The Corporation: en genomgång
730g32 HT 2012
Fundamentals of Corporate Finance
BMM
Lecture 4: Chap. 1, 2, 3 & 4: Financial decisions,
Financial institutions, and performance measures
LEARNING OBJECTIVES
•
•
•
•
Chapter 1
Understand the definition of a corporation
The role of the financial manager in a
corporation.
Functions of financial markets.
Principal-agent problems, agency costs and
information asymmetries.
2
Corporations
• two types of financial decisions that are made
in a corporation: investment decisions and
financing decisions.
• Financial managers are responsible for both
decisions!
Investment
decisions
Financing
decisions
Financial
Market
3
Corporation
• Corporation
– A business organized as a separate legal entity owned
by stockholders.
– Or a nexus of contract between legal entities.
• Types of Corporations
–
–
–
–
Public Companies
Private Corporations, sole proprietorships
Partnerships
Etc.
4
Organizing a Business
Sole
Proprietorship
Partnership
Corporation
Who owns the
business?
The manager
Partners
Stockholders
Are managers and
owners separate?
No
No
Usually
What is the owner's
liability?
Unlimited
Unlimited
Limited
Are the owner and
business taxed
separately?
No
No
Yes
5
Corporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Corporations
Corporate tax on profits +
Personal tax on dividends
6
Who is The Financial Manager?
• Chief Financial Officer (CFO)
– Oversees the treasurer and controller and sets
overall financial strategy.
• Treasurer
– Responsible for financing, cash management, and
relationships with banks and other financial
institutions.
• Controller
– Responsible for budgeting, accounting, and taxes.
7
Who is The Financial Manager?
Chief Financial Officer
Treasurer
Controller
8
Definitions
Capital Budgeting Decision
– Decision to invest in tangible or intangible assets.
…also called the Investment Decision
Financing Decision
– The form and amount of financing of a firm’s
investments.
9
Capital Structure (D/E ratio)
• Capital Structure
The proportion of debt vs. equity financing.
1.Debt/Equity ratio, a multiple of debt over equity.
Can be tricky when equity becomes small.
2.D/(E+D) debt asset ratio measures the
indebtedness of the company. ranging from 0 to
100%.
Market capitalization: the company´s total amount
of shares outstanding times the share price.
10
Distinguishing Real Assets
and Financial Assets
• Real Assets
– Assets used to produce goods and services.
– examples: Patents, Machines, a new pipeline, etc
• Financial Assets
– Financial claims to the income generated by the
firm’s real assets.
– Examples: stocks, bonds, bank loans
11
The Goals of the corporation
• Firm Value maximization:
I.
II.
Anglo-America model: shareholder interests
Continental European model: Stakeholder interests
which include all claimants who has a vested interest
in the company, for example, the supplier, the workers
union, the local government, tax authority, etc.
Is it just a conceptual dispute?
Most firms do maximize Firm value taken into
consideration of the stakeholder interests:
That is to say, Corporate Social Responsibilities, ethics
of corporation add value to the firm.
12
Corporate governance
and Agency problems
• Shareholder oriented model: US, UK
1. Professional managers, principal-agency problems,
agency costs,
2. Monitoring type: Shareholder meeting, institutional
ownership, specialist monitoring
3. Market for corporate control: hostile takeovers
• Stakeholder oriented model: continental Europe
1. Big shareholder control, long term ownership, Less
agency costs, Less problem of investor protection,
specialist
2. Bank monitoring, Shareholder Meeting, friendly
takeover
13
Asymmetric information and
Principal agency problem
Managers know more about the corporation
including:
•Stock price movement and returns
•Issues of shares and other securities
•Dividends decision
•Financing
Managers may have their own goals other than
shareholders´.
14
Agency Problem Solutions
1 – Management Compensation plans
2 - Board of Directors
3 – Market for corporate control: Takeovers
4 - Specialist Monitoring
5 - Legal and Regulatory Requirements
15
Chap 2. Financial Markets and Institutions
Learning objectives
•The Importance of Financial Markets and
Institutions
•The Flow of Savings to Corporations
•Functions of Financial Markets and of Financial
Intermediaries
•Value Maximization and the Cost of Capital
16
Financial Markets
Money
Primary
OTC
Markets:
issuing
stocks,
bonds
Markets:
forex
trading
Secondary
Markets:
trading
stocks, bonds
17
Financial Markets
Issue Securities
Company
Cash
Reinvested
Investors
Cash
18
Financial Markets
Financial markets
Corporation
Investment
in real assets
Reinvestment
Stock markets
Fixed-income markets
Money markets
Markets for
Commodities
Foreign exchange
Derivatives
Investors
worldwide
Financial
Intermediaries:
Mutual Funds
Pension funds
Financial Institutions
Banks
Insurance companies
19
Financial Institutions
Company
Obligations
Funds
Intermediaries
Banks
Insurance Cos.
Brokerage Firms
20
Financial Institutions
Intermediaries
Obligations
Funds
Investors
Depositors (sparare)
Policyholders (försäkringstagare)
Investors
21
Financial Markets
Company
Banks
Obligations
Funds
Insurance Cos.
Intermediary
Brokerage Firms
Obligations
Funds
Depositors
Policyholders
Investor
Investors
22
Financial Markets
Company
$2.5 m
Loan
Banks
Intermediary
Deposits
Depositors
Cash
Investor
23
Financial Market: some definitions
• Financial Market is a market where securities are
issued and traded.
• A security is a traded financial asset. Shares,
bonds, asset backed securities, options, etc.
• Fixed income market: market for debt securities,
for example, treasury bills, corporate bond, etc.
• Capital market: market for long term financing,
e.g. stocks, long term bonds, etc.
• Money market: market for short term financing,
less than 1 year.
24
Function of Financial Markets
•
•
•
•
•
Transporting cash across time
Risk transfer and diversification
provide Liquidity
Payment mechanism
Provide useful information for all: commodity
price, cost of capital, interest rate, exchange
rate, share price, etc.
25
U.S. Financing
Information Provided by Financial Markets
• Commodity prices
• Interest rates
• Company values
Interest rates on 30-year corporate
bonds,
February 2008.
Credit Rating
AAA
AA
A
BBB
BB
B
Interest Rate
5.71%
5.78
6.38
7.12
9.84
10.82
Source: Bloomberg Composite Corporate Bond
Indexes.
26
Opportunity cost of capital
(alternativ kapitalkostnad)
• Opportunity cost of capital: the best possible
investment forego by the investor is the
opportunity cost of capital for the firm.
• Cost of capital: minimum acceptable rate of
return on capital investment for the investor.
• The investors can invest in financial market and
get expected rate of return on the investment at
a similar risk level. This expected rate of return in
the market determines the firm´s cost of capital.
27
Chapter 4 Measuring corporate
performance
Important issues! Very relevant for business
lawyers.
•Measuring Profitability
•Measuring Efficiency
•Analyzing the Return on Assets: The Du Pont
System
•Measuring Leverage
•Measuring Liquidity
•Interpreting Financial Ratios
28
Importance of accounting data
Accounting data
Financial decisions
Accounting data
Performance evaluation
Financial decisions
29
Value and Value Added
• Market Capitalization
Total market value of equity, equal to share price
times number of shares outstanding.
Market Capitaliza tion  (# shares)  (price per share)
• Market Value Added
Market capitalization minus book value of equity.
MVA  Market Capitaliza tion - Equity Book Value
30
Value and Value Added
PepsiCo Balance Sheet (December 31, 2006)
$Millions
Pepsico Income Statement (year end
2006) M$
Net Sales
Cost Of Goods Sold
Selling, G&A expenses
Depreciation expense
EBIT
Net interest expense
Taxable Income
Income Taxes
Net Income
Allocation of net income
Dividends
35,753
15,762
11,530
1,406
7,055
66
6,989
1,347
5,642
1854
32
Market-to-Book Ratio: performance
measure
– Ratio of market value of equity to book value of
equity.
market val ue of equity
Market - to - book ratio 
book value of equity
$102,457

