MBA ASAP Corporate Finance Fundamentals
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- 15 downloadable resources
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- Certificate of Completion
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- 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.
You will be able to use these tools and calculations to value assets and make financial decisions relative to investing and allocating money and resources to the best projects.
What Will I Learn Analyze and understand an income statement (even if you have no experience with income statements). Analyze and understand a balance sheet (even if you have no experience with balance sheets). Analyze and understand a cash flow statement (even if you have no experience with cash flow statements). Understand the Financial Concepts of: Time Value of Money Interest Rates and Discount Rates Financial Risk Present Value Future Value Discounting Cash Flows (DCF) Valuation Understand the gold standard financial decision-making tools: Net Present Value (NPV) Internal Rate of Return (IRR)
- There are no prerequisites for this course. If you are able to take this online course then by definition you have enough facility with computers to understand the material. We will talk conceptually about the core concepts and tools of finance and start from square one so you don’t need any prior knowledge of experience. To begin, I recommend taking a few minutes to explore the course site and get a feel for the material we’ll cover in each section
- Learn the main concepts and tools of Corporate Finance by an Award Winning MBA Professor, business consultant and MBA Graduate of the Ivy League Wharton School at the University of Pennsylvania; 15 year experience as a Public Company CFO.
Learn how to raise money and invest it wisely. Learn how to analyze and value companies and income producing assets. Make better business decisions and support them with financial analysis and rationale.
Corporate Finance is the Tools and Techniques of how Companies Make Decisions about what Projects to Pursue, and how to Value those Projects.
- Time Value of Money
- Present Value and Future Value
- Net Present Value
- Internal Rate of Return
Ever wonder how the top executives at your company got there and what they think about?
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.
Content and Overview
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 these concepts.
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.
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. Adnan
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
- Anyone interested in learning a skillset that will make you more valuable at your job, help you start something on the side, or let you quit your job and start your own business.
- If you are thinking about an MBA or are enrolled in a program and are preparing to take accounting and finance courses, this course will prepare you for excelling in your program.
- Why take this finance course? Understand the Numbers side of Business Financial Literacy Matters Senior executives routinely share and discuss financial data with marketing directors, operations chiefs, and other direct reports. But how much do those managers really understand about finance and the numbers? A recent investigation into this question concluded most managers understand not enough to be useful. Asked to take a basic financial-literacy exam—a test that any CEO or junior finance person should easily ace—a representative sample of U.S. managers from C-level executives to supervisors scored an average of only 38%. Lack of financial literacy matters and impacts an organizations ability to optimally perform. Those who can’t speak the language of business can’t contribute much to a discussion of performance and are unlikely to advance in the hierarchy or reach their full potential. Does a lack of financial literacy matter? From a managers’ point of view, it surely does. Those who can’t speak the language of business can’t contribute much to a discussion of performance and are unlikely to advance in the hierarchy. They may get caught off guard by financial shenanigans, as many employees at Enron were. They also are unable to gauge the health of a prospective or current employer. The CFO of a small manufacturing company often asks candidates for engineering positions whether they would like to review the past two years of the company’s financials. None yet have taken him up on the offer—knowing, perhaps, that they could make neither head nor tail of the statements. People don’t tell their bosses that they don’t speak finance. It’s the usual human reluctance to admit ignorance. In a survey managers were asked what happens in meetings when people don’t understand financial data. The majority chose answers reflecting that reluctance, such as “Most people don’t ask because they don’t want to appear uninformed in front of their boss or peers.” Don’t let this be you. Take this course and understand Corporate Finance.
- • Anyone interested in how accounting works (no prior accounting experience is needed). • Anyone interested in how finance works (no prior finance experience is needed). • Anyone interested in how financial modeling works (no prior modeling experience is needed). • Anyone interested in how valuation works (no prior valuation experience is needed). • Anyone interested in how financial ratios work (no prior financial ratios experience is needed). • Anyone interested in understanding the Time Value of Money, and interest rates. (no prior knowledge required) • Anyone interested in finally understanding DCF, NPV and IRR with no prior knowledge required.
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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The Big Picture of Financial Statements
The three Financial Statements: Balance Sheet, Income Statement, and Cash Flow Statement, are interconnected and the accounting numbers flow through them. They are the measure of a company’s performance and health.
The basic interconnection starts with a Balance Sheet showing the financial position at the beginning of the period (usually a year); next you have the Income Statement that shows the operations during the year period, and then a balance Sheet at the end of the year.
The Cash Flow is necessary to reconcile the cash position starting from the Net Income number at the bottom of the Income Statement. The cash number calculated from the Cash Flow Statement is added to the cash reported on the beginning Balance Sheet. This number needs to match the actual cash in the bank at the end of the period and is used as the Cash account balance at the top right (Asset column) of the end of year (EOY) Balance Sheet.
