of Corporate Finance
Rationale
Corporate Finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions.
The discipline as a whole may be divided among long-term and short-term decisions and techniques with the primary goal being the enhancing of corporate value by ensuring that return on capital exceeds cost of capital, without taking excessive financial risks. Capital investment decisions comprise the long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. Short-term corporate finance decisions are called working capital management and deal with balance of current assets and current liabilities by managing cash, inventories, and short-term borrowing and lending (e.g., the credit terms extended to customers).
Corporate finance is closely related to managerial finance, which is slightly broader in scope, describing the financial techniques available to all forms of business enterprise, corporate or not.
- Capital investment decisions
- Working capital management
- Financial risk management
- Relationship with other areas in finance
- Corporate Finance page, Prof. Aswath Damodaran, Stern School of Business, New York University
- Global Financial Management page, Prof. Campbell R. Harvey, Fuqua School of Business, Duke University
- Finance Lectures (.exe format), Peter Ekman, CEU Business School
- Studyfinance.com, University of Arizona
- Web Sites for Discerning Finance Students, Prof. John Wachowicz at the University of Tennessee.
- FM Worksheets excel in Financial Management By Matt Evans
Today's Videos
- Connect with us on http://www.youtube.com/finntrack
- Google's Playlists
Teaching and Learning Resources
Overview
- Financial Analysis and Planning
- Finance and Accounts: Basic Principles
- Finance and Accounts: Analyzing Accounts
Financial statements (or financial reports) are a record of a business' financial flows and levels.
The big four statements are :
1. Balance Sheet which describes a company's assets and liabilities.
2. Income statement which describes a company's income and expenses.
3. Statement of Cash Flows which describes how corporate operating, investment, and financing activities have affected the company's cash position.
4. Statement of Retained Earnings which describes changes to shareholders equity (for example a payment of dividend).
Because these statements are often complex an extensive set of Notes to the Financial Statements and management discussion and analysis is usually included. The notes will typically describe each item on the Balance Sheet and Income statement in further detail. In many cases the notes are much longer than the financial statement they are elucidating.
If a company has extraordinary items that affect the balance sheet or the shareholders equity position it will usually include a Other Comprehensive Income Statement, which describes the adjustments to made. Examples of Other Comprehensive Income include revaluation of corporate assets away from their stated cost, as well as accruals for liabilities.
Today most governments require publicly-traded companies to issue, and issue in a certain way, annual financial statements. Some governments, such as the United Kingdom government, require all companies to publish annual financial statements, although smaller companies only need publish them in abbreviated form.
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Activity
Image: The time between the planting of a vineyard and the
first drop of revenue can be lengthy.
Valuation and Capital Budgeting
Tutorials
- Multinational Capital Budgeting
- Making Investment Decisions with the Net Present Value Rule
- Why Net Present Value Leads to Better Investment Decisions than Other Criteria
- The Value of Bonds and Common Stocks
- How to Calculate Present Values
- Present Value, the Objectives of the Firm, and Corporate Governance
- Finance and the Financial Manager
Readings
For Europe, the Middle East and Africa, Better Management provides regional perspectives into their extensive content. From regionally-focused business management articles to webcasts presented in local time zones, their regional coverage provides localized insights and resources.
Risk and Return
Tutorials
Readings
The risk-return spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken.
Practical Problems in Capital Budgeting
Tutorials
- A Project is Not a Black Box
- Strategy and the Capital Investment Decision
- Agency Problems, Management Compensation, and the Measurement of Performance
Readings
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Capital
Budgeting and Long-Term Financing Decisions,
4e Ellison,
Mitch This text explores all areas of capital budgeting and all the strategies used to make long-term financing decisions. Utilizing a strategic framework, it discusses how the key concepts synchronize with overall corporate strategies and goals. This text covers practical capital budgeting and long-term financing decisions in a way that is comprehensive, applicable, understandable, and flexible. Check the availability and buy your books from our Bookshop. |
Risk Management
Tutorials
- Introduction to Risk, Return, and the Opportunity Cost of Capital
- Risk and Return
- Capital Budgeting and Risk
- A Project is not a Black Box
Readings
Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.
Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.
In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.
- Market risk
- Corporate governance
- Liquidity risk
- Risk adjusted return on capital
- Risk modeling
- Risk pool
- References
- References
- CERA - The Chartered Enterprise Risk Analyst Credential - Society of Actuaries (SOA)
- Financial Risk Manager Certification Program - Global Association of Risk Professional (GARP)
- Professional Risk Manager Certification Program - Professional Risk Managers' International Association (PRMIA)
- Managing a portfolio of stock and risk-free investments: a tutorial for risk-sensitive investors
- Managing Risk in International Business, Techniques and Applications, CountryMetrics Risk Management Solutions
- Modelling & Measuring Soverign Credit Risk, CountryMetrics Risk Management Solutions
- Sovereign Credit Risk, The Case of Argentina, CountryMetrics Risk Management Solutions
- World Bank: Banking Sector Development in the Period of Change - EU Perspective. Remarks of Mr. Andrew Vorkink, Turkey Country
Director Delivered at 2nd International Finance Summit Istanbul, December 2, 2004
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The
CEO and Managing Risk in the 21st Century (318 KB)
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Financing Decisions and Market Efficiency
Tutorials
Check the availability and buy your books from our Bookshop. |
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Readings
Payout Policy and Capital Structure
Tutorials
- Payout Policy
- Does Debt Policy Matter?
- Capital Structure: Basic Concepts (narrated powerpoints)
- Capital Structure: Limits to the Use of Debt (narrated powerpoints)
- How Much Should a Firm Borrow?
- Financing and Valuation
Readings
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.
The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm.
- Capital structure substitution theory
- Cost of capital
- Corporate finance
- Debt overhang
- Discounted cash flow
- Enterprise value
- Financial modeling
- Financial economics
- Pecking Order Theory
- Weighted average cost of capital
- Further reading
- References
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=778106
- http://www.westga.edu/~bquest/2002/rethinking.htm
- http://www.listedall.com/search/label/capital%20structure
Options
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Tutorials
Check the availability and buy your books from our Bookshop.
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Readings
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.[1] The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset.
An option which conveys the right to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific price is called a put. The reference price at which the underlying asset may be traded is called the strike price or exercise price. The process of activating an option and thereby trading the underlying at the agreed-upon price is referred to as exercising it. Most options have an expiration date. If the option is not exercised by the expiration date, it becomes void and worthless.[1]
In return for assuming the obligation, called writing the option, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.
An option can usually be sold by its original buyer to another party. Many options are created in standardized form and traded on an anonymous options exchange among the general public, while other over-the-counter options are customized ad hoc to the desires of the buyer, usually by an investment bank.[2][3]
- Contract specifications
- Types
- Valuation models
- Model implementation
- Risks
- Trading
- The basic trades of traded stock options (American style)
- Option strategies
- Historical uses of options
- American Stock Exchange
- Chicago Board Options Exchange
- Eurex
- Euronext.liffe
- International Securities Exchange
- NYSE Arca
- Philadelphia Stock Exchange
- LEAPS (finance)
- Real options analysis
- PnL Explained
- References
- Further reading
- Financial reports: valuing options, audit and international accounting standards
- Investment Valuation, Options Pricing, Real Options & Product Pricing Models
- Recognize
the True Cost of Compensation, Expensing options increases transparency
in financial reporting
- Technical Note No. 15, Options, Futures, and Other Derivatives, Sixth Edition, John Hull
- The Real Power of Real Options
- Understanding Options Trading
- Understanding Options Strategies
- Valuing Options on Baskets of Stocks and Forecasting the Shape of Volatility Skews
- Why
the binomial stock pricing model is the most prudent approach
for valuing options
Valuing Employee Stock Options Using a Lattice Model By Les Barenbaum, Walt Schubert, and Bonnie O’Rourke |
Recommended Texts
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Understanding
Options Check the availability and buy your books from our Bookshop. |
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Real
Options - Managerial Flexibility and Strategy in Resource
Allocation Check the availability and buy your books from our Bookshop. |
Debt Financing
Tutorials
Reading A debt is an obligation owed by one party (the debtor) to a second party, A debt is created when a creditor agrees to lend a sum of assets to In finance, debt is a means of using anticipated future purchasing power
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- Derivative (finance)
- Debt bondage
- Debtors' prison
- Dissaving
- Financial markets
- List of finance topics
- Odious debt
- Revolving account
- Saving
- Equity
- Time value of money
- Thomson Financial League Tables
- References
External links
- Bond
- Bond Valuation, Duke
- Bond Valuation, Strathclyde
- How to Value Bonds and Stocks
- Securities Market in 2003
Financial Planning and the Management of Working Capital
Tutorials
- Short-Term Finance and Planning (narrated powerpoints)
- Working Capital Management
- Short-Term Financial Planning
Readings
In general usage, a financial plan is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan sometimes refers to an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.
