Class 1 - Introduction to Corporate Finance (Itcf) Guanghua 9-10 2014 Ug

8/10/2019 Class 1 - Introduction to Corporate Finance (Itcf) Guanghua 9-10 2014 Ug

1/42

TOPICS

in International Finance & Capital Markets

15 September31 October 2014

Professor Giles Chance


2/42


3/42

CLASS RULES Attend ClassDont be late

Identify Yourself in Classuse Name-Boards Late assignments will not be accepted

Final Exam Date is 31 October

No date changes or exceptions Contacts:

Email [email protected]

Cell 137-1919-2077

TA Lynn Hsu

Cell: (+86)150-1087-9389

Email: [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


4/42

INTRODUCTION TO CORPORATE FINANCE

Practical, operational focus

Case studies - to connect theory with reality

Class discussion & participation

Readings from textbook:

Principles of Corporate Finance by Brealey, Myers,

Allen (BMA). Edition 11 Final Exam


5/42


Grading

Case Studies: 48%Bond Homework: 12%

Class Participation: 10%

Final Exam: 30%


6/42

CASES

19 Sep Making Investments: Beijing Enterprises

22 Sep Making Investments: Beijing Enterprises (2)

29 Sep Currency Evaluation: Yanjing Beer24 Oct Raising Equity Capital: Guanghua Dot Com

Homework

13 Oct Bonds and the Yield Curve


7/42


What is Corporate Finance ?


8/42



Why Form a Company ?


9/42




A Company is a Legal Person

with Limited Liability

Advantages/Disadvantages of Incorporation?


10/42




Company:

- Ownership

- Supervision

- Management


11/42




The Shareholders (or Stockholders) are the Owners


12/42




As Agents of the Owners:The Board supervises the Company

The Managers manage the Company

Purpose: Value Maximisation

Agency Problems?


13/42



What is Value ?

How is Value Measured ?


14/42



What is Value ? How is Value Measured ?

Accounting measures Corporate Value

Balance SheetP&L - Cashflow

- Profits- Net Worth

- Market Capitalisation


15/42



What is Value ? How is Value Measured ?

Measurement Problems with Accounting ?


16/42


Corporate Finance - Questions

What Investments to Make ?

How to Finance Investments ?


17/42


18/42


Chief Financial Officer (CFO) is responsible for:

Day to day management

Distributing profit Making good investmentsValuation

Financing investments:

- Debt - bank or market

- Equityretained profits, sell new shares


19/42


20/42

VALUATION

Valuing Securities

Valuing Investments


21/42

OPPORTUNITY COST

Economics is the Science of Choosing


22/42

OPPORTUNITY COST


Objective: Maximise Utility subject to Cost


23/42

OPPORTUNITY COST



The Opportunity Cost is the next bestopportunity

In finance, Opportunity Cost means an

alternative investment of equivalent riskiness


24/42

OPPORTUNITY COST



The Opportunity Cost is the next bestopportunity

In finance, Opportunity Cost means an

alternative investment of equivalent riskiness

A dollar today is worth more than a dollar

tomorrow

A safe dollar is better than a risky dollar


25/42

TIME VALUE OF MONEY

Present Value * Opportunity cost = Future Value

PV * OC = FV

Present Value = Future Value / Opportunity Cost

PV = FV / Discount Rate


26/42

PRESENT VALUE

The Present Value of Future Cashflows CF 0, 1, N are expected periodic cashflows

(annual ?)

r is the discount rate, derived from theopportunity cost

Discounting accounts for the timing of

cashflowsno need to adjust for period r includes the riskiness (uncertainty) of the

cashflows


27/42

NET PRESENT VALUE

The Present Value of Future Cashflows

Minus

The Investment Cost incurred to acquire them


28/42

VALUATION

Valuing Securities

Valuing Investments


29/42

Opportunity Cost

Economics is the Science of Choosing Maximise Utility subject to Cost

The Opportunity Cost is the next best opportunity

In finance, Opportunity Cost means an alternative

investment of equivalent riskiness

A dollar today is worth more than a dollar

tomorrow

A safe dollar is better than a risky dollar


30/42


31/42

Calculating NPVs

Carefully identify Free Cashflows

Apply Relevant Opportunity Cost

Maturity

Risk

Derive Net Present Value

NPV = future values / opportunity cost

= cashflows / discount rate

If NPV is +ve, it expands wealth


32/42

Discount Rate

The opportunity cost

Risk-Free rate choose appropriate maturity

+

A Risk Factor appropriate to the riskiness of the

cashflows


33/42

AN EXAMPLE

GEELY AUTO is developing a new model

Li Shufu, the chairman/ CEO of Geely has askedthe Finance Department if the new model is

financially viable.

How does the Finance Department approach

this problem?


34/42

CALCULATE IF THE PROJECT HAS A

NET PRESENT VALUE


35/42

GEELYS NEW MODEL

Estimate the models life as 6 years,

Price/auto RMB 30 000, Gross Margin 40%

Project the revenues, costs and operating profits

Estimate the capital investment required at RMB

1.2 bn

Model the working capital requirement Use the GEELY discount rate for new projects: 12%

Use the average GEELY tax rate of 25%


36/42

ESTIMATING SALES

Year

RMB mn 1 2 3 4 5 6

Number Sold 5,000 50,000 80,000 70,000 60,000 50,000Price/auto 30,000 30,000 28,000 27,000 27,000 25,000


37/42

ESTIMATING SALES

Year

RMB mn 1 2 3 4 5 6

Number Sold 5,000 50,000 80,000 70,000 60,000 50,000

Price/auto (RMB) 30,000 30,000 28,000 27,000 27,000 25,000

Sales 150 1,500 2,240 1,890 1,620 1,250


38/42

ESTIMATING GROSS PROFITS

YearRMB mn 1 2 3 4 5 6

Number Sold 5,000 50,000 80,000 70,000 60,000 50,000

Price/auto (RMB) 30,000 30,000 28,000 27,000 27,000 25,000

Sales 150 1,500 2,240 1,890 1,620 1,250

COGS -90 -900 -1344 -1134 -972 -750

Gross Profit 60 600 896 756 648 500


39/42

ESTIMATING EBIT

RMB mn 1 2 3 4 5 6

Number Sold 5,000 50,000 80,000 70,000 60,000 50,000

Price/auto 30,000 30,000 28,000 27,000 27,000 25,000Sales 150 1,500 2,240 1,890 1,620 1,250

COGS -90 -900 -1,344 -1,134 -972 -750

Gross Profit 60 600 896 756 648 500

SG&A -15 -150 -224 -189 -162 -125

Depreciation -200.00 -200.00 -200.00 -200.00 -200.00 -200.00

EBIT -155.00 250.00 472.00 367.00 286.00 175.00Tax -62.50 -118.00 -91.75 -71.50 -43.75

AT EBIT -155.00 187.50 354.00 275.25 214.50 131.25


40/42

ESTIMATE WORKING CAPITAL

Working Capital RMB mn

1 2 3 4 5 6Cash 37.5 375 560 472.5 405 312.5

Inventory 15 150 224 189 162 125

Receivables 7.5 75 112 94.5 81 62.5

Payables -18 -180 -268.8 -226.8 -194.4 -150

Increase in WC 42.00 378.00 207.20 -98.00 -75.60 -103.60


41/42

CASHFLOWSTART WITH AT EBIT

1 2 3 4 5 6

AT EBIT 45.00 187.50 354.00 275.25 214.50 131.25


42/42

TOTAL CASHFLOW

Documents

Class 1 - Introduction to Corporate Finance (Itcf) Guanghua 9-10 2014 Ug