Finance MBA 13.01.2016

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Welcome to

“Finance”

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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PunctualityCleanlinessFairnessInternetBreaks

A4endanceList

CourseOverview

Grading

1.  Assignment 20%

2.  Presenta8on 30%

3.  Final 50%

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Finance! What is it? CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Finance? Individualsaretakingchargeoftheirpersonalfinanceswithdecisionssuchas:

ü Whentostartsavingandhowmuchtosaveforre8rementü Whetheracarloanorleaseismoreadvantageousü Whetherapar8cularstockisagoodinvestmentü  Howtoevaluatethetermsofahomemortgage

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Finance? InyourBusinessCareer,youmayfacesuchques8onssuchas:

ü  Shouldyourfirmlaunchanewproduct?ü Whichsuppliershouldyourfirmchoose?ü  Shouldyourfirmproduceapartoroutsourceproduc8on?ü  Shouldyourfirmissuenewstockorborrowmoneyinstead?ü  Howcanyouraisemoneyforyourstart-upfirm?

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Borrowed Qwn

Financing Aktivity Capital

1

Investing Activity Assets

2

Capital = Assets

Operating Activity 3

Making Business

3 Business Activities CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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SoleProprietorships

The4TypesofFirmsInvestment&FinancingDecisionsbytheFinancialManger

Partnerships

LimitedLiabilityCompanies

CorporaCons

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

SoleProprietorships:ü  StraighQorwardandmanynewbusinessesusethis

organiza8onalformü  Principallimita8onisthatthereisnosepara8onbetweenthe

firmandtheownerü  Thefirmcanhaveonlyoneownerü  Theownerhasunlimitedpersonalliabilityforanyofthefirm’s

debtsü  Thelifeofasoleproprietorshipislimitedtothelifeofthe

ownerü  Itisdifficulttotransferownershipofasoleproprietorship

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

Partnership:ü Morethanoneownerü  Allpartnersareliableforthefirm’sdebt

Alendercanrequireanypartnertorepayallthefirm�soutstandingdebts

ü  Thepartnershipendsonthedeathorwithdrawalofanysinglepartner

ü  Partnerscanavoidliquida8onifthepartnershipagreementprovidesforalterna8vessuchasabuyoutofadeceasedorwithdrawnpartner

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

Partnership:ü  Alimitedpartnershipisapartnershipwithtwokindsof

owners,generalpartnersandlimitedpartnersGeneralPartners

HavethesamerightsandprivilegesaspartnersinanygeneralpartnershipArepersonallyliableforthefirm�sdebtobliga8ons

LimitedPartnersHavelimitedliabilityandtheirownershipinterestistransferableTheyhavenomanagementauthority

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

LimitedLiabilityCompanies:ü  Nogeneralpartnerü  Alltheownershavelimitedliability,buttheycanalsorunthe

business

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

CorporaCons:ü  ACorpora8onisalegallydefined,ar8ficialbeing,separate

fromitsownersIthasmanyofthelegalpowersthatpeoplehave

Itcanenterintocontracts,acquireassets,incurobliga8ons,anditenjoysprotec8onundertheU.S.Cons8tu8onagainsttheseizureofitsproperty

ü  Acorpora8onissolelyresponsibleforitsownobliga8onsü  Theownersofacorpora8onarenotliableforanyobliga8ons

thecorpora8onentersintoü  Thecorpora8onisnotliableforanypersonalobliga8onsofits

owners

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

CorporaCons:ü  Forma8onofaCorpora8on

MustbelegallyformedMustbecharteredinthestateinwhichitisincorporatedCorporatecharterspecifiestheini8alrulesthatgovernhowthecorpora8onisrunMorecostlythanseXngupasoleproprietorship

ü  OwnershipofaCorpora8onNolimitonthenumberofownersTheen8reownershipstakeofacorpora8onisdividedintosharesknownasstockThecollec8onofalltheoutstandingsharesofacorpora8onisknownastheequityofthecorpora8on

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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The4TypesofFirms

CorporaCons:ü  OwnershipofaCorpora8on

NolimitonthenumberofownersTheen8reownershipstakeofacorpora8onisdividedintosharesknownasstockThecollec8onofalltheoutstandingsharesofacorpora8onisknownastheequityofthecorpora8onAnownerofashareofstockinthecorpora8onisknownasashareholder,stockholder,orequityholderShareholdersareen8tledtodividendpayments

Usuallyreceiveashareofthedividendpaymentsthatispropor8onaltotheamountofstocktheyown

Nolimita8ononwhocanownitsstock

CorporateFinance&theFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TypesofU.S.FirmsInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Investment&FinancingDecisionsInvestment&FinancingDecisionsbytheFinancialManger

CommonFinanceTerminologyü  RealAssets

Assetsusedtoproducegoodsandservices.

ü  FinancialAssetsFinancialclaimstotheincomegeneratedbythefirm�sRealAssets.

ü  InvestmentDecisionsPurchaseofRealAssets.

