THE FOUNDATIONS OF CORPORATE FINANCE:
INTRODUCTION TO THE FINANCIAL
STATEMENTS
Lesson 1
Corporate Finance
Castellanza,
21st September, 2011
The foundations of Corporate Finance:
role and objective
 What is Corporate Finance
 The Financial Division in a company
 Who is the Financial Manager
 Financial Decision making
 The objective function
 The tools of Corporate Finance
Corporate Finance
What is Corporate Finance
Corporate Finance concerns the financing of
enterprises - that is, unique combination of physical
and human capital – and the investing of financial
resources.
Core of Corporate Finance: 3 principles
 financing
 investment
 dividends
Corporate Finance
The Financial Manager
The Financial Manager stands between the firm’s operations and
the financial markets, where investors hold the financial assets
issued by the firm.
Firm’s operations
Financial Managers
(Real assets)
Financial Markets
(Financ. Assets)
 Chief Financial Officer (CFO): Treasurer / Controller
 Treasurer: cash management/raising capital/banking relationships
 Controller: preparation of financial statements / accounting /taxes
Corporate Finance
Financial Decision making
Financial decisions:
ordinary
short term
cash / working capital
medium-long term
financing / investing
extraordinary floatation / M&A, …
maximize the value of the firm
but value for who?
stockholders
firm
Corporate Finance
6
The classical objective function
Corporate Finance
The real world
Corporate Finance
8
The real world
Corporate Finance
The tools of Corporate Finance
 Financial Statements
 Time value of money
 Valuation of companies
Corporate Finance
Introduction to the Financial Statements
Objective: to maximize the value of the firm
How can we check the objective?
financial analysis
(financial anlysts, investment banks, …)
technical
fundamental
candlestick, …
Financial Statements
static
ratios analysis
Corporate Finance
dynamic
flows analysis
Introduction to Financial Statements: tools
Static financial analysis (ratio analysis)
picture of the financial position of the firm at a point in time
Dynamic financial analysis (flows analysis)
changes in year and why
Corporate Finance
Introduction to Financial Statements
Static Analysis
Dynamic Analysis
Ratios
Flows
 Flows from operations
 Flows from investment and financing
Corporate Finance
Introduction to Financial Statements
Static Analysis
Dynamic Analysis
Assets = Liabilities
Uses of funds =
Sources of funds
Corporate Finance
Non Current
Introduction to Financial Statements:
the balance sheet
Current Assets
Current Liabilit.
Fixed Assets
LT fin. Debt
Financial Assets
Other LT liabil.
(ex. provisions)
Intangible
Assets
Equity
Corporate Finance
Introduction to Financial Statements:
the balance sheet
Net Working Cap.
LT fin. Debt
Fixed Assets
Other LT obligat.
Financial Assets
(ex. provisions)
Intangible Assets
Equity
Corporate Finance
Introduction to Financial Statements:
Net Working Capital
Cash and Marketable
securities
Accounts payable
Accounts receivable
Financ. s. term loans
Other current liabil.
Inventories
(ex: accrued income taxes)
NWC
Other current assets
Corporate Finance
Accounts receivable
Accounts payable
Other current liabil.
Inventories
NWC op.
Other current assets
Corporate Finance
Non cash current liabilities
Non cash current assets
Introduction to Financial Statements:
Net Working Capital (operating or non cash)
18
Introduction to Financial Statements:
the balance sheet
NWC
NFP.
Non curr. Assets
(fixed, intang., fin.)
Other LT assets
and liabil.
Equity
Corporate Finance
Introduction to Financial Statements:
the income statement (Profit and Loss)
Sales
- Operating expenses
= EBITDA
- Depreciation and Amortization
= EBIT
- Financial expenses/revenues
- Extraordinary items
= EBT
- Taxes
= Net Earning
Corporate Finance
Ex. Prepare a balance sheet for ABC co. from the
following information. What is the equity?






Bank loans short term of 200
Cash of 100
Inventory of 800
Building and fixtures of 1500
Accounts receivable of 1200
Mortgage loan of 1300
Corporate Finance
Ex. Prepare a balance sheet financial
reclassification using the following data
Short-term Financial Debt
Cash
Long-Term financial debt
Accounts receivable
Other current liabilities
Inventories
Other current assets
Employees' Termination Pay
Equity
Financial Assets
Fixed Assets
Intangible Assets
Allowance for doubtful
receivable accounts
Marketable Securities
Trade accounts payable
55,062
40,419
93,832
80,214
33,016
41,156
31,660
14,087
98,186
5,281
67,893
66,114
2,519
14,039
50,074
Corporate Finance