Finance Foundations

Explore the balance sheet, income statement, and statement of cash flows to see assets, earnings, and cash movements; learn how borrowing, owner investments, and retained profits fund asset purchases.

Explore how financial statements, including the balance sheet, income statement, and cash flows, support decision making through asset, liability, and earnings analysis, cash flow insights, basic ratios, and forecasting.

Learn how the statement of cash flows tracks cash inflows and outflows across operating, investing, and financing activities, including CapEx and free cash flow, illustrated by Walmart's 2023 cash flow.

Explore key financial ratios, including the debt ratio (total liabilities over total assets) and the current ratio (current assets over current liabilities), illustrated with Walmart.

Understand how the price-earnings ratio measures a company's value of current earnings and signals expected future growth. Compare Walmart and Target examples to see valuations and growth expectations.

Forecast financial statements using the accounting structure to assess future financing needs, including borrowing, new investments, and cash, inventory, and payables growth tied to sales.

Adidas's 130-day operating cycle spans 80 days in inventory and 50 days to collect cash. Burger King processes a seven-day cycle with instant cash collection.

Manage the operational cycle from inventory procurement on credit through inventory management and receivables to ensure timely cash collection and seamless inventory to cash flow.

Master cash management by balancing reserves with obligations, using a cash budget to forecast inflows and outflows and secure lines of credit for future needs.

Balance receivables and inventory by weighing credit sales against bad debts, bookkeeping costs, and tied-up funds, while applying the Goldilocks principle to meet demand.

Explore the link between risk and return by examining airline industry uncertainties, from pandemics to fuel swings, and show how higher risk demands higher expected returns.

Identify risk as the uncertainty of future outcomes across investments, hires, and projects, and examine price, credit, interest rate, exchange rate, cash flow risks, with insurance supporting mitigation.

Explore why people avoid risk and demand higher returns, compare banks, corporate bonds, and stock index funds, and understand how higher risk yields higher expected returns.

Examine the capital asset pricing model and beta, showing how systematic risk cannot be diversified away and how beta measures a stock's market sensitivity, including cash with beta zero.

Define the risk-free rate as the combination of the time value of money and expected inflation, which varies over time and across countries, averaging about 5% historically.

Explore the equity risk premium within the capital asset pricing model, showing that stocks yield about 11% while the risk-free rate is 5%, making the premium about 6%.

Explore the capital asset pricing model (CAPM) by showing how the risk free rate and equity risk premium, scaled by beta, determine the required return for Ford and Walmart investments.

Explore long term financing, including owner investment and long term loans, and how capital structure affects value. Analyze Modigliani and Miller theorem and real world frictions, taxes, and leverage trade-offs.

Identify how tax rates, collateral quality, and cash flow stability shape the optimal capital structure and borrowing decisions for firms, illustrated by Walmart and Google.

Grasp how the cost of capital, including debt costs and equity costs from the capital asset pricing model, shapes profitability. Compare Sebastian's 100% debt and 100% equity cases.

Compute the weighted average cost of capital by weighting the cost of debt and cost of equity; a 50/50 mix yields 10%, the minimum return required by investors and lenders.