L1 Intro to Finance

4 Areas of Finance: Corporate, Investments, Financial Institutions, International Finance

Measures of Profit:
o Return on Asset = Net Profit / Total Assets
o Return on Equity = Net Profit / Total Equity
o Price Earnings Ratio = Price Per Share / Earnings Per Share
o Earnings Per Share = Net Profit / Number of Ordinary Shares
Goal: Maximise shareholder wealth through share price / dividends. Wealth = Cash Flow
Factors in any Financial Decision: CASH, TIME, RISK
FM Responsibilities: Investment Decision, Financing Decision, Working Capital Decision
Net Working Capital: Current Assets Current Liabilities
INV Decision: Determine value of long-term asset, evaluate size, time & risk on Cash Flow
FIN Decision: Determine between DEBT (loan) & EQUITY (owner), trade-off risk & return
WC Decision: Managing short-term assets/liabilities. Inventory, Acc. Rec & Pay management
Principal-Agent Problem: Where a person/entity can make a decision that effects another entity
Role of Financial Markets: Facilitates transactions in financial securities, market exist to efficiently
allocate funds for alternative use, brings buyers and sellers together
Earnings Per Share: [(EBIT Interest)(1-tax rate)] / No. of shares
L2 + 3 Time Value of Money
PV, FV = Present/Future Value || i, r = Interest Rate || n, t = no. of Periods || PMT = Periodic Payment
FV = PV + INT || INT = PV * i * n || (Compound) FV = PV (1 + i)
n
|| INT = FV PV || !!!REARRANGE!!!
Effective Annual Rates (EAR) = (1 + i)
m
1 | m = no. of compound periods per year
Terminal Value: The PV in the future of all future cash flow when theres a stable growth rate
Annual Percentage Rate: Compounded more frequently | EAR,EFF,ER = Compounded annually only
EAR = (1+APR/n)
n
-1 | n = no. of compounding period of the APR per EAR period | EAR = (1+i)
m

Annuity: case of multiple case flows, no. of = cash flow at = time intervals, NORMAL = at end of period

()

PMT = Annuity Payment

()

Amortisation Schedule: Beginning Balance, Total Payment, Interest Payment, Principal Payment, End BL
L4 Debt and Valuation
Debt: Contractual rather than residual, Commits Firm to interest/repayment (Not Equity), No Voting
(Equity does), Unpaid debt is liability (Not Equity), Debt is loan repaid in future (Equity not Repayable)
Features: Maturity (Short/Long), Security, Ranking (Subord. Or Senior), Int. Rate (Fixed, Float, Combo),
Repayment Pattern (Int. Only, Principle + Int. capitalised Int.), Currency, Source
Securities: Floating Charge over asset, Mortgage, Specific Charge, + & - covenants, Guarantees
Short-Term Debt: Securities with term <1year, Instant money raise, Bills, Promissory Notes, Overdrafts
Long-Term Debt: Securities with term +1year, Public/Private Funding, Term Loans, Bank Funds, Bonds
Valuing Short-Term Debt: PV = FV / ( 1 + rt), r = interest rate, t = time to maturity (Anything Borrowed)
Valuing a Bond: No. of Periods to maturity, FV, Coupon Payment (CP Rate x FV), Market Interest Rate
Bond Valuation Formula:
()

+ FV(1 + i)
-n

CP PMT: FV x CP Rate / Times Paid per annum | Term = Time for Maturity / Times Paid Out (semi-ann=2)
o If CP PMT > once a year, divide same number for YTM rate before use, n used backwards
Yield to Maturity (i): Discount Rate which equates the PV of all future coupon payments and the FV
with the Market Price. Same as, required return, market yield/rate.
Coupon Rate: Yield paid by a fixed income security. Simply the annual coupon payment related to value.
L5 Equity and Valuation
Equity: Permanent Risk Capital, Most important source of funds, limited liability, residual claim, ASX
Dividends: Distribution of Profit, One type of Shareholder return, Payment at directors whim
Shareholder Rights: Right to receive DIV, Voting Rights, Asset Rights, Participate in Rights Issue
Raising Equity: Primary Issue, Rights issue, Private placement Types: Ordinary Share, Pref. Shares
Primary Issue: Sale of new shares (IPO), Prospectus, Corporate Adviser, Underwriter, apply for listing
o ADV: Access to Cap. Markets, Raise firm profile, market valuation, align MNG & Share H goals
o DIS: Dilute Control, Directors ++ Responsibility, Increased Cost, Demand for Information
Pref. Shares: Pref. treatment for dividends, liquidation, but no voting rights
Rights Issue: Secondary issue of shares to existing shareholders, Buy more shares, in-ratio to no. owned
Rights Valuation: R = N(M-S)/(N+1) | Ex-Rights Share Price: P
x
= M (R/N) or S + R
M = Current Mar. Price, S = Subs. Price of new share, N = No. of current share which allow for new share
Private Placement: Issue share to individual or group, pre-considered to be friendly
o ADV: Easier to do and for smaller amounts, High certainty, low cost, friendly buyer
o DIS: Dilute interest of existing shareholders, can lower share price, cannot place >15%
Current value of a share is PV of all future divided. P
0
= D
1
/(1+r)
1
+ D
2
/(1+r)
2
+ + D
x
(1+r)
x

P
0
= Value of Share at Time 0 (PV) | D
t
= expected dividend payment at period t | r = discount rate (i)
Price Today (D
o
) = D
1
/ [Required Rate (r) Growth Rate (g)] || Price Future = D
t+1
/ (r g) OR P
o
(1+g)
t

Constant Dividend Model: PV = PMT / i / OR For shares, P
o
= D / r | D = value of constant Div (PMT)
Constant Growth Model: P
o
= D
1
/ (r-g) | D
1
is DIV at time 1, g = growth rate, D
1
= D
0
(1+g)
Shifty Shares: Use PV = FV(1+i)
-n
for initial, P
x
= D
x+1
/(r-g) for 1
st
Change, Put it through FV(1+i)
-n
, ADD ALL

L6 Capital Budgeting 1

Accounting Rate of Return: Measure of efficiency/prof, ratio of income to asset,

( )

o ADV: Simple to workout, Profit figures available, considers income for each year of life
o DIS: TVM ignored, Related to net profit not cash flow, Profit dependent on depreciation
Payback Period: Length of time required for INV stream of cash flow to equal INV initial cost
Determined by adding expected CF for each year until it reaches original value
o ADV: Simple, Risk Insight, used as supplementary info, measure of liquidity
o DIS: Ignored cash flow after payback, TVM ignored, Biased against slow projects,
Discounted Payback: Cash Flow converted to present values THEN do payback period
Net Present Value: Present value of all future cash flows discounted at the required rate of return less
the cost of the initial investment. Return = cost of capital, minimum return a firm needs to earn

()

()
()
OR [
()

] (for consistent payments)

NPV Decision Rule: Accept NPV > 0 only, 0 NPV = complete repayment no gain, No Shareholder Wealth
Internal Rate of Return: IRR = required rate that gives 0. NPV = 0, find r, IRR > Discount Rate = Good
Capitol Rationing: Process where limited capital budget is allocated to different projects in a way to
maximise shareholder wealth. Too many projects can be a bad thing, needs Profitability Index.
Profitability Index: Shows relative profitability of project or present value of benefits per dollar of cost
PI = (NPV + initial cost) / initial cost | PI = 1 (Indifferent), PI > 1 (Accept), PI < 1 (Reject)