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Corporate Finance (Subject) / Introduction to Corporate Finance (Lesson)

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• Purpose of Financial Statements Provide Information about: financial position performance changes in financial position for: making economic decisions  Requirements: understandable relevant reliable comparable
• Recipients of Financial statements Owners (shareholder) and manager prospective investors financial institutions (EZB etc) employees regulatory institutions (BaFin etc.)
• Goal of Financial Management = maximize the market value of the existing owners equity (shareholder value)
• Three Dimensions of market value maximization Investment Decision → invest in assets that > minimum acdeptable hurdle rate (required return) Financial Decision → find the right kind of debt and the right mix of debt and equity to fund the operations Dividend Decision → decide the payout ratio and retention ratio your earnings or pay as dividends to owners
• Payout Ratio = depends on investment opportunities and owners dividens policy Erklärung: Auschüttungsquote der Dividende im Verhältnis zum Gewinn Bsp: 1 Mio Gewinn, 350TEUR ausgeschüttet, Payout Ratio = 35%
• Retention Ratio = depends on potiential investment opportunities 1- Payout Ratio = amout which is not paid out in dividends
• Return (Rendite) = reflects magnitude and timing of cash flows
• Hurdle Rate = reflects riskiness and leverage of investment. (Gewinnschwelle)
• NPV (Net Present Value) = ∑ CF (t) / (1+i)t CF = Cash Flow > 0, investement good!
• Stockholders vs. Bondholders Bondholders receive a fixed interest payment Equity holders receive CF after interest is paid Bankruptcy: Bondholders Equity holders (after all others)
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• Stockholders vs. Managers Stockholders are interested in long term investments with less risk Managers are interested in short-term goals (high-risk)
• Managers/Stockholders vs. Society Managers/Stockholders = maximize shareholder value Society = maximize economic welfare
• Goodwill Difference between payment after companies sell and balance sheet Example: Balance Sheet Value 10 Mio €, Payment 11 Mio €, Goodwill = 1 Mio € = for Name of company, trade marks, patents ...
• Current Assets expected to turn into cash within < 1 Year or consumed during a normal operating cycle Cash and equivalents (liquide Mittel) marketable securities short term receivables inventories prepaid expenses accounts receivables deferred tax assets
• Fixed Assets Economic life > 1 Year acquired for use in operations not for resale to customers securties pension funds
• Current liabilities due within 1 year "short-term debts accouts payable bank overdraft accurals (Rückstellungen) taxes due dividends proposed
• Long term liabilities not due within the next year Long-term loans Bonds Obligations under Leases deferred taxes
• Common stock portion of a companys equity (book value) that has been obtained by trading stock to a shareholder
• Retained earnings Net Income that was not paid out as dividends (compare return ratio)
• EBITA = Earnings before interest, taxes, depreciation and amortisation EBITA: Net Sales  - cost of good sold - selling and marketing cost - general and administrative costs - research and development costs = EBITA
• EBIT = Earnings before interest and taxes = Operating Income = EBITA - depreciation/amortisation and impairment losses on fixed assets = EBIT
• EBT = Earnings before taxes = EBIT - financial expense net of financial income (Zinsen) = EBT
• Net Income  EBT - corporate income taxes = Net Income
• Retained Earnings Net Income - Dividends
• Cash-Flow Statement how is cash generated from assets and how it is paid to providers of equity and debt
• Accounting Statement (within Cash-Flow Statement) Operating activities  = net income and changes in most current accounts investment activities  = changes in fixed assets Financing activities  = changes in notes payable, long term liablities, equity accounts and dividends
• NWC = Net working Capital Current Assets - Current Liabilities
• Income Statement Scheme - Measures Performance over Period Sales - COGS - Admin Expenses ( Marketing, salaries etc) - Depreciation = EBIT - Interest Expenses = EBT - Taxes = Net Income
• EPS = Earnings per Share = Net Income / Shares outstanding
• DPS - Dividends per Share = Dividends / Shares outstanding
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• Total Cash Flow (TCF) = Free Cash Flow (FCF) OCF - Capital Spending - Additions to NWC (Vergleich 2010 - 2011 zb) = Total Cash Flow
• EBITDA = EBIT + Depreciation and Amortisation adds back two non Cash Items, better measure

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