rere TereeeEEEEES Session-4 What is Finance ? prt & Science Of Managing money. >) What is corporate Finance ? = Is not Just an oxtension of accounting A | ok Corpora Rev oo ° Finance is forward Qooking Cost go (80) — talks about cash flow ~Gh- 20 | -80 Definition :- ~ Planning , xeaising , Controlling & ocministering funds used in corpordle business Gckivity CE ig aligned with each segment of businese furetions (yaekeding , 2¢eounting, Hee Finandal View of a firm's balance sheet eee Y \ Asget 4 —) Liabilities ames ane L Pepe Growth Debt. Equity One of the direction is Cash, 1f company grows excess cash & it isa ope > Growth Company — Cosy grows continuouc hy Markel Valu to Book Value — A growing dyend (in this dubia 1s a sign oft groutCon porate Finan Principles © Big Picture thy iv Financing Dividerd Liqualy ‘nein Decisions Decisions fae eis Wee sede < Rede of Returner | fox investment 40 be Leesible (Financing ) Rate of raising captah 7 Rote f Return, project should not be executed . Risk. Return Analysis e Coofficient of vaidation is used as a porameta. Higher value > the project is rnone Sucreative B Project finandng is costlier than Corporate Financing, Twestenent__ 1) Whak business te growth rate is appropnidte 2) What assets to cquixe ? Financing © optimal mix of dobt a equily Dividers s- © Growth compony don't dedow dividends & ingtead Jedeploy the generted —Tf opporturily 4o deploy cach is not there , it should be givento investors cash Liquidity 1. @ Level Inventory G Debtors conversion cycle should be sina ponies blockage of funds in CA without compromising profitability@ by inouasing Shou pric , maxi mization of wealth fox investors . Eq: Buy back - Shores Time vil / —, OF money, ( Rick g ) Ss Retur ) ~ (oer Finan a Twa Leverage & ‘ats © Carning opany/ Primmoy Market Players a | pee | corns | [sav Site sme ||. “~___Tivestor 2 | Inst aan \ | NN npital > — Thvestor 3 Capital — Forms of Business - — a « Prope tethip Poseknaxships Corporation (Focus in cunt Risk Vey high) Ri . Cowre isk vou high L ( oahah) Limited Liability (se, Ple , Luc) 4 | Toingt Stock, CompanyCLE x Coxpoxate Organogram a oo ee | YChoirman of bond | \ jmp QM i | ay CFo GM Marketing Production God of Financial Management Tee aa ‘ie 2(2 ja [5 8 \io| zo] 5 | 5 [o| ~~ Bete 1—_t Pe AS Cach tn iret year can be redeployed “Time value OF Money ® Why money has time value ? — Due to inflation sdsks @ Cowrage — Ttrincic Value, Prosent value , Fuku Value , Annuity“pond & Equity Valuation; ~ (st of Cota: Asse _+— Y ot Wet Debt Equity Wet abt “1 of Equily Cet 9D TX cat of iy ¢ at of “Copitel Risk Return @ Factors affecting the Stock Price ~ Dividends — Tayes Finance Life Cyde of Business Maturity Seals 1 Decline X Growth / | \ J \ sate Z| ns ~ ? aSession 2 2(spo, al { ‘Tite VALUE OF MONEY Asse. — which gives you a series of Cosh Flow _py Stoo oo > i , FVe AVX Futue Wa oY =Pvx (Leryn : (a, Fve Pv (tte)" Py aves pve) EV (ery py “the Guar Fader) Fuluxe Value Annuity (FvA) Discuniy ay of 2 3 y . Twestment at the end of Poriod a oo 400 © 100 400 loo | | L L | " t*) Loo(te)* foo(ea)? sole? Loo(it) a“ Sums PVA Future Value of! Annuity Due (Fvan) . 