Corporate finance

Các chương đã học:

Chap 1: Intro
Chap 2: Financial statement analysis and firm valuation
Chap 3: Capital budgeting
Chap 4: Risk, return, firm cost of capital
Chap 5: Corporate capital structure
Chap 6: Dividend policy

Chap I: Introduction
* 3 main questions
1. Invest what? => Investment decision
2. How to mobilize capital => financing decision
3. How to manage short-term cash flow => working capital management

* Goal of corporate finance

maximize profit + minimize risk
=> Conflict because "High risk, high profit"
Final goal: maximize value.(shareholder's value => increase all stakeholders
value)
(b/c: value of an asset is increasing function of return and decreasing function of
risk)

* Definition of corporate finance

Business disciplines -> value relationship bw corporation and stakeholders.

* Business organizations:
+ Sole proprietorship
+ Partnership
+ Corporation(học corporate finance thì phải biết corporation là gì :3)
owned by stockholders, limited liability
Advantages:
 Limited liability,
 Inexpensive capital available,
 Management expertise not limited to owners (Board of director) =>
separation of ownership and management
 Unlimited life
Disads:
 Complex management structure
 Double taxation(corp pays tax on their profit, shareholders pay tax on
dividend)
* Agency problem:
+Principal: owners
+Agent: manager
=> conflict in interests (E.g: BOD act for their own interests, not maximizing
value of shareholders)
Reasons of separation:
 Large numbers of owners -> who manage?
 Owners -> individual investors, can sell stocks => no longer owner -> who
manage?
 Owners have money but not enough knowledge while BOD: professionals
Solutions:
+ Internal mechanism:

+ External mechanism:
Labor market
Financial market
* Financial markets (FM) and corporate finance:
+ FM provides capital -> financial resource for firm

+ FM increases liquidity

+ FM offers measurement tools

Return:
Market efficiency: Price nearly equals value
=> Stock price measure shareholder's value.
Risk: E.g: hedge against risk: currency contract, payment in 1 month later, -> face
exchange rate risk => go FM to buy an option.

Chap 2: Financial statement analysis and firm valuation

* Financial statements
1. Balance sheet: BS particular date
Công thức huyền thoại ^^
Assets = Liabilities + Stockholder's equity
A L+E
Current assets NWC = Current liabilities
Cash current assets-
Marketable current liabilities
securities (3)
A/R
Inventories
…
Fixed Assets Long-term Long-term Financing (2)
+ Tangible: PP&E investment debt
+ Intangible: (1) Shareholder'
Goodwill, s equity
trademark,…

2. Income statement: IS over a specific period of time

Accounting definition:
Revenue - Expenses = Income
+ GAAP: Generally accepted accounting principles
Phân biệt:
- Matching principal: revenues matched with expenses
- Accrual accounting: revenue is recognized when earned and expenses are
recognized when incurred.

+ Non cash item: Depreciation

+ Time and cost:

3. Cash flow statement: CF

+ CFO
+ CFI
+ CFF
(Nguồn: CFA book 3, study session 8: Cash flow statement)

* Firm valuation: Financial Ratio

 Liquidity
 Long-term Solvency
 Asset management
 Profitability
 Market Value

1. Liquidity ratios
+ Current ratio
+ Quick ratio
+ Cash ratio

2. Long-term debt ratios

+ Total debt ratio
+ Long-term debt ratio
(mẫu: Total Assets)
+ Long-term debt to equity

3. Asset management ratios

+ Total asset turnover: S/A

+ Fixed asset turnover: S/Net fixed Assets

+ Receivable turnover: S/Average receivables

=> Days of sale outstanding: 365/receivable turnover

+ Inventory turnover = COGS/Average inventories

=> Days of inventory on hand = 365/Inventory turnover

Bonus:
Cash conversion cycle = Days of sale outstanding + Days of inventory on hand
- number of days of payables

