Principles of Finance

Session 1
• Introduction to Corporate Finance
• Financial Statements, Taxes, and Cash Flow
 1. GRADING

• UTS = 35%
• UAS = 35%

Agenda
• Kat = 30%

Perkuliahan 2. Home Works

• Due date of Home wprks should be on time

3. Groups
Will be announced next week.
 Materi Perkuliahan-RWJ

• 1. Introduction to Finance Chapter 1 & 2

• 2. Working With Financial Statements – Chapter 3
• 3. Long-Term Financial Planning and Growth – Chapter 4
• 4. Intro To Valuation: Time Value of Money – Chapter 5
• 5. Discounted Cash Flow Valuation – Chapter 6
• 6. Bond Valuation – Chapter 7
• 7. Stock Valuation – Chapter 8
• 8. Mid Semester Test: 30 soal (10 calculation, 20 theory)
60 menit
 Materi Perkuliahan

• 9. Managing Personal Finance: Financial Planning, etc

• 10. Net Present Value Decision – Chapter 9
• 11. Making Capital Decisions – Chapter 10
• 12. Project Analysis and Valuation – Chapter 11
• 13. Short-term Finance and Planning – Chapter 18/19
• 14. Credit and Inventory Management – Chapter 20
• 15. Quiz and Summary/Riview – Week 9 to 14
• 16. Final Examination - Essay
 Introduction to Corporate Finance, p-2

• Key Concepts

• Financial Management Decisions and Role of the

Financial Manager
• Objective of Financial Management
• Agency Problem
 Financial Management Decision, p-2/3

• Capital budgeting
• What long-term investments or projects should the
business take on?
• Capital structure
▪ How should we pay for our assets?
▪ Should we use debt or equity?
• Working capital management
▪ How do we manage the day-to-day finances of the
firm?
 Financial Manager, p-2/3
• Financial managers try to answer some or all of these questions
• The top financial manager within a firm is usually the Chief
Financial Officer (CFO)
 Treasurer – oversees cash management, credit management,
capital expenditures, and financial planning
 Controller – oversees taxes, cost accounting, financial
accounting and data processing
 Goal of Financial Management, p-8.
• What should be the goal of a corporation?
 Maximize profit? Short-run or long-run? Accounting profits or
cash flows?
 Minimize costs? Withhold purchasing?
 Maximize market share?
 Maximize the current value of the company’s stock?

• Does this mean we should do anything and everything to

maximize owner wealth?
 Agency Problem, p-10
• Agency relationship
 Principal hires an agent to represent his/her interests
 Stockholders (principals) hire managers (agents) to run the
company

• Agency problem
 Conflict of interest between principal and agent

• Management goals and agency costs

Chapter 2: Financial and taxes; Key Concepts and Skills
• Know the difference between book value and market value

• Know the difference between accounting income and cash flow

• Know the difference between average and marginal tax rates

• Know how to determine a firm’s cash flow from its financial

statements

2-10
Copyright © 2016 by McGraw-Hill Education. All rights reserved
 Balance Sheet, p-20
• The balance sheet is a snapshot of the firm’s assets and
liabilities at a given point in time

• Assets are listed in order of decreasing liquidity

 Ease of conversion to cash
 Without significant loss of value

• Balance Sheet Identity

 Assets = Liabilities + Stockholders’ Equity

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The Balance Sheet
Figure 2.1, p-20

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 Net Working Capital and Liquidity, p-21
• Net Working Capital
 = Current Assets – Current Liabilities
 Positive when the cash that will be received over the next 12
months exceeds the cash that will be paid out
 Usually positive in a healthy firm

• Liquidity
 Ability to convert to cash quickly without a significant loss in value
 Liquid firms are less likely to experience financial distress
 But liquid assets typically earn a lower return
 Trade-off to find balance between liquid and illiquid assets

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ASIA-PACIFIC Corporation Balance Sheet

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 Market Value vs. Book Value, p-23
• The balance sheet provides the book value of the assets,
liabilities, and equity.

• Market value is the price at which the assets, liabilities, or

equity can actually be bought or sold.

• Market value and book value are often very different. Why?

• Which is more important to the decision-making process?

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 Income Statement, p-24
• The income statement is more like a video of the firm’s
operations for a specified period of time.

• You generally report revenues first and then deduct any

expenses for the period

• Matching principle – GAAP says to show revenue when it

accrues and match the expenses required to generate the
revenue

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ASIA-PACIFIC Corporation Income Statement –
Table 2.2, p-25

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 Taxes, p-27
• The one thing we can rely on with taxes is that they are
always changing

• Marginal vs. average tax rates

 Marginal tax rate – the percentage
paid on the next dollar earned
 Average tax rate – the tax bill/taxable income
 Average tax rates vary widely across different companies and
industries

• Other taxes

2-18
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 The Concept of Cash Flow, p-30
• Cash flow is one of the most important pieces of
information that a financial manager can derive from
financial statements.

• The statement of cash flows does not provide us with the

same information that we are looking at here.

• We will look at how cash is generated from utilizing assets

and how it is paid to those that finance the purchase of the
assets

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Cash Flow Summary - Table 2.6, p-34

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