ü  FinancingDecisionsSaleofFinancialAssets

ü  CapitalBudgeCngDecisions

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Investment&FinancingDecisionsInvestment&FinancingDecisionsbytheFinancialManger

CommonFinanceTerminologyü  CapitalBudgeCngDecisions

DecisiontoinvestintangibleorintangibleAssets.…alsocalledtheInvestmentDecision…alsocalledCapitalExpendituresor(CAPEX)

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Investment&FinancingDecisionsInvestment&FinancingDecisionsbytheFinancialManger

InvestmentChoosethebestProjects

•

CapitalBudge8ng

FinancingChoosesourceofFinancingforInvestment

•CapitalStructure

LiquidityEnsuretohaveenoughCashand

Inventory•

Short-TermFinancialPlanning

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheBalanceSheetModeloftheFirmInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheBalanceSheetModeloftheFirmInvestment&FinancingDecisionsbytheFinancialManger

InJune,2011,GlencoreInterna8onal,aglobalcommodi8esandrawmaterialsfirm,announceditsfinancialresultsforthefirstquarter.InJune2011,thecompanyhad$36.69billionintangiblenon-currentassetsandonly$150millioninintangiblenon-currentassets.Currentassetsamountedto$46.75billionandcurrentliabili8es(liabili8esduewithinoneyear)were$39.16billion.Glencorehad$20.81billioninnon-currentliabili8es.WhatistheBalanceSheetmodel?

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheBalanceSheetModeloftheFirmInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheCapitalStructureInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheCapitalStructureInvestment&FinancingDecisionsbytheFinancialManger

Filtronic,theBri8shwirelessinvestmentfirm,raised£1.3millionin2011byissuingnewsharestoinvestors.Filtroniccouldalsohaveborrowed£1.3millionfromabankorissuedbondsworth£1.3millionasdebt.Whydidthefirmchoosetoissuenewequity?

ClearlythedecisionwasbasedonwhatwouldmaximisethevalueofthefirmandinFiltronic�scase,equitywasthemostsensibleop8on.Theshareissuefollowedanannuallossof£7millionin2011andalossof£1millionin2010.Itwouldhavebeenexcep8onallydifficulttogetanyonetolendtothefirmalersuchpoorperformanceandsoequitysharesweretheonlychoicetheyhad.

Thisisagood8metousetheinternettoseehowFiltronichasperformedsincetheshareissue.

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheCapitalStructureInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheFinancialManagerInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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HowCashFlows…Investment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Accoun8ngFlowvs.CashFlowInvestment&FinancingDecisionsbytheFinancialManger

MidlandplcisanIrishfirmthatrefinesandtradesgold.Attheendoftheyear,itsold2,500ouncesofgoldfor€1.67million.Thecompanyhadacquiredthegoldfor€1millionatthebeginningoftheyear.Thecompanypaidcashforthegoldwhenitwaspurchased.Unfortunatelyithasyettocollectfromthecustomertowhomthegoldwassold.

Accounting Flow Cash Flow Sales €1.670.000

-  Costs €1.000.000 Profit €670.000

Inflow €o -  Outflow €1.000.000 - €1.000.000

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TimingofCashFlowInvestment&FinancingDecisionsbytheFinancialManger

TheItalianfirm,MontanaSpA,isanemp8ngtochoosebetweentwoproposalsfornewproducts.Bothproposalswillprovideaddi8onalcashflowsoverafour-yearperiodandwillini8allycost€10,000.Thecashflowsfromtheproposalsareasfollows:

Year New

Product A

New Product

B 1 € 0 € 4,000 2 0 4,000 3 0 4,000 4 20,000 4,000

Total €20,000 €16,000

WhichisBest?

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheRiskofCashFlowInvestment&FinancingDecisionsbytheFinancialManger

TheNorwegianfirm,FjellASA,isconsideringexpandingopera8onsoverseas,anditisevalua8ngtheNetherlandsandSouthAfricaaspossiblesites.TheNetherlandsisconsideredtoberela8velysafe,whereasopera8nginSouthAfricaisseenasconsiderablymorerisky.Inbothcasesthecompanywouldclosedownopera8onsaleroneyear.

Alerundertakingacompletefinancialanalysis,Fjellhascomeupwiththefollowingcashflowsofthealterna8veplansforexpansionunderthreescenarios—pessimis8c,mostlikely,andop8mis8c:

PessimisCc MostLikely OpCmisCc

Netherlands NOK750,000 NOK1,000,000 NOK1,250,000SouthAfrica 0 1,500,000 2,000,000

WhichistheBest?