4. Profitability ratios
+ Net profit margin = NI/revenue
+ Gross profit margin = Gross profit/ revenue
+ Operating margin = operating income/ revenue (EBIT/revenue)
+ ROA = (NI + Interest )/A
+ ROE = NI/Equity
Dupont equation
ROE = net profit margin x total asset turnover x asset/equity(Leverage)
NI/E = ROA x A/E = NI/S x S/A x A/E
(A/E = (D+E)/E = D/E + 1)
5. Market value ratios
+ P/E: Price per share/EPS
+ P/B: Price per share/Book value per share
+ EPS:
Basic EPS: (Net income - preferred dividend)/ Weighted average number of
ordinary shares outstanding
Diluted EPS: Basic EPS x adjusted factor
Dùng khi chia tách cổ phiếu -> cổ phiếu pha loãng
(Phần này hình như thầy bảo ko phải học bởi vì khó)
(Đọc thêm: Book 3, CFA)

* Dividend discount model:

+ Stable growth-> Gordon growth model
Vo = D1/(r-g)
Market efficiency: Po = D1/(r-g)
E.g:
Calculate value of stock paid $2 dividend last year, growth rate: 5% , required return on equity
12%
D1 = D0*(1+g) = 2*1.05=$2.1
Vo = 2.1/ (0.12-0.5) = $30.00

Sustainable growth rate (g) = (1 - dividend payout ratio) x ROE

+ Multistage Dividend Growth model: high growth and then stable growth
(thầy chưa dạy)

Chap 3: Capital budgeting

The process of evaluating and selecting profitable long-term investments
consistent with the firm’s goal of shareholder wealth maximization
Five key principles
1. Decisions are based on cash flows, not accounting income
2. Cash flows are based on opportunity costs:
3. Timing of cash flows are important
4. Cash flows are analyzed on an after tax basis
5. Financing costs are reflected in the project's required rate of return

Investment decision:
+ Payback period:
year before recovery + |CNCF last year| / CF during this year
CNCF: Cumulative net cash flow
+ NPV: positive
Positive NPV project -> increase stock price
+ IRR: > cost of capital
May have no IRR or multiple IRR (unconventional cash flow)
=> MIRR: modified internal rate of return
MIRR = (∑CFi*(1+r)N-1/ I)1/n
ko hiểu phần này lắm, chỉ biết có cái công thức dài dài ở tử là required return (r), ở mẫu là IRR
Biến đổi 1 lúc thì ra cái công thức trên, đành học gạo =))

+ Profitability index: 1 + NPV/CFo

Conflicting profit rankings
Mutually exclusive projects: choose project with highest positive NPV
(Chương này có cái bài tập dài ngoằng gần 2 buổi, mong là ko thi vào :P)

Chap 4: Risk, return, firm cost of capital

(Most important)
1. Return
Return = Profit/ Cost of investment
Return: realized return and expected return

Estimate expected return

+ Direct: look forward to future
+ Indirect: look back into the past
E(rp) = wA* E(rA) + wB* E(rB)

2. Risk: Difference from our expected number

Formula: (xem lại sách xác suất or thống kê)
Mean
Standard deviation
Variance
Cov(A,B)
Correlation coefficient = Cov/ ∂A*∂B
Corr = 1: A and B positively correlated
Corr = -1: A and B negatively correlated

Portfolio Variance = w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cov(RA, RB)

Where: wA and wB  are portfolio weights, σ2(RA) and σ2(RB) are variances and 
Cov(RA, RB) is the covariance 

Efficient frontier: (đường biên hiệu quả) Markowitz

Quan hệ giữa Risk và Return, làm thế nào chọn được optimal portfolio highest
return and lowest risk
theo Markowitz, ko nên vượt quá đường biên hiệu quả

Systematic risk and unsystematic risk

Thầy Dũng: slide page 8
Thầy Hiếu: Ví dụ về đảo chuối và chim
=> specified risk -> diversify portfolio to reduce risk

=> Beta: -> systematic risk

β = Cov(Ri, Rm)/Var Rm

Relationship between Risk and Expected Return (CAPM)

Expected return on an individual security rA = rf + β(rmkt - rf)

Cost of capital:

* After tax cost of debt = kd(1-t)

* kp = Dps/P
* kce
3 cách tính kce
1. CAPM
kce = rf + β(rmkt - rf)
for developing country, add country risk premium CRP

Estimate β
2. DDM
kce = (D1/Po) + g
D1 = Do(1+g)
3. Bond yield plus risk premium

Retained earnings are a component of equity, and therefore the cost of retained

earnings (internal equity) is equal to the cost of equity
(nếu có retained earning tính Weighted average như bình thường)

Capital structure => weight