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Accounting & Finance

Introduction to the Course

1/31/13

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Overview

What would you say is thebroadest goal is for a (profit-

oriented) company; thatmanagers should primarily be

concerned with?

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Overview - Basics

Overall goal should beValue Creation

When this occurs obviouslyother good things also happen

For example jobs are added,factories and other assets are

put to productive use etc

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Overview - Basics

We will use the first severalsessions to learn basic principles of

accounting and finance such thatyou will gain an understanding ofhow the Corporate financial

manager helps to participate in thevalue creation process

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Overview

After that we will primarily usethe Case Study approach

This is viewed as the optimalmethod of appl icat ionof the

Principles of Accounting andFinance

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Overview

Point is that we will doAccounting and Finance not so

much for the academicexercise but for understanding

the process of value creation /preservation

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Overview

What are some typical waysto create / preserve value?

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Overview

For example Innovation but this is not so much aFinancial approach

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Overview

Nonetheless who can thinkof some companies with

significant Contrast inValueCreationvsValue

Destruction

by virtue ofcontrasting approaches toinnovation

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Overview

How about Apple vs RIM oreven HP?

What is a good metric tomeasure value creation vs

value destruction?

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Intro to the Course

What else?

More in the category of apurely Financial approach?

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Intro to the Course

Lowering the Cost of Capital?

In fact we will learn how can afirm arrive at the lowest

possible cost of capital?

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Intro to the Course

What is Capital Structure /Funding?

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Intro to the Course

Mix of Long Term Debt vsEquity

What would you say is moreexpensive Debt or Equity

Funding?

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Intro to the Course

Equity! Why? How so?

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Intro to the Course

Investors in debt securitiesissued by a companyreceive a stated return ontheir investment.

Whats this called?

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Intro to the Course

The coupon or stated interestrate.

What about investors in thecommon stock issued by a

company i.e., theequityinvestors? What are they

entitled to receive?

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Intro to the Course

If you bought Facebook stockwhat would you be entitled to

receive as a return on yourinvestment?

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Intro to the Course

NOTHING

Hence what can youdeduce from this in terms

of risk to the investor?

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Intro to the Course

Equity investing (funding to the company)is a lot riskier to the investor (vs debt)

The natural consequence of this is thatequity funding is more expensive for thecompany even though this seemscounterintuitive in terms of actual costs to

the company. We will explore this in more detail.

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Intro to the Course

Whats another reasonthat debt funding is lessexpensive than equityfunding?

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Intro to the Course

TAXES!

What do you know about the

tax consequences of companypayments of interest to debt

investors vs dividends tostockholders?

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Intro to the Course

Interest is tax deductible but commonstock dividends are not.

Hence the after-tax cost of interest isa lot lower than common stockdividends paid to shareholders.

We will have applications where wesee this issue.

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Intro to the Course

What is the dividend onFacebook stock?

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Intro to the Course

Nada!

Hence why would aninvestor buy this stock?

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Intro to the Course

Stock appreciation but rightnow FB is doing what to

value?

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Intro to the Course

Destroying it.

$38 at issuance vs roughly$30 today.

On the other hand theoriginal investors in FBmade a fortune.

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Intro to the Course

We will come back to these issues as partof the case studies on IPOs

All this is consistent with idea thatinvesting in common stock is risky sincethe company promises to return nothing toinvestors

But the corollary is that investors incommon stock have a much higherrequired rate of return to buy the stock.

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Intro to the Course

We will come back to

these issues as wereview the various case

studies.

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Intro to the Course

What about debt? What arethe problems that the company

might have with debt funding?

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Intro to the Course

Debt issued by a corporationcreates firm obligations that a

corporation must pay or facethe prospect of Bankruptcy

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Intro

If company cant meet itsinterest and / or maturing principal

payment obligations on maturingdebt

How do we refer to this type offinancial trouble?

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Intro

Financial Distress

We will see case studies involving

such situations and how realcompanies adopted the mostappropriateFinancialStrategiesincluding

Special Security design

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Intro

In order to be able to fully grasp andunderstand these financial strategies

its critical to be able to understand1. Accounting and

2. Finance concepts

And how to apply these to FinancialStmt analysis

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Intro

Hence first few classes willcover important Accounting

and finance concepts These will be critical to

success

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Also be sure to be proficient inEXCEL

Group presentations will need to bedone in PPoint with support forconclusions using EXCEL

EG. In lieu of a company payingdividends How do we performvaluation?

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Intro

Should understand percentageof sales method of projecting

cash flows in order to do a_discounted cash

flow______________analysis?

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Intro

Any idea what is the mostcritical variable / aspect of

the DCF?

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Intro

The discount rate

As level of risk increases what

should happen to the discountrate?

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Intro

As the discount rateincreases what happens to

value?

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Intro

In lieu of dividends DCF is ameasure of the flow of cash

that should accrue toshareholders on a PV(present

value ) basis We will see cases involving

these elements.

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Intro

What is another approach toValue Creation

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Intro

Expansion projects

What does this fall under?

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Intro

Expansion Project(s) whichfall under category of

Capital Budgeting

And what are some ways to

fund expansion?

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Intro

IPOS; i.e. stock

Or debt issuanceWe will see this in case

studies

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Intro

What other ways arethere to enhance value?

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Intro

M & A

Who can name some recentM & A deals?

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Intro

What techniques areoften used for M & Adeals?

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Intro

Stock Swaps.

Why?

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Intro

Stock swaps are tax freeto the investor.

Whats another form of

M & A activity?

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Intro

Leveraged Buyouts

We will see casesinvolving all of the above.

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Intro

Whats often importantdriving force for M & Aactivity?

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Intro

Synergies. ()

Note the CAPM(capital asserts

pricing model) is important toderive value.

We will use this includingEMRP, beta etc

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Intro

CAPM is based in part onthe principle that there is a

Risk Freeasset namely US Treasury

Securities. Why are they considered to

be risk free?

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Intro

Other important basicconcepts to learn include:

Sustainable growth

What is it?

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Intro

Rate at which the company (in theory)can grow without resorting toexpensive external funding yet keep

its optimal capital structureunchanged

The point is that GROWTH is a

Financial Strategy to create value

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Intro to the Course

Note we will see that firmsgrowing too fast can be a reckless

even dangerous approach

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Intro

Other related areas that wewill cover include:

Venture Capital and;

Security Design

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Intro

Growing while protecting aportfolio of assets falls under

category ofRiskManagement

We will have a case coveringthis area of Finance

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Intro

By the time we are done youshould have a good sense of

the practical use of accountingand finance for purposes of

understanding CorporateFinance

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Intro

In addition you should become amore educated investor and be

able to discern where you wouldlike to invest all the money youwill be making

EG you may become devotees oftheBenjamin Grahamschool

of investing

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Intro

Somewhat beyond the scopeof this course

Maybe a good foundation forthe discipline ofFinancial

Engineering

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Intro

Finally what is another FinancialStrategy that we have seen

recently very prominently in thenews?

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Intro

Business Law

Apple vs Samsung usingPatent or intellectualproperty law

We may be able to squeezein?

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Intro

Other current topics

In this all time low interest rate

environment we have seenrecord debt issuance what

might be a financial strategyrelated to this phenom?

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Intro

Issue debt to buy back equity we will have a case on LBOs

same principle Other more advanced accounting

/ finance concepts such as FAS

157 = Fair Valuation one of thecases will incorporate this

approach

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Intro

For next time read HorngrenChapters 15-17