University of the Aegean School of Business Studies
University of the Aegean School of Business Studies Shipping, Trade & Transport Dpt. MA Shipping, Trade & Transport e-course Advanced Corporate Finance THEODORE SYRIOPOULOS Professor of Finance Department of Shipping, Trade & Transport School of Business Studies UNIVERSITY OF THE AEGEAN 2 A, Korai street, 82100 Chios, Greece, Tel. : 22710 35 861, 6944 911 787 e-mail: tsiriop@aegean. gr http: //www. stt. aegean. gr/Syriopoulos. En. asp ADVFIN
Course Overview 5
Learning Objectives § understand & become skilful in managerial decision-making with emphasis on corporate financial management § determine the financial resources to attain key corporate strategic objectives § increase the economic and social added value of the firm 6
Learning Objectives § to attain these goals, the course will cover material on: - Financial Management to Value Creation - Investment Decisions - Financing Decisions - Business Decisions § financial decisions that create value for the corporation 7
Main Textbooks Hawawini, G. & Viallet, C. (2013, 5 th ed. ): ‘Finance for Executives: Managing for Value Creation’ Cengage Southwestern Publications 8
Main Textbooks Berk, J. & De. Marzo, P. (2014, 3 rd ed. ): Corporate Finance Pearson International Edition 9
Corporate Financial Management & Value Creation: Overview
Core Principle in Financial Decisions § managers should manage their firm’s resources with the objective of… increasing firm’s Market Value 11
Fin Mgt Key Objectives n understand & undertake managerial decisions for value creation n how to attain efficient investment decisions NPV, IRR, PBP, DPB, PI n how to choose best financing decisions - firm’s capital structure - cost of capital n function of financial markets n understant key drivers to firm return, risk, growth as source of corporate funding Key input: Financial Statements - Balance Sheet - Income Statement - Cash-Flows 12
Who benefits of value creation ? . . company owners: ultimate value beneficiaries 13
Will your Decisions Create Value ? 14
The Goal of the Firm What Should Management Maximise? § § Why not maximise profits? Profit maximisation does not tell us when cash flows are to be received § Profit maximisation ignores uncertainty or risk associated with cash flows 15
The Goal of the Firm Maximise Value of Firm’s Share Price ! § appropriate goal for financial management is maximise current value of firm’s shares § for private companies & partnerships maximise current value of owner’s equity BUT. . . § . . share price also does not indicate directly company drivers of value creation ? 16
Financing an investment… § A project is financed by either: n shareholders provide equity capital n debt-holders provide debt capital 17
Risks vs. Returns… § Firm’s owners want to increase the firm’s value… a project’s expected return must exceed… …its financing cost ! 18
Investments & Value Creation… § before deciding to go ahead with an Investment Project, … Key Question: n § will Investment raise firm’s market value ? (share price) Firm Market Value = Number of Shares X Markets Share Price 19
Internal Environment External Environment Major factors affecting Share Prices 20
Measuring Value Creation 21
Measuring Value Creation with Net Present Value (NPV) § Net Present Value (NPV) n NPV = + Future Net Cash Flows (present value of) - Initial Cash Outlay 22
Measuring Value Creation with Net Present Value (NPV) n A business project creates value if: … § its Net Present Value >0 23
Discount Rates § to estimate NPV of investment, must… § take into account ‘time-value-of money’ § discount future cash flows into present values § choose… § for an investment, it is… cost of financing appropriate discount rate this investment 24
Only Cash Matters to Investors why investors are only interested in cash returns 25
Cash Flows: From – To the Firm 26
Key Financial Decisions 27
Key Financial Decisions § impact of & implications for firm value of financial decisions on: § capital budgeting § capital structure § business acquisition § foreign investments 28
Capital Budgeting Decision n capital budgeting decisions affect firm’s business performance for a long period of time n decision criteria used in capital budgeting: direct applications of fundamental finance principle: • NPV rule • if NPVproject > 0 accept project • If NPVproject < 0 reject project • IRR rule (Internal Rate of Return) • if IRR > WACC accept project 29
Cost of Capital § when a project is funded with both equity & debt…. § cost of capital is …. weighted average cost of capital (WACC) • both shareholders + debt-holders require a return from their contribution 30
Capital Structure Decision § Firm’s optimal capital structure … n maximizes firm value WACC = lower firm market value = higher § As firm replaces equity with debt… n financial distress risk increases (risk that firm may be unable to service its debt) 31
Business Acquisition Decision § acquisition of a business can increase firm value… § if net cash flows from target firm exceed acquisition price paid by buyer • synergies: 1 + 1 = 3 ! (economies of scale; economies of scope; diversification etc. ) 32
Foreign Investment Decision § additional risks § currency risk • unanticipated changes in value of currency § political risk • unexpected events 33
The Role of Financial Markets 34
The Role of Financial Markets § role of financial markets in value creation… § primary markets • provide financing for funding growth • act as intermediaries § secondary markets • provide efficient means for trading outstanding securities § role of investment banking 35
The dual functions of Financial Markets 36
The Equity Market § efficient equity markets… • share prices adjust instantly to new, relevant information • evidence indicates that on average most well-developed stock markets can be described as reasonably efficient equity markets (? ) 37
How Profitable is a Firm? 38
How profitable is a firm? § information from a firm’s Financial Statements… • …to analyze firm’s financial performance in terms of profitability on… - equity Return on Equity (ROE) - invested capital Return on Invested Capital (ROIC) 39
How Risky is a Firm? 40
How risky is a firm? § Firm’s SALES may fluctuate because of uncertainty due to: • economic risk • operational risk • business risk firm’s total risk • financial risk 41
End of Session
- Slides: 42