Ignacio Lezaun

English edition
2021

Fundamentals of Finance

1
 2

Contents of the course

1. The role of the Chief Financial Officer

2. Statement of cash flows
3. Working capital management
4. Short-term finance instruments
5. The time value of money
6. Conclusions

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 UNIT
2

Recap of Monday’s exercise:

Unit 2 (statement of cash flows)

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Class exercise: Laserlus company
◼ The following information about the company Laserlus SL is provided: UNIT
◼ Balance sheet for the years 2020 and 2021
2
◼ Income statement for the year 2021

◼ The following information is also available:

◼ The Corporation tax rate is 25%
◼ In March 2021, a dividend is paid to shareholders (40% of the previous year’s profit)
◼ During 2021, 70% of the Corporation Tax for the current year is paid
◼ Half of the loan is returned

◼ For the year 2021, calculate:

1. FCFF
2. Debt flows (tax shield included)
3. FCFE
4. Cash Flow Statement
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Class exercise: Laserlus company

GROSS ASSETS
31/12/20
150,000.00 €
31/12/21
150,000.00 € CAPITAL
31/12/20
120,000.00 €
UNIT
31/12/21
120,000.00 €
DEPRECIATION
NON-CURRENT
-30,000.00 € -35,000.00 € RESERVES 18,000.00 € 2 21,600.00 €
ASSETS 120,000.00 € 115,000.00 € NET INCOME 6,000.00 € 7,500.00 €
INVENTORIES 18,500.00 € 5,000.00 € NET EQUITY 144,000.00 € 149,100.00 €
CUSTOMERS 38,000.00 € 20,000.00 € NON-CURRENT LIABILITIES -€ -€
CASH 24,900.00 € 33,975.00 € SUPPLIERS 15,000.00 € 4,125.00 €
CURRENT ASSETS 81,400.00 € 58,975.00 € TAXES PAYABLE 2,400.00 € € 750.00
OTHER DEBTS 40,000.00 € 20,000.00 €
CURRENT LIABILITIES 57,400.00 € € 24,875.00
TOTAL ASSETS 201,400.00 € 173,975.00 € TOTAL EQUITY + LIABILITIES 201,400.00 € 173,975.00 €

INCOME STATEMENT 2021

Sales 120,000.00 €
Cost of materials 30,000.00 €
Direct labor cost 37,500.00 €
Indirect costs 35,000.00 €
Depreciation 5,000.00 €
Gross margin 12,500.00 €
General expenses 2,000.00 €
EBIT 10,500.00 €
Interests € 500.00
EBT 10,000.00 €
Tax 2,500.00 €
Net Income 7,500.00 €

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Summary of solutions
FCFE 2021
Net Income UNIT
7.500,00 €
FREE
FCFF CASH FLOW
EBIT (+)
2021
10.500,00 €
Depreciation (+)
Provisions (+)
25.000,00 €
0,00 €
Operating taxes (-) -2.625,00 € Var customers (+/-) 18.000,00 €
Depreciations (+) 5.000,00 € Var. Inventories (+/-) 13.500,00 €
Provisions (+) 0,00 € Var Suppliers (+/-) -10.875,00 €
Var customers (+/-) 18.000,00 € Var Tax payable (+/-) -1.650,00 €
Var. Inventories (+/-) 13.500,00 € Investment in non- 0,00 €
Var Suppliers (+/-) -10.875,00 € Divestments in non- 0,00 €
Var Tax payable (+/-) -1.650,00 € Var anticipated income 0,00 €
Investment in non-current 0,00 € Var anticipated 0,00 €
Divestments in non-current 0,00 € Financial debt inflow (+) 0,00 €
Var anticipated income (+) 0,00 € Repayment fin debt (-) -20.000,00 €
Var anticipated expenses (-) 0,00 € FCFE 11.475,00 €
FCFF cash flow
Free 31.850,00 €
11.475,00 €

DEBT FLOWS 2021

Financial debt entry (-) -€
Repayment of financial debt (+) 20,000.00 €
Interest payment (+) € 500.00
Interest tax shield (-) -125.00 €
Cash flow for debt € 20,375.00
Summary of solutions
Cash Flow Statement 2021 UNIT
Cash flows from operating activities:
Net income 7.500,00 €
2
Adjustents to reconcile net income to net cash from operating activities
+ Depreciation 5.000,00 €
+ Var Customers 18.000,00 €
+ Var. Inventories 13.500,00 €
+ Var Suppliers -10.875,00 €
+ Var Tax payable -1.650,00 €

Net cash from operating activities 31.475,00 €

Cash flows from investing activities

Proceeds from sale of investments 0,00 €
Purchase of assets 0,00 €

Net cash from investing activities 0,00 €

Cash flows from financing activities:

Repayment fin debt (-) -20.000,00 €
Dividend (-) -2.400,00 €
Net cash used by financing activities -22.400,00 €

Net increase in cash during the year 9.075,00 €

Cash and cash equivalents on January 1, 2021 24.900,00 €
33.975,00 €
Cash and cash equivalents on December 31, 2021
Unit 3: Working Capital 8

Management UNIT 3

OBJECTIVES
1. Background
2. Managing and Measuring Liquidity
3. Managing Accounts Receivable
4. Managing Accounts Payable
5. Managing Inventory
6. Working Capital Management
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 9

UNIT 3

3.1 Background

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All activities require resources UNIT 3
For example …

• An industrial company requires a supply of raw

materials, and to store the finished product before
distributing it

• In a commercial enterprise, merchandise must be

purchased, stored, and shipped

• In a service provision company, structural expenses

must be borne until the service provision is
completed
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Operating and cash cycles of a 11

firm UNIT 3

+ Manufacturing

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What is working capital 12

management? UNIT 3

 Deals with short-term aspects of corporate finance activities

 A way to ensure a firm has access to funds for day-to-day expenses

without compromising on asset investment
 For example: if incoming cash is delayed (e.g. because of
uncollected receivables) or if cash leaves too quickly (e.g. by making
payments earlier than due), short-term liquidity becomes an issue
for day-to-day expenses

To avoid this, the firm needs effective working capital

management

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Finance definition 13

UNIT 3

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 14
Accounting definition
UNIT 3

WORKING CAPITAL =

CURRENT ASSETS – CURRENT

LIABILITIES

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Accounting definition: Apple example 15

UNIT 3

Working capital

= 134,931 - 89,704

= 45,227

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Accounting definition: Spotify example 16

UNIT 3

Working capital

= 2,231- 2,439

= (208)

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But where does liquidity come 17

from? UNIT 3

1. Primary Sources:
 E.g. cash balances, short-term funds
 Changes don’t usually result in change in company’s operations

2. Secondary sources:
 E.g. liquidating assets, filing for bankruptcy protection
 May lead to significant changes in firm structure and operations
 Could indicate firm’s deteriorating financial position

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Is it better to have too much or too 18

little liquidity? UNIT 3

 It depends …

 Too little indicates firm might be in trouble

 Too much can mean firm is inefficient (untapped resources,
shareholders to be rewarded)
 But sometimes the liquidity position can be part of a well defined
strategy: inorganic growth in turnaround/volatile contexts (competitors,
clients, suppliers to be purchased, etc.)

Managing liquidity is therefore critical

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Reasons for little liquidity UNIT 3

 A drag on liquidity occurs when cash coming into firm is

delayed due to:
 Uncollected receivables
 Obsolete inventory

 A pull on liquidity happens when:

 Cash leaves the firm too quickly (early repayments, reduction
in trade credit)
 Access to credit is reduced because of reduction in financial
credit

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Reasons for little liquidity
UNIT 3

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