Corporate Finance

The Balance Sheet

Assets: Left-hand side (or upper portion). In order of decreasing liquidity.
Liabilities and Owners ‘Equity: Right-hand side (or lower portion). In ascending order of
when due to be paid.
Balance Sheet Identity: Assets = liabilities + stockholders ‘Equity.
Net working capital: current assets minus current liabilities. It’s usually positive for a healthy
firm.
Liquidity: speed and ease of conversion to cash without significant loss of value. Valuable in
avoiding financial distress.
Debt versus Equity: Shareholders ‘equity = assets – liabilities (=net debt)

Book value: the balance sheet value of assets, liabilities and equity. In this book value, there
are amortizations.
Market value: true value. It’s the price at which the assets, liabilities, or equity can actually
be bought or sold.

Income Statement: measures performance over a specified period of time. Report revenues
first and then deduct any expenses for the period.
End result = Net Income = “Bottom Line”. (dividends paid to shareholders, addition to
retained earnings).

Cash flow is one of the most important pieces of information that can be derived from
financial statements. The accounting statement of cash flows does not provide the same
information that we are interested in here.

CFFA = OFC – NCS - NWS

OFC = EBIT + depreciation – taxes
NCS = ending net FA – beginning net FA + depreciation = investment – disinvestment.
NWC = ending NWC – beginning NWC

CFFA = CF/CR + CF/SH

CF/CR = interest paid – net new borrowing = cash flow to creditors
CF/SH = dividends paid – net new equity = cash flow to shareholders.

(CF 2-30)

Internal Growth Rate = (ROA x b)/ (1- (ROA x b))

ROA = Net income/total assets

The sustainable growth rate represents the maximum rate of growth that the company can
achieve without recourse to new equity, while maintaining a constant debt-to-equity ratio. It
shows the growth potential of the company that it can achieve while leaving its financial
leverage intact.
Sustainable Growth Rate = (ROE x b) / (1 – (ROE x b))
ROE = Net income / total equity

Session 3-4:

Interest rate ( r ): discount rate, cost of capital, opportunity cost of capital, required return…

Future values : General Formula

FV = PV(1+r)^t
FV = future value
PV = present value
r= period interest rate, expressed as a decimal
t= number of periods

Simple interest: interest earned only on the original principal

Compound interest: interest earned on principal and on interest received.

Present value: current value of future cash flows discounted at the appropriate discount
rate. It is worth less than face value because of the opportunity cost and the risk and
uncertainty.
 Discount Rate = f(time, risk)
Discounting = finding the present value of one or more future amounts.