5 ° poe ea s Twettmet at the baginning of Pood } 4 yt to L iv Lfopeyt |. doolve) ‘e0() foo(te)® Loo(tey]? —Sum= FVAD |Fuap > evn] ae+——1 nm Annuity (PVA) fue OL Annu Present Vue of Rrnulty a ore tov 4100 400 400 oo - _) hae A b+ VA = 100 oo + 100 4 400 4“tnp dtr er? Cite)? ten Gres ——A pci val of Pity Du (AD) ot * 3 Y H+ +—+— en , FoRMULAES 10001000 Fv= pv (atvy" Pye Ev (re? = 50 Mn xX 05158 =25+79 My a) S5oMn x A Fun = put (eo! Yr . (tong) b) PV amount = Exhibit 4 factor Xx FV amounts icnout gee eee FVAD = PMT wale Exhibit 4 Padiorc t ie 25-79 Mn = FV amount ee ee 2690 |pva = put (ets. ] ee ¥ (itr), FV anurts = [9587360 | PvAD = BMT (00. a) t ln hes ys s- oe es Fukise Value Amount Savings ak he ond of yee be Tt Neve Ch + 3 CR ke bo 4uvare fhe p00 $40}000 ¢ is) wu Gxt hf = 40,000 X PVIFA | nr4o = Yo,000 %89384y > $ 335360‘ 2 eo @) Ke 1 ) 46,000 48,000 | = 4s,000 X PVIFA | = 48,000 x 7.360 | | = $ 353280 - ve 2 4 5 6 1 8 9 wy in &) H+ +--+ — Foe © 5e,000 50,000. mae 50,000 30,000. =. Sn», Lo _ | , 7 v = 50,000 x 4.9)7 + 30,000 X 4.917 _ —~____ = tu 7519 = $2use50 4 4 447540 x0+7050 = $ 349g4q.5 ver Qucett:- > zu y G) Equipment Cost = $45,000 At Tnowsse in Sales (Annually) = § 8000 Total Present Value = R000 X 5.147 = 4 45976 Makes sense to Purcu as saving of $976 After ™ bu = 5900 $00 geg9 - b) oO 42°93 4 6 ! H+ a Gino Bom Bow Bim 000 Tax Guvings 360» 0 3600 3600 S600 | (du-to Depreciatcn) | So Prasert Value = U@00X 5147 + 3600 % 3.993 =$ 275856 + $ 1u3Ty.g = $ 44960- Not worthwhile To buy 24 Lu pment | pesca -, aofe220 00 8s: te+—_+_ +4 ————_+ o 12 3 4 5S 1... .- 1o ; ~ $220,000. - . . $220,000 $ 220,000 a Dep QbMn - - -. O6Mn 40:6 Mn / Cot OA My ~~ Mn $ OL Mn om 024mm 0-24 Mn ‘Varseing 4-432-an0 ee Net Cach Flow =$2.72,000 — - - q'272,000 eee {a Sig + Bins ps a = CORE) Tax Soving = (220,000 — 100000) X06 = 72000 Dep. Tax Saving = 240,000 Total Saving = $ $12,000 frusnt Value = § 212,000 X 6-70 = 4 2099505 J Lees than cot , $0 doesn't make songe to investQ|40| 2049 dessin - 5 _, The Buy vs Rent Decicion G Buying — Forced Saving Mortgage Dou Palma - 2074 (0 BOr/, v ome Je [eo A % A K i) a > Monkgage Paymunt (curunt case) So Due Diligence (Vou cationy Thdion Financing Seenaxto Mortgage. en Payment - 205 . ee ea —T a F Ne — : 4 Ligh Raty ; Due Diligence | 4 High Reb Us| confide Scenario Annual Thieect Role (an) = 4 y, Annual, Effective Tntoust Rabe (AeiR) = (u xy 7 n Monthly Effective Tntevet Rae (MEIR) = (t+ 5) May a a— Compounding frequencya e fox. cwweent Cae NER = (tt wVyoy 200 MER = (4+ 4. \%2 200 ~ Seenartios Atle. 2 = Ao yys Fixed Priv @ | Aoy. Oniginal tot 8 | 2h 2/ 5) SY Bis Purchase Price - 600,000 Down Payment. @ 201. - 420,000 Deed Ta @ 