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FINANCE MAP
By
Gaylen K. Bunker
Objectives of WorkshopPrinciples:• Time lag between investment and return.• Compounding versus Summing• Value = Discounted future cash flows.• Decisions: Convert into today’s dollars• Discount rate = Cost of Capital• Finance focus on Cash Flows• Cost & Return are the same thing.
CAPITAL FUNCTIONS
$Financing
Liabilities
& EquityInvestingPP&E
Operating
Revenue
Expense
Profit
A/R & Inv A/P
Operate
Balance Sheet
Income Statement
Financing Decisions
$Financing
Liabilities
& EquityInvestingPP&E
Operating
Revenue
Expense
Profit
A/R & Inv A/P
Operate
Balance Sheet
Income Statement
Financing Decisions
$Financing
Liabilities
& Equity
Revenue
Expense
Profit
Income Statement Capital Structure
Cost of Capital
Financial Leverage
WACC
Cost of Debt (Interest)
Cost of Equity (Stock)
Dividend Discount Model
Capital Asset Pricing Model
(Dividend Yield & Growth)
(Risk-free rate, Beta, Market Return)
Risk and Return Trade-offD E
Risk
Return
Investing Decisions
$Financing
Liabilities
& EquityInvestingPP&E
Operating
Revenue
Expense
Profit
A/R & Inv A/P
Operate
Balance Sheet
Income Statement
Investing Decisions
InvestingPP&E
Revenue
Expense
Profit Operate
Income Statement Capital Budgeting
Capital Rationing
Free Cash Flow
Net Present Value
Internal Rate of Return
Profitability Index
Payback
FCFInv
Inv Inv Inv Inv Inv
Met
rics
Operating Decisions
$Financing
Liabilities
& EquityInvestingPP&E
Operating
Revenue
Expense
Profit
A/R & Inv A/P
Operate
Balance Sheet
Income Statement
Operating Decisions
Operating
Revenue
Expense
Profit
A/R & Inv A/P
Income Statement
Working Capital
Credit Management
Days Sales Outstanding
Cash Discounts
Just-in-time Systems
Financial Ratios
EBIT
Operating Leverage
NOPAT
Free Cash Flow
Capital Charge
Economic Value Added
Valuation Decision
$Financing
Liabilities
& EquityInvestingPP&E
Operating
Revenue
Expense
Profit
A/R & Inv A/P
Operate
Balance Sheet
Income Statement
Free-Cash-Flow; Net Invested and Operating Capital
Time Value of Money; Present Value; Future Value; & Annuities
WACC; and Future Growth
VALUE =
Future Free Cash Flows Summarized in Today’s Dollars
94.81
10 20 25 30 30 20
2008 2009 2010 2011 2012 20032007
9.0916.5318.7820.4918.6311.29
Fundamental Building-blocks
FV = PV x (1 + r)
PV = FV / (1 + r)