Thorie Financire 20032004 1. Introduction

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Théorie Financière2003-20041. Introduction

• Professeur André Farber

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Organisation du cours

• Ouvrage de référence
• Brealey, R. and Myers, S.
• Principle of Corporate Finance
• 7th ed., McGraw-Hill 2003
• Site web www.ulb.ac.be/cours/solvay/farber
• Copie des transparents (PowerPoint)
• Glossaire anglais - français
• Notes pédagogiques
• Exercices
• Anciens examens
• Liens vers dautres sites
• Cas
• Examen(s)

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Cas

• 2 cas
• Groupe de maximum 5 étudiants
• Solution écrite
• 20 de la cote finale
• Discussion du cas en groupes

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Plan du cours

• 1. Introduction
• 2. Valeur actuelle
• 3. Cash flows, planning financier
• 4. Evaluation dentreprises
• 5,6. Analyse de projets dinvestissement
• 7,8. Rentabilité attendue et risque
• 9,10. Options
• 11, 12. Evaluation et financement

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What is Corporate Finance?

• INVESTMENT DECISIONS Which REAL ASSETS to buy ?
  
• Real assets will generate future cash flows to
  the firm
• Intangible assets RD, Marketing, ..
• Tangible assets Real estate, Equipments,..
• Current assets Inventories, Account
  receivables,..
• FINANCING DECISIONS Which FINANCIAL ASSET to
  sell ?
• Financial assets claims on future cash flows
• Debt promise to repay a fixed amount
• Equity residual claim
• DIVIDEND DECISION How much to return to
  stockholders?

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Accounting View of the Firm

• Balance sheet

• Income statement
• Sales
• Operating expenses
• Earnings before interest and taxes (EBIT)
• Interest expenses
• Taxes
• Net income (earnings after taxes)
• Retained earnings
• Dividend payments

Net Working Capital
Current liabilites
Current assets
Long-term debt
Fixed assets
Shareholders equity
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Cash Flows between the Firm and the Financial
Markets
Firm issue securities
Firm invest
Firm
Financial markets
Investors
Cash flow from operations
Dividend and debt payments
Timing of cash flows uncertainty
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Financial markets

• Primary markets
• Secundary markets
• Stock exchanges
• Over-The-Counter (OTC)
• Direct financing
• Intermediate financing banks, insurance companies

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Market values
Market value of equity
Equity
Total capital employed
Cash flow
Market value of debt
Debt
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Value creation

• Market value added (MVA)
• Market value of the firms capital Total
  capital employed
• VALUE CREATION 2 strategies
• Strategy 1
• Buy assets at a cost lower than the value of the
  future revenues
• real assets
• financial assets
• Strategy 2
• Sell financial assets for a price higher than the
  value of future payments

Market value of equity Market value of debt
Stockholders equity Financial debt
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The Capital Investment Trade-off

• The firm can always give cash back to the
  shareholders
• Capital employed by the firm has an opportunity
  cost
• The opportunity cost of capital is the expected
  rate of return offered by equivalent investments
  in the capital market
• The weighted average cost of capital (WACC) is
  the (weighted) average of the cost of equity and
  of the cost of debt

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Investment opportunities in capital markets
Project
?Cash?
Stockholder
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Economic Value Added (EVA)

• EVA Earnings after tax WACC ? Total capital

Example Equity 10bDebt 10bTotal
capital 20b EBIT 2.5bTax rate 40WACC 11
EVA calculation Earnings after tax 2.5b
(1-0.40) 1.5b EVA 1.5b 11 ?
20b 1.5b 2.2b 700m
(EVA is explained RWJ Chapter 12 Appendix)
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How to measure value creation ?

• 1. Compare market value of equity to book value
• Value creation if M/B gt 1
• 2. Compare return on equity to the opportunity
  cost of equity
• Value creation if ROE gt Opportunity Cost of
  Equity

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M/B vs ROE

• Simplifying assumptions
•        Expected net income income constant
•        Net income dividend
• Market value determination
• Net income Expected return ? Market value of
  equity
• NI r ?
  MVeq
• ROE (definition)
• Return on equity Net income / Book value of
  equity
• ROE NI /
  BVeq
• r ? MVeq / Bveq
• Conclusion in this simplified setting,
• M/B MVeq/BVeq gt 1 ? ROEgt r

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Value creation Example

• Data
• Book value of equity 10 b
• Net income 2 b / year
• Cost of equity r 10
• Return on equity ROE 2 / 10 20 gt 10
• EVA 2 10 10 1 b / year
• Market value of equity NI / r 2 / 10 20
  b
• Market value added MVA 20 10 10 b
• Market to Book M/B 20 / 10 2

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The Top Companies 2003
SourceBusiness Week, July 14 2003
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The Top Companies 2002
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QD financial analysis

• PROFITABILITY (du Pont system)
• Three determinants

17.1
Financial Leverage
Asset Turnover
Profit Margin

• Microsoft - 2003 US bil.
• Net Income 7,829
• Sales 28,365
• Assets 67,646
• Book equity 45,784

27.6
0.42
1.48
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References

• Corporate finance textbooks (MBA level)
• Brealey, Richard and Steward Myers, Principles of
  Corporate Finance, xth edition, McGraw-Hill 2000
• Ross, Stephen A., Randolph W. Westerfield and
  Jeffrey F. Jaffe, Corporate Finance, 6th edition,
  McGraw-Hill Irwin 2002
• Damorada, Aswath, Corporate Finance Theory and
  Practice, Wiley 1997
• Ouvrages de référence en français
• Bodie, Z. et Merton, R. Finance (édition
  française dirigée par C. Thibierge) Pearson
  education 2000
• Corporate finance texts for executives
• Bertoneche, Marc and Rory Knight, Financial
  Performance, Butterworth Heinemann 2001
• Hawawini, Gabriel and Claude Viallet, Finance for
  Executives Managing for Value Creation,
  South-Western College Publishing, 1999