In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department.[1] A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.[2]
While the common usage of the term "financial plan" often refers to a formal and defined series of steps or goals, there is some technical confusion about what the term "financial plan" actually means in the industry. For example, one of the industry's leading professional organizations, the Certified Financial Planner Board of Standards, lacks any definition for the term "financial plan" in its Standards of Professional Conduct publication. This publication outlines the professional financial planner's job, and explains the process of financial planning, but the term "financial plan" never appears in the publication's text.[3]
Textbooks used in colleges offering financial planning-related courses also generally do not define the term 'financial plan'. For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals[4] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards' definition of 'financial planning'.
Because of the lack of a formal definition in industry literature, and in major textbooks on the subject, it should be noted that the term 'financial plan' is merely inferred from the defined process of 'financial planning'.
See also |
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External links
Prospective Analysis: Guidelines for Forecasting Financial Statements, Ignacio Velez-Pareja, Joseph Tham , 2008
To Plug or Not to Plug, that is the Question: No Plugs, No Circularity: A Better Way to Forecast Financial Statements, Ignacio Velez-Pareja, 2008
A Step by Step Guide to Construct a Financial Model Without Plugs and Without Circularity for Valuation Purposes, Ignacio Velez-Pareja, 2008
Long-Term Financial Statements Forecasting: Reinvesting Retained Earnings, Sergei Cheremushkin, 2008
Financial Planning and Forecasting
McKinsey Quarterly, Corporate Finance (Free registration Required)
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
- Net Working Capital = Current Assets − Current Liabilities
- Net Operating Working Capital = Current Assets − Non Interest-bearing Current Liabilities
- Equity Working Capital = Current Assets − Current Liabilities − Long-term Debt
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.
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Mergers, Corporate Control, and Governance
Tutorials
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- Mergers and Acquisitions (narrated powerpoints)
- Mergers
- International Corporate Finance
- Governance and Corporate Control Around the World
Readings
Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.
- Best of Enemies - Case Study, Egypt
- Corporate Governance
- Competition Commission, UK
- Corporate Governance
- Corporate Restructuring By Ian Turner
- Corporate Restructuring and Governance in China
- Corporate Restructuring in East Asia: Promoting Best Practices, International Monetary Fund
- Mergers and Acquisitions Report
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The
Impact of Culture on Mergers & Acquisitions Check the availability and buy your books from our Bookshop. |
Case Study
Conclusions
Tutorials
Readings
Recommended Text
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Corporate
Finance: Core Principles and Applications Stephen A. Ross, Massachusetts Institute of Technology ISBN: 007353059x Check the availability and buy your books from our Bookshop. |
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Principles
of Corporate Finance,
8/e Related Web sitesCorporate Finance Online Check the availability and buy your books from our Bookshop.
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Principles
of Corporate Finance, 6/e Check the availability and buy your books from our Bookshop. |
Resources
