COMPANY FINANCE autre couleur = moi

CHAPTER 1 – INTRODUCTION

Company finance = Every activity related to the operations of a business

Financial key decisions:

- How much should be invested?
- Which projects should be chosen for investment purposes and which rejected?
- How much external finance should be raised?
- Which type of finance?
Equity vs Debt
- Should profits be reinvested or paid out as dividends?
- How is cash and working capital to be managed
to be available when needed
put to optimal use

Finance function

 Financial planning: A financial plan acts as a guide as you go through life's journey.
Essentially, it helps you be in control of your income, expenses and investments such
that you can manage your money and achieve your goals.
 Financing and capital market operations: Capital markets are financial markets that
bring buyers and sellers together to trade stocks, bonds, currencies, and other
financial assets. Capital markets include the stock market and the bond market. They
help people with ideas become entrepreneurs and help small businesses grow into
big companies.
 Financial control: Financial controls are the procedures, policies, and means by which
an organization monitors and controls the direction, allocation, and usage of its
financial resources. Financial controls are at the very core of resource management
and operational efficiency in any organization.
 Investment project appraisal: the analysis done to consider the profitability of an
investment over the life of an asset alongside considerations of affordability and
strategic fit.

 Businesses exist to create value for shareholders

 Shareholders are the investors who provide the capital necessary for the company to
operate, so they are the ones taking the risks and bear losses if the company does not
perform well
 The stakeholders of a company are all the actors whose interests will be affected by the
company's activities.

Objective of Company

“The primary objective of a business is shareholder wealth maximisation”

The shareholders are the owner of the company, they take risks and bear losses in case the
company does not perform.
Financial theory refers to the maximisation of shareholder value, which consists of CEOs
maximising share value and dividends. The value-oriented way of managing the company is
supposed to promote economic efficiency.
Corporations that concentrate on maximizing shareholder value might lose focus on what
customers want or might do things that are not optimal for consumers. They also leave out
the rest of the stakeholders. And it may encourage excessive cost cutting.

Short-term profits vs Long-term profits

 ST profits gives more flexibility

 by selling assets of less than 1 year old
 companies consider asset depreciation when making an investment
 ST profits generate liquid capital
 prepare and deal with unforeseen circumstances
 improve credit situation
 reward employees
 Fund for marketing programs

Wealth vs Profit maximisation

Wealth = increase the value of the stakeholders, especially the value of the shareholders
Profit = increase the value of the company

Wealth
It is defined as the management of financial
resources aimed at increasing the value of
the stakeholders of the company.
Focuses on increasing the value of the
stakeholders of the company in the long
term
It considers the risks and uncertainty
inherent in the business model of the
company.
It helps in achieving a larger value of a
company's worth, which may reflect in the
increased market share of the company.
Profit
It is defined as the management of financial
resources aimed at increasing the profit of
the company.
Focuses on increasing the profit of the
company in the short term.
It does not consider the risks and
uncertainty inherent in the business model
of the company.
It helps in achieving efficiency in the
company’s day-to-day operations to make
the business profitable.

Agency theory

 shareholders (principals) hire managers (agents) to run the company

 Agency problems arise when incentives or motivations present themselves to an agent to
not act in the full best interest of a principal. Through regulations or by incentivizing an
agent to act in accordance with the principal's best interests, agency problems can be
reduced.
Reducing agency problems:
 Develop a partnership relationship instead of hierarchical
 Meetings, reports, audits
 Compensation plans (salary, bonuses, stock options, benefits)

UK Corporate Governance Code

CHAPTER 2 – FINANCIAL STATEMENT ANALYSIS

Information from financial statement:

- How the business generates revenues
- How much it generates
- Cost of doing business
- Management of liquidities
- Assets and liabilities

Interpretation of ratios

ROSF: Return on equity (ROE) is a financial ratio used to measure the return on a company's
common shareholders' equity. It is expressed as a percentage. ROE gives shareholders an
idea of how effectively their money is being used to produce a profit. An ROE of 10% means
that €100 contributed by partners or shareholders generates €10 of net profit. The more
efficient the company, the higher its ROE and the more attractive it is to investors. However,
the ROE of a company should be compared with the average ROE of its sector.

Irr and npv finding similar findings in several markets