This course is based on my best selling book MBA ASAP Understanding Corporate Finance. Here are some reviews:
I am a big fan of your books, which make all these difficult topics really easy to understand. This is excellent work.
After reading John Cousins' book I was finally able to understand a subject that has been, for me, very foreign and intimidating. He makes the topic of corporate finance accessible to people like me who need the knowledge but easily get lost "in the weeds". Clear and very easy to digest and apply! Lizabeth
Having read the ’10 minutes to understanding Corporate Finance’ I can honestly say that it comprises a well-structured and straightforward presentation of the core elements of corporate finance. Nikolaos
Corporate Finance is the tools and techniques of how companies make decisions about what projects to pursue, and how to value those projects. This course provides a framework for how financial professionals make decisions about how, when, and where to invest money. Corporate Finance comprises a set of skills that interact with all the aspects of running a business. It is also extremely helpful in our personal lives when making decisions about buying or leasing, borrowing money, and making big purchases. It provides analytic tools to think about getting, spending, and saving. We will explore the time value of money and develop a set of tools for making good financial decisions, tools like Net Present Value and Internal Rate of Return. We will explore the trade off between risk and return, and how to value income producing assets. Valuation of companies and assets can seem mysterious. Where do you even begin? How can you value a startup that doesn’t even have any revenues yet? You will gain confidence in your knowledge and understanding of finance. The tools of corporate finance will help you as a manager or business owner to evaluate performance and make smart decisions about the value of opportunities and which to pursue. An understanding of Corporate Finance is essential for the professional manager in order to meaningfully discuss issues with colleagues and upper management. You need to be versed in this subject in order to climb any corporate ladder. Get started understanding corporate finance today.
Welcome to this course on Corporate Finance! The video lectures are the main part of the course and the book supports the lectures. Download the book provided here and give it a quick peruse. You can follow along in the book with each video segment and the two will reinforce each other and the concepts presented.
This course is part of the MBA ASAP series. I hope you find it valuable, instructive, and enjoyable.
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There are essentially two basic techniques that are used in Corporate Finance. One is the ratio analysis of financial statements and the other is calculating the present value of future cash flows. Bankers, investors, financiers, CFOs and entrepreneurs use these tools and techniques to value assets and make decisions.
In these next three lectures we will look at using financial ratios as a capital budgeting tool. There are lots of different accounting ratios that get used inside of a firm.
By ratio analysis I mean taking two numbers from financial statements and dividing one by the other. What we are doing is taking two pieces of accounting data, put one over the other, and this forms a ratio. We are taking two pieces of data and forming a performance metric. Ratios are usually presented as a percentage or a number depending on whether the usual case is bigger or less than one.
Besides being a capital budgeting tool, ratios allow us to compare different companies or a company over time. Ratios are great tools to do this comparison because they allow us to “normalize” the numbers. A ratio eliminates any size differences and allows for pure comparison so you can compare apples to apples.
Financial ratios are derived from accounting information and rely on an understanding of financial statements. The eBook attached to this section provide a primer on the subject. Download and check out MBA ASAP Understanding Financial Statements before you go through this section of lectures. It will get you up to speed on this critical business skill quickly. Also download and review the attached Financial Statement Glossary of Terms.
You also may want to go through the video lectures on Ratios, then read the book, and then go back through the videos. That way you will know where we are headed with this information.
Financial Statement Analysis and Ratios
Accounting and Finance overlap in this area. The launching place for Corporate Finance is the ability to read and understand Financial Statements. The analysis of financial statements and subsequent assumptions and projections based on that analysis is the next step. Financial Statement Analysis is the process of analyzing a company's financial statements and comparing the analysis across companies and industries in order to make better operating and investing decisions. This analysis method involves specific techniques for evaluating and quantifying risk, performance, financial health, and the future prospects of an enterprise. We can look at the performance of a particular company over time such as year to year results. This is called Horizontal Analysis. And we can look at various performance characteristics within a single time period. This is called Vertical Analysis. We can create metrics across an industry segment as an average value to compare our company against. This is called Benchmarking. We can also aggregate up different industry groups and see how they perform relative to each other. This type of analysis can be helpful in gauging where to allocate investment dollars in a portfolio. It can also be used to see how a management team is performing relative to its competition.
There are two sets of data that we use in corporate finance: retrospective and prospective. Retrospective data is compiled in financial statements. These represent the historical performance of an enterprise and can be analyzed, compared, and extrapolated. Ratios are the tools of financial statement analysis and we just discussed them
Prospective data is compiled in financial projections. These represent management’s forecast of how the enterprise will perform in the future. These projections can be analyzed, risk adjusted, and a present value of those future cash flows can be calculated. We will now get into the forward-looking aspects of finance with the concept of the Time Value of Money (TVM).