The Net Income number from the Income Statement is then added to the Retained Earnings number in the Equity section (lower left hand side) of the end of year (EOY) Balance Sheet.
Changes in non-cash accounts like Accounts Receivable and Accounts Payable and Depreciation and Amortization will make up the difference between the Cash Flow number added on the right side of the Balance Sheet and the Net Income number added on the left hand side.
When this is done correctly, all the numbers should reconcile and the Assets will be equal to the Liabilities and Equity (remember the Accounting Equation A = L + E) of the EOY Balance Sheet.
Financial Statement Interconnections and Flow
Think of it as a system of two Balance Sheets acting as bookends for the Income Statement. And the Cash Flow Statement used to reconcile the Net Income (or Loss) at the bottom of the Income Statement with the amount of cash actually in the bank. This process accounts for every penny that has come in, gone through, and gone out of a company during the period.
Understanding these three financial statements and how they knit together will allow you to assess the financial health, viability and prospects of any company, and help you make rational fact-based investment decisions. This is how Warren Buffett does it.
This post ties together the functionality of the financial statements. I hope this might be an “aha” moment for you. It was for me when I finally realized how this all fit and worked together. This is the basis of Financial Literacy and Capitalism. Understanding this conceptual big picture of accounting will provide a context to keep you from ever getting lost in the details.
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.
In this lecture I show you a spreadsheet with Financial Statements and we calculate and discuss financial ratios. Download the spreadsheet in order to get better insight into the calculations and how financial statements interconnect and flow.
Horizontal and Vertical Analysis
Horizontal analysis compares financial information over time, typically from past financial statements such as the income statement. When comparing this past information we look for variations of particular line items such as higher or lower earnings, sales revenues, or particular expenses. Horizontal analysis is used to look for trends that can be extrapolated in order to predict future performance.
Vertical analysis is a proportional analysis performed on financial statements. It is ratio analysis. Line items of interest on the financial statement are listed as a percentage of another line item. For example, on an income statement each line item will be listed as a percentage of Sales.
Financial ratios are powerful tools used to assess company upside, downside, and risk. There are four main categories of ratios: liquidity ratios, profitability ratios, activity ratios and leverage ratios. These are typically analyzed over time and across competitors in an industry. Using ratios “normalizes” the numbers so you can compare companies in apples-to-apples terms.
Liquidity and Solvency
Solvency and liquidity are both refer to a company’s financial health and viability. Solvency refers to an enterprise's capacity to meet its long-term financial commitments. Liquidity refers to an enterprise’s ability to pay short-term obligations. Liquidity is also a measure of how quickly assets can be sold to raise cash.
A solvent company is one that owns more than it owes. It has a positive net worth and is carrying a manageable debt load. A company with adequate liquidity may have enough cash available to pay its bills, but may still be heading for financial disaster down the road. In this case a company meets liquidity standards but is not solvent. Healthy companies are both solvent and possess adequate liquidity.
Liquidity ratios are used to determine whether a company has enough current asset capacity to pay its bills and meet its obligations in the foreseeable future (current liabilities). Solvency ratios are a measure of how quickly a company can turn its assets into cash if it experiences financial difficulties or is threatened with bankruptcy. Both measure different aspects of if, and how long, a company can pay its bills and remain in business.
The current ratio and the quick ratio are two common liquidity ratios. The current ratio is current assets/current liabilities and measures how much liquidity (cash) is available to address current liabilities (bills and other obligations). The quick ratio is (current assets – inventories) / current liabilities. The quick ratio measures a company’s ability to meet its short-term obligations based on its most liquid assets, and therefore excludes inventories from its current assets. It is also known as the “acid-test ratio.”
The solvency ratio is used to examine the ability of a business to meet its long-term obligations. Lenders and bankers most commonly use the solvency ratio because they are most concerned about their ability to get paid back any money they lend. The ratio compares cash flows to liabilities. The solvency ratio calculation involves the following steps:
All non-cash expenses are added back to after-tax net income. This approximates the amount of cash flow generated by the business. You can find the numbers to add back in the Operations section of the Cash Flow Statement.
Add together all short-term and long-term obligations. This is the Total Liabilities number on the Balance Sheet. Then divide the estimated cash flow figure by the liabilities total.
The formula for the ratio is:
(Net after-tax income + Non-cash expenses)/(Short-term liabilities + Long-term liabilities)
A higher percentage indicates an increased ability to support the liabilities of a business over the long-term. Acceptable solvency ratios vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy.
Remember that estimations made over a long term are inherently inaccurate. There are many variables that can impact the ability to pay over the long term. Using any ratio to estimate solvency needs to be taken with a grain of salt.
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:
- Buying a bond or stock, or
- Acquiring a company, or
- Purchasing an income-producing asset, or
- Undertaking a project and incurring the costs of developing or building the income-producing asset.
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:
- Net present value
- Accounting ratios
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.