Finance (Basic)
Ludek Benada
Department of Finance
Office 533
75970@mail.muni.cz

Corporate Finance
Corporation – Stock holders
q Closely held
q Public Companies

Financial Manager
q The role of FM:
»Investment decision
»Financing decision
q FM is a person responsible for a significant investment or financing decision

Senior Financial managers in large corporations
Chief Financial Officer
(CFO)
Treasurer
Controller

Flow of Cash between FMs and the Firm's Operations
Firm's
Operations
(a bundle
 of real
assets)
Financial
Markets
(investors
holding
financial
assets)
Financial
manager
3
2
1
4a
4b
1...
2...
3...
4a...
4a...

The main objective of Financial Management
..to maximize the Shareholders Value!


The Financing Decision
Capital structure:
ØEquity (stock, re)
ØDebt (loan, bond, rd)
ØHybrid securities

The Optimal Capital Structure
q MM (irrelevance of CS)
q Trade-off theory (tax benefit,               bankruptcy costs)
q Pecking order theory (priority in capital sources)

WACC



The Dividend Policy
q Free Cash Flow (surplus cash)
q Dividend Clienteles (different client preferences)
q Information Signaling (future development)

Working Capital Policy



Working Capital Management
qCash Management
q
qInventory Management
q
qDebtor Management
q
qShort-term Financing

The Investment Decision
Capital allocation
Estimating Value of Project
(Future CF)
Capital Budgeting

Project Valuation
DCF            PV             NPV


Other Methods for Valuating a Project
The Payback Period
IRR
MIRR

Example for valuating a project
Decide which project is preferable for investors.
The initial costs of investment for the project A are $ 90,000.00, and in the fourth year it is
required to pay the repairing costs of $ 30,000.00. Project implementation is planned for five
years with the generation of the following cash flows after one year: $ 10,000.00, $ 17,000.00, $
34,000.00, $ 41,000.00, $ 38,000.00. All cash flows are definite. Furthermore, it is known, that
the price of the foreign capital is 6%, and shareholders require interest at minimal rate of 7,5%.
The total debt is up to 70% in the capital structure.
The project B has the following structure of investments: $ 10,000.00 as initial costs and
$2,000.00 as annual additional costs. Estimated life of the project is 3 years. Project might
generate different payoff: $ 2,000.00, $ 3,000.00, $ 7,000.00 with 30% probability, $ 4,000.00, $
6,000.00, $ 9,000.00 with 50% probability, and $ 5,000.00, $7,000.00, $ 10,000.00 with 20%
probability.
The inclusion of income tax (15%) into the calculations is required.

Thank you for your attention