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheGoalofFinancialManagementInvestment&FinancingDecisionsbytheFinancialManger

MaximiseValueofOwner´sEquity

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WhataretheFinancialMarketsInvestment&FinancingDecisionsbytheFinancialManger

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Finance!SoWhatisit?Investment&FinancingDecisionsbytheFinancialManger

InvestmentDecision

FinancingDecision

Short-TermCapitalManagement

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheFinancialManagerhasthreemaintasks:ü Makeinvestmentdecisionsü Makefinancingdecisionsü Managecashflowfromopera8ngac8vi8es

TheFinancialManagerInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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MakingInvestmentDecisionsü  TheFinancialManagermustweighthecostsandbenefits

ofeachinvestmentorprojectü  Theymustdecidewhichinvestmentsorprojectsqualifyas

goodusesofthestockholders’money

TheFinancialManagerInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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MakingFinancingDecisionsü  Thefinancialmanagermustdecidewhethertoraisemore

moneyfromnewandexis8ngownersbysellingmoresharesofstockortoborrowthemoneyinstead

TheFinancialManagerInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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ManagingShort-TermCashNeedsü  Thefinancialmanagermustensurethatthefirmhasenough

cashonhandtomeetitsobliga8onsateachpointin8meü  Thisjobisalsoknownasmanagingworkingcapital

TheFinancialManagerInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheGoaloftheFinancialManagerü  Theoverridinggoaloffinancialmanagementistomaximize

thewealthofthestockholders

TheFinancialManagerInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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Stockholdersownthecorpora8onbutrelyonFinancialManagerstoac8velymanagethecorpora8on

ü  TheBoardofDirectorsandthemanagementteamheadedbytheCEOpossessdirectcontrolofthecorpora8on

TheCorporateManagementTeamü  BoardofDirectors

Agroupofpeopleelectedbyshareholderswhohavetheul8matedecision-makingauthorityinthecorpora8on

ü  ChiefExecuCveOfficer(CEO)Thepersonchargedwithrunningthecorpora8onbyins8tu8ngtherulesandpoliciessetbytheBoardofDirectors

TheFinancialManager´sPlaceintheCorpora8onInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheFinancialFunc8onwithinaCorpora8onInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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EthicsandIncen8vesinCorpora8onsü  AgencyProblems

Whenmanagersputtheirownself-interestaheadoftheinterestsofthoseshareholders

ü  TheCEO’sPerformanceWhenthestockperformspoorly:

TheboardofdirectorsmightreactbyreplacingtheCEOAcorporateraidermayini8ateahos8letakeover

TheFinancialManager´sPlaceintheCorpora8onInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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TheInvestmentTrade-OffInvestment&FinancingDecisionsbytheFinancialManger

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GoalsoftheCorpora8onInvestment&FinancingDecisionsbytheFinancialManger

Eachstockholderwantsthreethings:ü  Tobeasrichaspossible,thatis,tomaximizehisorher

currentwealth.ü  Totransformthatwealthintothemostdesirable8me

panernofconsump8oneitherbyborrowingtospendnoworinves8ngtospendlater.

ü  Tomanagetheriskcharacteris8csofthatconsump8onplan.

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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GoalsoftheCorpora8onInvestment&FinancingDecisionsbytheFinancialManger

Profitmaximiza8onisnotawell-definedfinancialobjec8ve,foratleasttworeasons:

ü Maximizeprofits?Whichyear�sprofits?Acorpora8onmaybeabletoincreasecurrentprofitsbycuXngbackonoutlaysformaintenanceorstafftraining,butthatmayaddvalue.Shareholderswillnotwelcomehighershort-termprofitsiflong-termprofitsaredamaged.

ü  AcompanymaybeabletoincreasefutureprofitsbycuXngthisyear�sdividendandinves8ngthefreed-upcashinthefirm.Thatisnotintheshareholders�bestinterestifthecompanyearnslessthantheopportunitycostofcapital.

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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24

29

78

83

97

76

71

22

17

3

0 20 40 60 80 100 120

United States

United Kingdom

France

Germany

Japan

% of responsesThe Shareholders

All Stakeholders

**Surveyof378managersfrom5countries

WhoseCompanyisIt?Investment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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11

11

59

60

97

89

89

41

40

3

0 20 40 60 80 100 120

United States

United Kingdom

France

Germany

Japan

% of responsesDividends

Job Security

**Surveyof399managersfrom5countries.Whichismoreimportant...jobsorpayingdividends?

Dividendsvs.JobsInvestment&FinancingDecisionsbytheFinancialManger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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FinancialIns8tu8onsFinancialInsCtuCons

ü  En88esthatprovidefinancialservices,suchastakingdeposits,managinginvestments,brokeringfinancialtransac8ons,ormakingloans

CorporateFinance&theFinancialManger

TheFinancialCycle1.  Peopleinvestandsavetheir

money2.  Throughloansandstock,that

moneyflowstocompanieswhouseittofundgrowththroughnewproducts,genera8ngprofitsandwages

3.  Themoneythenflowsbacktothesaversandinvestors

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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FinancialIns8tu8onsTypesofFinancialIns8tu8ons

ü  BanksandCreditUnionsü  InsuranceCompaniesü MutualFundsü  PensionFundsü  HedgeFundsü  VentureCapitalFundsü  PrivateEquityFunds

CorporateFinance&theFinancialManger

ü  Financialconglomerates/financialservicesfirmscombinemorethanonetypeofins8tu8on

+++ MCO 201 +++ Finance +++ Spring 2016 +++

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FinancialIns8tu8onsandtheirRoleintheFinancialCycleCorporateFinance&theFinancialManger