3 — — 48,000 Othex closing Expenses. - 2,000 Total closing Expenses - 440,000 Mortage Tenure (Yrs) - 25 Frequuncy in Year ie Rarmaning Months of Payment - 300 Mortagage Amount - 480,000 Annual Quoted TR — 0-04 MIER - [( oven) ”42 -| = 1003306 z Condo feos (Monthly) — 1055 = Propody Tax (Monthly) - 308Maintenance Expenses (Monthly) = 50 Total Monthly Fayment (Mortgage) OF To make value it ie oa = PMT (4 mo of Periods 5 Pv, 0,0) u Total Payment (‘lading Ofer Expense = 3929.90 = 2524.90 Monthly Rent = 3000 (tontiy) Additional Payment = 3929.90 - 2000 (Monthy) Opportunity Logs = heoen (Monitiy) Not Gach Outflow = 4399.72 23 20 Principle Outstanding tis aie = 929.99 (5 V2 N30 “PMT (4% 300, 420000 140) = PV(5e, period Sernaining _ rmonthy payment 0,0) | = 4eeeog Scenmrio 1 Atle 2 yrg SP 600,00 Mig ato Other Expenses 2009 Principal uttondag 45 ¢6oq Niet Procoods 144394 4iTe59 5 Ws 600,000 30,000 2000 417859 15014) 342109 do ys 600,000 30, 00d 2000 By2409 225891 dSDown Rayment — 1.4, ovo 140, v0 140,000 Opportunity Loss 34727. 42 92254,04 20U722 +9 ?-FV (tc, thuestment Us Period. 7 Net Cosh 4 aby?) Net Futw Valu - 63337 -goa49 (Wel Procoeds ~ Down Payment = ogee) —4Ageay # Not a profitable invectment, instead she is making a Joss Ned Psrocent Value —5e513 61265 79970 =-PV (se, No of podok , EY (es tema 2 110) Cconario2 4 Loge in this Case abso SwnorioS ! - s nao 4 3- She ctarts making profit for Syrs, oye CaseSession-4 Scho} 2a Bony VALUATION —Fixed Tneome security Face Value : Coupon —» Eq: 40° of FV anaren (@ Face value) 100 Loo 100 a So ° \ a S Loy v=5+f, t=2 yrs PV of Bond = ‘Noo 4 400 AMO (40-08) (440:05)" (4 40-05)? = too, Loo it 400 + Av00 (lt0v05) Cr008) Cl+0-05)% (440.05) = 1126.40 — Mowe than FU , Sold at promium On = Coupon Value x [ar] ee Fae Value Ctr)” PV of orl = Coupon Valu XA eV ier (yt (utr)? Equivalent Excel Formula :- price (Seltlement , Maturity , hale, Yield, Redenpt) iP Bond ic cold at value lower than FU, sold at dicount| Vrewe deate of interest ie Lower than coupon tale, go bond ie sold at promi # if redle of ntexext is higher than coupon nate, bond ts sold at discount | Carn) = (44x) (+i) dine Att ata nt he 1 +t aa 4— Fisher's Theory of Reol Tntorest 4 \ Rick Promium Rate Nominal Real ite Tnfotionany Trios of Rate Tntoredt — °xpectations re vF+ IR RP ee Rick Free Rake fe Exel code to Calculate Yied r- Yield (Settlement, maturity cole, PY, xedamption , Prequency basis) Diffownt Bonds in Market :- 4) Zero Coupon 2) Tntornational Bonds (To raise money in Poraign market ) 3) Kanga roo Bonds Redemption = Faco volun ok the end of the poriodSession - 5 24/20)2019 ALIBABA's BOND DILEMMA I Bo B | Vision s- Bac | — @ To do business oasily any whore. Coc | @ To be an ecsonticl Poctror do all the businese People @ build a Company that Lacts fon to2 years ("osm reg B28, Bre, Cac ~ Cerhaes ) Or a 7H Domestic S (Henwfade | \ 4 ~_-/_4+———— > 7 FFakc | | Buyere ES _ >is) eet