Corporate Finance

Corporate Finance is about how companies make decisions about what projects to pursue and how to value those projects.

Ratio Analysis

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.

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Corporate Finance

What is Corporate Finance?

– Business involves decisions which have financial consequences and any decision that involves the use of money is said to be a corporate finance decision.

– Corporate finance is one of the most important part of the finance domain as whether the organization is big or small they raise and deploy capital in order to survive and grow.

– These are the various roles that corporate finance plays, which are very interesting and challenging, one of the main roles is that of being a finance adviser.

– This can comprise helping to manage investments or even suggesting a mergers and acquisitions (M&A) strategy.

Corporate Finance Principles

Investment Principle:
This principle revolves around the simple concept that businesses have resources which need to be allocated in the most efficient way.

Financing Principle:
The job here for the corporate financier is to make sure that the business has right amount of capital and the right mix of debt, equity and other financial instruments.

Dividend Principle:

So the basic discussion here is that if the excess cash should be left in the business or given away to the investors/owners.

Understanding the concepts

Capital budgeting

Capital budgeting is the process of planning expenditures on assets (fixed assets) whose cash flows are expected to extend beyond one year. Managers study projects and decide which ones to include in the capital budget.

*The “capital” refers to long-term assets.
*The “budget” is a plan which details projected cash inflows and outflows during future period.

Time value of money

If you have a dollar today, you can earn interest on it and have more than a dollar next year. For example, $100 of today’s money invested for one year and earning 8% interest will be worth $108 after one year.