$15,368
 6.7
Pepci´s common stock closed at the end of 2006 at $62,55 per share. There
are 1,638 million shares outstanding. So, the total market capitalization
=62,55*1,638= $102,457 million
33
Market-to-Book Ratio
• Stock market measures of company performance, 2006.
Companies are ranked by market value added. (dollar values
in millions)
34
Measuring Profitability
• Economic Value Added (EVA)
– Net income minus a charge for the cost of capital
employed. Also called residual income.
• Residual Income
– Net Dollar return after deducting the cost of
capital
EVA  Residual Income
 Net Income - Cost of Equity  Equity 
35
Measuring Profitability
• Economic Value Added (EVA) of PepsiCo
EVA  Residual Income
 Net Income - Cost of Equity  Equity 
EVA  Residual Income
 5,642 - .095 14,251
 $4,527 million
Obs: the equity figure is the from the end of 2005,
because this was the equity employed in the year 2006.
36
Measuring Profitability
• Return on Equity (ROE)
– Net income as a percentage of shareholders’ equity
• Return on Capital (ROC)
– Net income plus Interest as a percentage of long-term
capital.
• Return on Assets (ROA)
– Net income plus interest as a percentage of total
assets
Svenska termer räntabilitet på eget kapital, se nästa
slides
37
Lönsamhets nyckeltal
Det totala kapitalets räntabilitet ---- RT
Resultat Mått:
Rörelseresultat + finansiella intäkter
Eller
Resultat efter finansiella poster + finansiella
kostnader
Kapital mått: genomsnittligt totalt kapital
=(T0 +T1 )/2
38
lönsamhets nyckeltal
RT
Rörelseresultat + Finansiella intäkter
RT =
x 100%
Genomsnittlig Balansomslutning
ROA= Räntabilitet på totala kapital =
AVKASTNING på Totala Kapital
RT Return on Assets ROA
Du Pont modellen:
RT =VP x KOH
Det Totala Kapitalets Räntabilitet
RT = vinst marginal x
Kapitalomsättningshastighet
RT =VP x KOH
RT =
Resultat efter finansiella intäkter * Omsättningar
Omsättningar
Totalt kapital
Tumregel 7~8% (*statsobligations avkastning +
riskpremie)
40
Rsyss
Avkastning (R ) på sysselsatt Kapital=
syss
Rörelseresultat + finansiella intäkter
x 100%
Genomsnittligt Sysselsatt Kapital
Sysselsatt kapital = Balansomslutning
- Ej räntebärande skulder (till Leverantörer)
- Latenta skatteskulder (på obesk. reserver)
41
RE
ROE
Return on Equity
Avkastning på Eget Kapital=
Rörelseresultat efter fin. netto x (1-τ)
Genomsnittligt justerat eget kapital*
X 100%
*: Eget kapital + obeskattade reserver *(1- τ)
τ : skattesats. Bolagsskatten år 2012 är 26,3 %
Den mäter ett företags effektivitet att generera
vinster för varje krona av nettotillgångar (Tillgångskulder)
42
Effektivitet i Kapitalanvändning
Kapitalomsättningshastighet (KOH)
KOH= Omsättning / Total kapital
Tumregel 1,5 för KOH.
Ränta Betalningsförmåga:
Räntetäckningsgrad = resultat efter finansiella
intäkter / finansiella kostnader
Tumregel är 2, men minst 1.
43
Rörelseresultat
Rörelsemarginal
= rörelseresultat / omsättning
Vinstmarginal (VP)
Brukar kallas Kapitalersättningsmarginal
De vanligaste definitionerna är:
Resultat före finansiella kostnader
Omsättning
44
Measuring Profitability
• Accounting measures of company performance, 2006.
Companies are ranked by return on equity.
45
Measuring Profitability (kursbok exempel)
PepsiCo Profitability Measurements
net income
5,642
Return on equity =