oo Ciel RAs [Retail ——t- i a Lestowe} GG P28, Bat, cae Alibeba is facilitating the ‘trade by Providing the Ginkages # Migned the viston with the businese model- Why US ? Why China ? @ Low Tntorest Environment, Undervalued Yuan over valued + 8 $ Proceeds Quantitative Easing :- Grovt buys the toxic ascels & ‘infuses the cash to boost the economy Managed load Exchange ;- The restriction for (luckuakion exchange Fuiles within a cortain band Pixed by govecnments Primary Market Syndicated Loans: - | - Secondary Maxkeh, Pa 2 6 {Corporation | ca Lead Bank, ——S > ar Doos Due Diligence \tw3 Canstituted differant cunancte s Bonds are cheepex than syndicated Voans dua Ao fied take @ interact offered Consoretiury loans ‘involves bank of same Cubrency —— Risk homo Vind = Rick Pees Seale + Risk Premium 0 Business Risk | ® Financial Risk wv @ Governane Risk v @) Country ab ~mL % ©) Fonex Risk ae © Clientele Risk v # DUAL SHARE STRUCTURE Share A Shore + 4 vote Shae B : teh ! Lo vote © Disproportiondle shone holding structwee Bond Life Cyde —— = “Thvectment Bank | ( fea Dealer — Alibaba. T Cae ™—— [Bee | (vt Prdmary Market Secondary Markel Nahe | Bond Thdent Standard Rechricted | Provieh Provision Yovision — Maintain accounts — Maintain Liquidity. — Submit Accounts Guertody bacis — Should not cell ractevables ~ Fay tr & other Voki find, —— Restriction on acsets punch — Maintain ascet purchase through ~ Collateral neode to be define! | bonds in propor order ClearlySpread - Represents dusk Pramium Higher Spread => Higher Risk Premium e-Bay > 0557 Baidu —> 1.265 Avage 0-94 Yi Bettor Seating , ted = ReR + RP) co BP will be ALighy low = 452 + 08 Seas Yield = (52 4 0:9} Yield »- (2-32 - 243) 2043 + Tf the Trechment bank fails to sell all the bonds , then it detwuns rumaining bond 40 Company => But takes a hit on reputationSession - 6 23|t0}2049 ‘ STOCK VALUATION - Efficient Market Hypothesis '- Traders axe well informed , Steck Pres ty] ~ Stock prices follow "Random Walk’ Model | - Tf thew is anamely fn the maxket , it can be oxploited , | “Thea form of Market Hypothesis a a) Weak Fox Sewi-strong Strong foxm Price te ~ Public Tnformation — Private. + - eae hie, Vohone Public Tao + Price Volume eb, — Fain Prie > tock Price, Undervalued! > Buy — Fain Pri £ Qhock. Price , Ovowalued > Sell ~Dividend:. Th ic vardable @Shorchollr recive jeecidual Paveningc Stock Vavuation Moves ;- © Dividend Diccount Madef ~FCEF Fcre © Relative Valuation Method ® Asset Value Method Many tines undermines the stock valu « # Wherever calculating stock Price, Use 2-3 methode,(ay) (Aty) ne5y, 105 Los P, = 40 4 loo = 104.76 105 4-05 not . yor m yer» =z De + Py tal = D, ae a5 te Ds ( Infinite) Car}? Clery pwidend Discount Model Accumption ~ 1) Company gives a fixed amount of Dividend A) Infinite Portod © Uf it ic growing ak a role of g Po = a + DCs) 4 Dray a (ite) “(tas)>& (ltr) = De + Do(') + Delta) (ara) Potter = Doty g Pox —= Bet