1. Introduction & Discounted Cash Flow Valuation Flashcards
What are the three main functions of corporate finance?
Capital budgeting (managing projects/long-term assets)
Capital structure (financing)
Short-term financial management (liquidity)(working capital)
What is net working capital?
Current Assets - Current Liabilities
What does a positive net working capital figure indicate?
The company’s Current Assets > Current liabilities. The company has enough liquid assets to pay off its short-term liabilities.
When would a company be considered to be “cash rich”?
When it has a high net working capital in comparison to the size of the company. It gives a company an excellent basis to invest over the coming year.
What is shareholders’ equity?
Total assets - Total liabilities
A residual claim on the firm’s assets.
How is the value of a company calculated?
Value of a company = Value of Debt + Value of Equity
What is the main role of a financial manager? How do they achieve this?
To create value for shareholders from the firm’s capital budgeting, financing and net working capital activities.
To do this, the financial manager should:
- Try to buy assets that generate more cash than they cost.
- Sell bonds, shares and other financial instruments that raise more cash than they cost.
i.e., create profit
What is discounted cash flow valuation?
A valuation method used to estimate the value of a company/investment based on its expected future cash flows.
What is the opportunity cost of money?
The potential forgone profit from a missed opportunity - the result of choosing one alternative over another.
What is the NPV criterion?
If NPV < 0, it is not profitable and is not an advisable investment.
If NPV > 0, it is profitable and would add value to the company, one would benefit from the investment.