Time is money, literally. If there is a prospect of receiving a certain sum, then the sooner you receive it, the more it is worth. Interest rates describe this relationship between present value and future value. This is the fundamental concept of finance. We will explore this relationship between present and future value from different angles and I will phrase it in different ways in order to let it sink in.
TVM represents the conceptual basis of finance. This is the underlying principle of how banks function, how stocks and bonds are priced, how assets and companies are valued, how projects are analyzed, and how you should think about the nature and function of money.
Lets look at the video lectures and explore this concept in more depth.
The concept of the time value of money dates back to the 1500s. Martín de Azpilcueta of the School of Salamanca (December 13, 1491 – June 1, 1586), also known as Doctor Navarrus, was an important Basque theologian, and an early economist and the first person to develop monetarist theory. He invented the mathematical concept of the time value of money. It’s an idea that’s about 500 years old.
The core of corporate finance is calculating the present value of future cash flows. This concept is based on the time value of money. A company is essentially an entity that generates cash flows each year into the future. The trick is estimating those future cash flows and how much they might grow or shrink and what the risks are to realizing (i.e. receiving) them.
It’s difficult to peer into the fog of the future. This is where you have to polish your crystal ball and do some deep analysis of the business, its markets and competitors. All this information is compiled in a spreadsheet of financial projections and the bottom line represents the future cash flows in each year. These are discounted back to the present value at a discount rate that takes into account what similar investments, which are just streams of expected cash flows, are priced at in the market and any and all risks specific to the particular enterprise or asset we are contemplating buying or selling.
This is the basic concept of Valuation. Valuation is an estimate of something’s worth. Something’s worth can be set at auction where people bid and the highest bidder wins. But how do bidders know how much to bid and how much is too much? For income producing assets, like stocks, it’s the present value of the future cash flows.
So far we have analyzed and calculated the value of future cash flows and brought them back to present value. Net Present Value (NPV) takes this idea a step further and accounts for the transactional aspect. We must “purchase” the future cash flows either by:
Net present value “nets out” the cost of acquiring the future cash flows. NPV compares the cost in today’s dollars to the present value of projected income or benefits also in today’s dollars. Its only worth doing if the price is less than our assessment of the future benefits.
The NPV is equal to the initial cost, which has a minus sign in front of it, plus the present value of what's coming in off the project as cash flows. Cash flow in period 1, discounted one period back, plus the cash flow in period two, discounted two periods back, the cash flow in period 3, discounted back three periods, you get the idea, plus all the other cash flows coming in discounted by their period.
What we do is take that initial cost and weigh that against the present value of all the cash coming in. We're going to “net” the two. There's a minus sign on the costs, and plus signs on all of the present value cash flows.
We ask how all the money going out weighs against all the money coming in. Think of it like a balance. If we know the initial investment and the stream of money coming in from the project in the future, we can measure the NPV as the difference between the two; the net between those two streams.
Next we are going to explore using the Internal Rate of Return (IRR) as a capital budgeting tool for deciding how to best to invest and allocate money. Internal rate of return is the discount rate used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. The higher the internal rate of return of a proposed project, the more desirable it is to undertake the project.
The internal rate of return is derivative of NPV. NPV basically tells us whether or not the present value of the cash coming in exceeds the cash going out. NPV calculates the net of the present value of the cash flows. With IRR we come at the issue from a different angle.
Corporations and investors invest in real assets that are intended to be productive in generating income. Some of these assets such as apartment buildings, factories, offices, machinery and computers are tangible. Others such as brand names and patents are intangible.
The decision-making tools of corporate finance assess the value of proposed projects and income producing assets based on the time value of money and its relation to risk. We rank projects based on the present value of their future cash flows. How we do that is called discounted cash flow (DCF) valuation.
Lets take stock of the capital budgeting tools that we've talked about:
CFOs rely on multiple metrics when making capital budgeting decisions. There are pros and cons to IRR, net present value and accounting ratios. What is important to understand is that each one of those data points represents an interesting and informative perspective.
Using a portfolio of different capital budgeting tools helps make for better financial decisions. NPV is the gold standard.
I am the author of Patent It Yourself!, Negotiation Communication Nation, Learn Accounting Fast!, Managing and Leading Organizations and People, Reading and Understanding Financial Statements, MBA ASAP, and nine other books. I am the founder of MBA ASAP which can be found at www.mba-asap.com, an "online business education community" chock full of business skills and knowledge on the web.
Previously, I was CEO of a biotech company developing innovative cancer diagnostics. I took two companies public and I was the CFO of several public companies for 15 years. For the past decade I have also been teaching business classes at a number of universities and colleges.
Writing these books and creating these courses has been a wonderful opportunity to gather and organize my thoughts and experiences and share them. I have an electronics degree from MIT, a BA from Boston University and an MBA from Wharton.