Corporate Finance is about how companies make decisions about what projects to pursue and how to value those projects.
Ratio Analysis is taking two numbers from financial statements and dividing one by the other. What we are doing is taking two pieces of accounting data, put one over the other, and this forms a ratio. We are taking two pieces of data and forming a performance metric. Ratios are usually presented as a percentage or a number depending on whether the usual case is bigger or less than one.
Time value of money
Time is money, literally. If there is a prospect of receiving a certain sum then the sooner you receive it the more it is worth. Interest rates describe this relationship between present value and future value.
Discounting Cash Flows
A company is essentially an entity that generates cash flows each year into the future. The trick is estimating those future cash flows and how much they might grow or shrink and what the risks are to realizing (receiving) them.
Present value and Future value
$100 invested for one year, earning 5% interest, will be worth $105 after one year, therefore $100 paid now and $105 paid exactly one year later both have the same value to a recipient who expects 5% return. That is $100 invested for one year at 5% interest has a future value of $105.
Net Present Value
The way we look at decisions about whether to fund a project or calculate the value of an asset is to turn that stream of future dollars into today’s dollars. Then we compare that sum of present value, we don’t do the deal, if t is less, it is considered a good deal.