🏢 Managerial Finance — Executive Reference Notes
Module 1: Corporate and Financial Environment
Role of Financial Management
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Primary goal of a firm: Maximize shareholder wealth (stock price).
Key decisions in finance:
o Investment (Capital budgeting): What assets to acquire.
o Financing (Capital structure): How to raise capital (debt vs equity).
o Dividend (Distribution): How to return profits to shareholders.
Forms of Business Organization
Type
Sole
Proprietorship
Partnership
Corporation
Liability
Taxation
Ownership Transfer
Unlimited
Personal
Difficult
Unlimited
Limited
Personal
Double
Difficult
Easy
Financial Markets
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Money Market: Short-term debt (<1 year)
Capital Market: Long-term debt and equity (>1 year)
Primary Market: New issues (IPOs)
Secondary Market: Trading existing securities
Financial Statements Overview
1. Balance Sheet: Assets = Liabilities + Equity
a. Liquidity = Ability to pay short-term obligations
2. Income Statement: Revenue - Expenses = Net Income
a. EPS (Earnings per Share) = Net Income / Shares Outstanding
3. Cash Flow Statement:
a. Operating, Investing, Financing cash flows
b. Free Cash Flow (FCF) = [EBIT(1 - Tax Rate)] + Depreciation - CAPEX ΔWorking Capital
4. Statement of Retained Earnings: Beginning RE + NI - Dividends = Ending RE
Financial Ratios
Liquidity Ratios
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Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Efficiency Ratios
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Inventory Turnover = COGS / Avg Inventory
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Receivables Turnover = Sales / Accounts Receivable
Total Asset Turnover = Sales / Total Assets
Leverage Ratios
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Debt Ratio = Total Debt / Total Assets
Debt-to-Equity = Total Debt / Total Equity
Times Interest Earned (TIE) = EBIT / Interest Expense
Profitability Ratios
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Net Profit Margin = Net Income / Sales
ROA = Net Income / Total Assets
ROE = Net Income / Equity
Market Ratios
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P/E Ratio = Price per Share / Earnings per Share
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Market-to-Book = Market Value / Book Value
Corporate Governance
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Board of Directors oversees management.
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Agency Problem: Managers may pursue self-interest → align incentives with
performance-based compensation.
Ethical governance & transparency increase firm value and reduce capital costs.
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Module 2: Valuation
Time Value of Money (TVM)
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Future Value (FV): FV=PV(1+r)nFV = PV(1 + r)^nFV=PV(1+r)n
Present Value (PV): PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV
Annuity (Equal Payments):
o PVannuity=PMT×1−(1+r)−nrPV_{annuity} = PMT \times \frac{1 - (1 +
r)^{-n}}{r}PVannuity =PMT×r1−(1+r)−n
o FVannuity=PMT×(1+r)n−1rFV_{annuity} = PMT \times \frac{(1 + r)^n 1}{r}FVannuity =PMT×r(1+r)n−1
Perpetuity: PV=PMTrPV = \frac{PMT}{r}PV=rPMT
Risk and Return
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Expected Return: E(R)=∑piRiE(R) = \sum p_i R_iE(R)=∑pi Ri
Variance: σ2=∑pi(Ri−E(R))2\sigma^2 = \sum p_i (R_i - E(R))^2σ2=∑pi (Ri −E(R))2
Standard Deviation (Risk): σ=σ2\sigma = \sqrt{\sigma^2}σ=σ2
Portfolio Return: E(Rp)=w1R1+w2R2+...E(R_p) = w_1R_1 + w_2R_2
+ ...E(Rp )=w1 R1 +w2 R2 +...
Portfolio Risk (Two Assets):
σp2=w12σ12+w22σ22+2w1w2σ1σ2ρ12\sigma_p^2 = w_1^2\sigma_1^2 +
w_2^2\sigma_2^2 + 2w_1w_2\sigma_1\sigma_2\rho_{12}σp2 =w12 σ12 +w22 σ22
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+2w1 w2 σ1 σ2 ρ12
Beta (Systematic Risk):
β=Cov(Ri,Rm)Var(Rm)\beta = \frac{\text{Cov}(R_i,
R_m)}{\text{Var}(R_m)}β=Var(Rm )Cov(Ri ,Rm )
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CAPM:
Ri=Rf+βi(Rm−Rf)R_i = R_f + \beta_i(R_m - R_f)Ri =Rf +βi (Rm −Rf )
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Security Market Line (SML): Shows relationship between risk (β) and expected
return.
Corporate and Stock Valuation
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Value of Operations:
Vop=∑FCFt(1+WACC)tV_{op} = \sum \frac{FCF_t}{(1 + WACC)^t}Vop
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=∑(1+WACC)tFCFt
Intrinsic Stock Value:
P0=D1r−gP_0 = \frac{D_1}{r - g}P0 =r−gD1
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Free Cash Flow to Firm (FCFF):
FCF=EBIT(1−T)+Dep−CapEx−ΔNWCFCF = EBIT(1 - T) + Dep - CapEx ΔNWCFCF=EBIT(1−T)+Dep−CapEx−ΔNWC
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Weighted Average Cost of Capital (WACC):
WACC=wdrd(1−T)+wprp+wereWACC = w_d r_d (1 - T) + w_p r_p + w_e
r_eWACC=wd rd (1−T)+wp rp +we re
Module 3: Equities and Fixed Income Securities
Bonds
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Price of Bond:
P=∑C(1+r)t+FV(1+r)nP = \sum \frac{C}{(1 + r)^t} + \frac{FV}{(1 +
r)^n}P=∑(1+r)tC +(1+r)nFV
• Current Yield: CY=CouponPriceCY = \frac{Coupon}{Price}CY=PriceCoupon
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Yield to Maturity (YTM): Discount rate making PV = price.
