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Corporate Finance

Hoorcollege 1

A______L
FCF | E + D
|

 FCF = Free cash flows

Value of a company (Vc)

𝐹𝐶𝐹𝑡
𝑉𝑐 = ∑
(1 + 𝑊𝐴𝐶𝐶)𝑡
With,

WACC = E/(E+D)*Re + D/(D+E)*Rd *(1-p)

Buisness
 FCFt
 Asset/Buisness Risk + Financial risk
o Equity risk    Re
o Credit risk  Spread  Rd
 Re +Rd = WACC

Profitibility analysis
Valuation is relative to other company’s
Different Ratio’s

Working capital = the money that is needed in the period between payment to supplier and
client pays. Net working capital is linked to cash conversion cycle.

Risk reduction by AH trough not having inventory  negative cash conversion cycle.

Supply chain finance


If company’s have difficulties funding themselves, they have to lower their assets
 This is why the companies have increased days outstanding
 Case 1: supply chain gives them advantage
Days payment outstanding is increasing  Due to supply chain finance
Hoorcollege 2
Sides HC 1/WK1

Supply chain finance,


BUYER  SUPPLIER
BIG company (has easy access to capital market)  Poor company (difficult access capital
market)

Supplier gives invoice  buyer  invoice send the same day to the bank  bank pays
supplier cash, but with a discount because it is immediate.

For instance, the discount is 2% and this will go to the bank and is waiting for the invoice of
BIG company which gets extended by 3 months and thus gives even more profit to BIG
company because he can lend for “free”.

Why is everyone happy?


Supplier: gets money directly and financially restricted so they like it.
Buyer: want lower working capital  NWC. Has power and thus can push their decision
through.
Bank: gets their 2%

 Big company has way less interest costs because they are so big and thus does not mind.
 IS not recognized as a loan only as accounts payable.

Liquidity management
Match funding, conservative finance.
For smaller companies, the high risk they take is compensated by conservative finance.\\

Correction working capital  acc resc + inv + cash + acc pay + ST debt / total assets
If you leave short term debt and cash out of the working capital, you get a more clear and
‘true’ working capital.

Accounts receivable and accounts payable are stickier and can’t be corrected through
normal companies. In slides (week 1) the improvements come from inventories.

 Why do companies have cash on the balance sheet?


Motives: Transaction, precaution, financing (facebook for instance because they want to buy
other companies like whatsapp for instance), self-interest motive (agency costs) (play save
and be a lazy manager & low problems), speculation
If companies more restrictive and small, then more cash due to precaution.

Setting up a cash budget

Cash income – cash outflow – inv CG = FCF => Change in cash balance
 In opdracht rekening houden dat de cash payments en cash income geshift moeten
worden want invoice is niet gelijk

Long-term financing need  Conservative financing is costly because you finance when you
don’t need money.

Hoorcollege 2
Topic 2

- MM = m and miller
- Why does book equity go down?
- Cash and book equity are very close related
o Shows in the regression coefficient of 0,86
Book equity goes down and debt increases which is logical
 Debt increases because it is cheaper to lend nowadays.

Hoorcollege 4
Topic 2

Pecking order

 What is the financing need?

Market timing (1)

Low b/m ratio  growth  issue


High B/m Ratio  no growth  repurchase

High beta vs. low beta


High beta stocks issue more? What could be the story?
High beta
- Business risk is higher  less financing so  issue more
- More volatile  less loans  issue more

Practical view: not one theory