 .396
equity
14,251
Net Income  Interest 5,642  239
Return on assets =
=
 .185
total assets
31,727
Net Income  Interest
5,642  239
Return on capital =

 .355
Long term debt  equity
16,564
46
Measuring Efficiency
Asset turn over ratio
Asset
=
Sales
total assets at start of year
turnover ratio
=
OR
Sales
Average total assets
For PepsiCo
Asset turn over ratio
=
Sales
35,753

 1.13
total assets at start of year 31,727
Asset turn over ratio
=
OR
Sales
35,753

 1.16
Average total assets (31,727  29,930) / 2
47
Measuring Efficiency
Inventory turnover ratio =
cost of goods sold
inventory at start of year
Average Days in Inventory =
inventory at start of year
cost of goods sold/365
Receivable s Turnover =
sales
receivable s at start of year
Average collection period =
receivable s at start of year
average daily sales
48
The DuPont model
Net Income  interest paid
ROA=
assets
total sales Net Income  interest paid
ROA=
x
assets
total sales
Asset
turnover
Operating Profit
margin
49
Measuring Leverage
long term debt
Long term debt ratio =
long term debt + equity
long term debt
Debt equity ratio =
equity
Skuldsättningsgrad (S/E) = Debt-to-equity ratio (D/E)
Skuldsättningsgrad (S/E)
skulder + skatt på obeskattade reserver
=
eget kapital + obeskattade reserver med avdrag för
skatt
50
Measuring Leverage
Justerat Eget Kapital (JEK)
SOLIDITET =
Totalt Kapital
JEK= Eget kapital + (1 – skattesats) x
obeskattade reserver
Equity ratio = shareholders funds/ total assets
=shareholders funds/(debt+equity)
EBIT+depreciation
Cash coverage ratio=
interest payments
Räntetäckningsgrad = (EBIT+ avskrivningar)/ räntekostnader
51
Return on Equity
ROA
assets sales Net Income  interest
Net Income
ROE =
x
x
x
equity assets
sales
Net Income  interest
leverage asset
ratio turnover
Operating
profit
margin
debt
burden
Kom ihåg: Du Pont modellen
RT =VP x KOH
52
The DuPont Model
• A breakdown of ROE and ROA into
component ratios
Net Income
Profit Margin =
sales
Net Income  Interest
Operating Profit Margin =
sales
53
Measuring Liquidity
Net working capital
Net working capital
=
to total assets ratio
Total assets
Net workin g capital  current asset - current liabilitie s
current assets
Current ratio=
current liabilities
54
Liquidity Ratios
cash + marketable securities + receivable s
Quick ratio =
current liabilitie s
cash + marketable securities
Cash ratio =
current liabilitie s
55
Sustainable Growth
dividends
Payout ratio =
earnings
earnings - dividends
Plowback ratio =
earnings
= 1 - payout ratio
56
Interpreting Financial Ratios
• PepsiCo Ratios
57
Interpreting Financial Ratios
• PepsiCo Ratios (continued)
58
Interpreting Financial Ratios
• Selected 2006 financial ratios for industry groups in Standard & Poor’s
Composite Index
59
Accounting information and market
information are important
• The market demand transparency of company
information!
• this is to ensure fairness for all the market
participants to make informed decision.
• Efficient market is characterized of efficient
information revealing.
60
Next topic: Valuing stocks!
Thank you for
coming!
61