hrg =p, 5g Fox this model to woxk , aa © rf growing ok sete i, (ty) Clar)* fo = Py (ia) - Dd, (+9) Ye Pog - fo - hy = Dot Dog Po= -Do (4+4) 4-¥ 1 for nm yeas Bg, for next all yous, Me Do + Dolira) 4. do (I49)2 + ( fenepeuity ) \txr City? Cav) Example te Do= ts 4rtO% | d= 51 abterwards | ove dsy. pal 5 | 2014 SC) / (45) S are i HUN/ (es = Lay 201% 15 (44)? /(s)3 = hay et ae US (ap (hoe) | ta J OIS-005 = 20.96Po = UA + 20:96 = Gy) +13-78 = 17-89 15)3 Free CASH FLOW EVALUATION MobeL Four methods to caleulate :. NI (Net Tneome EB\TDA | CEO NT + Nee (+) we Nee + Tnt (tt) + Gtl-) Fer N¢C- Non Cash Charges * Seo PPt Example Common Stock Valuation by PE yeatio :- PIE Patio is a feelative model © Volw of Common stack = Appropridke PIE vatio x Estima. Earnings Por share for Year t s (Average of other. Companies) @ Value of Common stock = Total Ascot Total Liability ——— 7 No of ¢& Shae outstanding(Common Stock Valuation :- LV value a, ® Valuing Prefered Stock, Value of Prefowed Stack = Annual Prefomed cteck Disideng SE Sto, DivideSession -7 28|40 [2049 Risk ® RETURN Retwn = Capital gain or Doss from an investment @) Stock t me = a+ lo = 5. +104. fete Pe lop t DY CG ald a Yield Gain Oy) (ca) ») Machine. Tnvestment, B Jon 2018 20,000 (Po) 4.2000 Cash Gain 800 (Cash) 1700 Dec 34,2018 24500 (84) 11500 : at 2500. «100 1100 x 100 + 500 y Ing Pogo 12000 )2000 = Ah 41547, = Ape = 5) A (nfs) B (Gold) c (Tes) Pensays Osa F058 aBy. 297. 137, 1g 7, 15. 457 45+. 4s} ay). WW. AT Aoy,Avegye 15 45). ssf; A5Sy ~ o 2 8 2 8 H Goo is to gal maximum xeturn with ow risk Shanpe Ratio = — v- vp dye tisk fre rote | L, senses dusk adjusted Frlwuy “ Highe the rwtio, betor the xelworg © A & 5Or of A&B both ve 41]. 134, tay. 15+] 134. | Sp aay 134, ASy, at ep | [7 a). A2-/, | Xa = J 13 13 Tr= 2 2 0 i | # A&B have perfect negative conralation of -1 > O Hisk Prom comb d # Duxing diversification , you need 4o find funds which are neqad ively conned | (oR) 6 —~ Total Risk = Diversifiable Risk + Non-diversi ible Risk | (way 0 Twa perfectly Markel | mimicking portfolio 92" Ruccel 2000 Trex" aes"at Risk fro rate also changes with time Higher Tf fakion => Higher Risk Frat Rake » Fractional Tategration G Total Risk Diversifiable Risk= 0 se aaa, i nnn a 500 NOR — Systematic Risk (8) DR—> Unsystematic Risk (By Investing in maxkek , We diversify the visks) B— Covey) = Cov i,m) — © oc Sg Q = Cov(ism) e an "aaeet > covlim = Qin.n, -© Substitike b in a B= Qviem = Qe; Tim Fm Qe Q > Conrelation Gn po high , high tusk,1, Aggressive Beta (High Risk) Bet , Market Portfolio B <0, Raogessive Beta (Low Risk) B 20 —» Dimes risky as thet of market ~2:0 —> (-) times thed of the marke 20 Lo we 0 Maxket scisk premfum rho |-ve ~2:0|-ve ——t BEE BOK) | Bro, Treasury Bills Jy = ut +(@) Jeim= Sent 4 tp [= ) 4 Risk Premium Anfletion Poni ¢— Altace all the accels unify we aim (Security Maxket Line ) |So when Country is in Wor Om Leader dies , Xn f