Introduction

Question 1

Goal of corporate finance

Answer 1

Maximize firm/enterprise value through identifying profitable investment projects, determining optimal financing and liquidity planning

Question 2

What are financial statements and their purpose

Answer 2

Financial statements are firm-issued accounting reports with past performance information, which are a reliable source of information for shareholders and stakeholders of the firm. They are filed with the relevant listing authority and prepared under certain rules and standards (GAAP, IFRS)

Balance sheet / statement of financial positions
Income statement
Statement of Cash flows
Statement of changes in shareholders’ equity

Question 3

Balance sheet and balance sheet equation

Answer 3

A snapshot of the firm’s financial position (assets, liabilities, and shareholders’ equity) at a given point in time

Assets = Liabilities + Shareholders’ equity

Question 4

Assets

Answer 4

Current Assets: cash or expected to be turned into cash in the next year (Cash, marketable securities, accounts receivable, inventories)
Non-current Assets: Assets for long-term use (Net property, plant & equipment (PPE), Goodwill and intangible assets, other nun-current assets)

Question 5

Liabilities

Answer 5

Current liabilities: due to be paid within one year (accounts payable, short-term debt, current maturities of non-current long term debt, taxes payable, wages payable)
Non-current liabilities: to be paid beyond one year (long-term debt, capital leases, deferred taxes)

Question 6

Net working capital

Answer 6

Current assets - current liabilities

Question 7

Shareholders equity

Answer 7

Book value of equity = Book value of assets - book value of liabilities
- could possibly be negative and firm’s valuable assets may not be captured on balance sheet

Market value of equity (market cap) = market price per share x no. of shares outstanding
- cannot be negative
- often differs substantially from book value

Reasons for differences -> accounting

Question 8

Market to book ratio (=P/B ratio, price to book)

Answer 8

Market value of equity / Book value of equity
- value stocks: Low M/B ratios
- growth stocks: high M/B ratios

Question 9

Enterprise value (= Total enterprise value - TEV = EV)

Answer 9

EV = Market value of equity + Net debt (debt - cash)
Net debt = total debt - cash & short-term investments
- value of the firm’s underlying business operations/assets

Question 10

Income statement

Answer 10

Slide 25

Question 11

Net income and Earnings per share

Answer 11

Net income = total earnings of the firm’s equity holders
EPS = Net income / Shares outstanding

Question 12

Statement of cash flows

Answer 12

Record of the sources (+) and uses (-) of the firm’s cash over a given period of time
-> derived from the firm’s income statement and the changes in the firm’s balance sheet

• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities

Question 13

Use of financial ratios

Answer 13

• compare the firm with itself over time
• compare the firm to other similar firms

Question 14

What is the DuPont identity

Answer 14

The DuPont identity further decomposes return on equity (ROE)
- Profitability (= net profit margin)
- asset efficiency (= Asset turnover)
- Leverage (= equity multiplier)