Interest Rate Risk: Price falls when rates rise.
Duration: Measures bond’s sensitivity to interest rates.
Preferred Stock
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Valuation: P=DrpP = \frac{D}{r_p}P=rp D
Fixed dividends, hybrid between debt and equity.
Convertibles and Warrants
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Convertible Bond: Debt that can convert to equity.
Warrants: Right to buy shares at a set price → potential dilution.
Module 4: Capital Budgeting and Cash Flow Estimation
The Cost of Capital
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Cost of Debt: rd(1−T)r_d (1 - T)rd (1−T)
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Cost of Preferred Stock: rp=Dp/Ppr_p = D_p / P_prp =Dp /Pp
Cost of Equity:
o CAPM: re=Rf+β(Rm−Rf)r_e = R_f + β(R_m - R_f)re =Rf +β(Rm −Rf )
o DCF: re=D1P0+gr_e = \frac{D_1}{P_0} + gre =P0 D1 +g
Capital Budgeting Methods
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Net Present Value (NPV):
NPV=∑CFt(1+r)t−Initial InvestmentNPV = \sum \frac{CF_t}{(1 + r)^t} \text{Initial Investment}NPV=∑(1+r)tCFt −Initial Investment
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o Accept if NPV > 0
Internal Rate of Return (IRR): r where NPV = 0
Payback Period: Time to recover initial investment
Discounted Payback: Uses discounted cash flows
Profitability Index (PI): PI=PV of future CFsInitial InvestmentPI =
\frac{PV\ of\ future\ CFs}{Initial\ Investment}PI=Initial InvestmentPV of future CFs
Cash Flow Estimation
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Use incremental cash flows only.
Sunk costs excluded.
Opportunity costs included.
Side effects: Include cannibalization or synergy.
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Terminal Value (TV): TV=FCFn+1(WACC−g)TV = \frac{FCF_{n+1}}{(WACC g)}TV=(WACC−g)FCFn+1
Corporate Valuation and Planning
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Forecast future FCFs → discount by WACC → add non-operating assets → subtract
debt → divide by shares for intrinsic value.
Module 5: Financial Planning and Financial Decision-Making
Working Capital Management
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Net Working Capital (NWC): Current Assets - Current Liabilities
Cash Conversion Cycle (CCC):
o CCC=DIO+DSO−DPOCCC = DIO + DSO - DPOCCC=DIO+DSO−DPO
o DIO = Days Inventory Outstanding
o DSO = Days Sales Outstanding
o DPO = Days Payables Outstanding
Goal: Shorten CCC without hurting operations.
Supply Chain Finance
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Use trade credit efficiently.
Optimize inventory levels to reduce carrying costs.
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Negotiate better supplier and customer payment terms.
Module 6: Corporate Financing and Distribution Decisions
Sources of Financing
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Debt: Lower cost, tax shield, increases financial risk.
Equity: No repayment, ownership dilution.
Dividend Policy
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Dividend Irrelevance (MM): Doesn’t affect firm value (no taxes or costs).
Bird-in-the-Hand: Investors prefer certain dividends.
Residual Theory: Pay dividends only after funding all positive NPV projects.
Share Repurchases: Flexible alternative to dividends; can signal undervaluation.
Capital Structure Decisions
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Trade-off Theory: Optimal debt when tax benefits = financial distress costs.
Pecking Order Theory: Firms prefer internal funds → debt → equity.
Signaling Theory: Debt issuance can signal confidence.
Module 7: Strategic Finance
Mergers and Acquisitions (M&A)
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Motives:
o Synergy (operational, financial)
o Market power
o Diversification
o Tax benefits
Types:
o Horizontal (same industry)
o Vertical (supply chain)
o Conglomerate (unrelated business)
Valuation: Estimate target firm’s FCF and synergy value.
Purchase Methods: Cash, stock, or hybrid.
Bankruptcy and Reorganization
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Types:
o Chapter 7: Liquidation
o Chapter 11: Reorganization
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Priority of Claims:
o Secured creditors
o Unsecured creditors
o Preferred shareholders
o Common shareholders
Reorganization Goal: Restore firm to viability while preserving value.
⚙️ Key Formulas Summary
Concept
FV
PV
WACC
CAPM
NPV
IRR
ROE
ROA
Debt Ratio
Dividend Growth
FCF
Terminal Value
Formula
PV(1+r)nPV(1 + r)^nPV(1+r)n
FV(1+r)n\frac{FV}{(1 + r)^n}(1+r)nFV
wdrd(1−T)+were+wprpw_d r_d(1 - T) +
w_e r_e + w_p r_pwd rd (1−T)+we re +wp rp
Ri=Rf+β(Rm−Rf)R_i = R_f + β(R_m R_f)Ri =Rf +β(Rm −Rf )
∑CFt(1+r)t−I0\sum \frac{CF_t}{(1 + r)^t}
- I_0∑(1+r)tCFt −I0
Rate where NPV = 0
Net Income / Equity
Net Income / Total Assets
Total Debt / Total Assets
P0=D1r−gP_0 = \frac{D_1}{r - g}P0
=r−gD1
EBIT(1−T)+Dep−CapEx−ΔNWCEBIT(1 T) + Dep - CapEx ΔNWCEBIT(1−T)+Dep−CapEx−ΔNWC
FCFn+1(WACC−g)\frac{FCF_{n+1}}{(WA
CC - g)}(WACC−g)FCFn+1