Introduction to Corporate Financ
1. Time Value of Money
Financial sector: commercial banking, investment banking, private equity, venture capital, insurance, consulting, etc
Let me give you an example to emphasize this point (time value). If I have $100.00 today, I can put the money in a savings account at my bank and at the end of one year I will have about $100.01 – sad but true in today’s low interest rate environment. Alternatively, if I put the $100.00 in a stock-based mutual fund – an investment in a large portfolio of stocks – then I will have, on average, approximately $112.00 at the end of the year. (Yes, you don’t really know exactly what you will have in the future and you could lose money but, on average, you will make about 12% per year.)
The implication of these investment opportunities is that $100 today is not the same thing as $100 one year from today because the money received in the future misses out on the investment opportunity. As such, $100 today is worth more than $100 in the future. And, this distinction has nothing to do with inflation.
the return on your investment represents the opportunity cost you face, and the risk of the investment determines the precise cost – low risk, low cost; high risk, high cost.
Intuition and Discounting (backward)
We can't add money with different currency directly, just like we can't add money at different time directly, you need to convert it into same time unit first.
截屏2022-07-06 上午8.50.49.png
R goes by several other names. It goes by a discount rate, a hurdle rate, and opportunity cost of capital. The way to think about R is just to ask yourself, what are the risks, or how risky are the cash flows that I'm going to be discounting here?
截屏2022-07-06 上午8.52.26.png
Add money at the 0 point, you need to convert them to day 0 and then add it. Move CFs back in time today.
截屏2022-07-06 上午8.56.36.png
截屏2022-07-06 上午9.00.20.png
Compounding (forwarding)
call back
截屏2022-07-06 上午9.05.44.png
截屏2022-07-06 上午9.07.03.png
Shortcuts Calculate methods
shortcut
shortcut
截屏2022-07-06 下午7.17.20.png
截屏2022-07-06 下午7.20.24.png
Taxes
截屏2022-07-07 上午7.35.51.png
截屏2022-07-07 上午7.37.17.png
截屏2022-07-07 上午7.40.08.png
2. Interest Rates
Inflation
What inflation is going to do is it's going to affect what we can buy with the money we're pulling out.
截屏2022-07-07 上午9.17.26.png
Withdraw calculation: (CF each year)
截屏2022-07-07 上午9.22.43.png
If we want our withdrawal increase with inflation:
截屏2022-07-07 下午12.07.29.png
APR and EAR
截屏2022-07-07 下午12.16.00.png
截屏2022-07-07 下午12.16.38.png
The EAR is what matters for computing interest and discounting cash flows. The APR is not a discount rate, it's a means to an end.
截屏2022-07-07 下午12.18.25.png
K, that's just the number of compounding periods per year. So imagine we had monthly compounding, that would imply k = 12. How about semi-annual? That would imply k = 2.
I is the periodic interest rate or the periodic discount rate and that = APR over k.
截屏2022-07-07 下午12.23.58.png
截屏2022-07-07 下午12.25.29.png
Summary
Term Structure
the term structure is nothing more than the relation between the investment term and the interest rate. The yield curve is just a graph of that relation.
截屏2022-07-07 下午12.35.04.png
截屏2022-07-07 下午12.38.29.png
Yields vary by maturity (term) and risk:
截屏2022-07-07 下午12.43.41.png
Now all of these interest rates that we've discussed thus far are referred to as spot rates. And what are spot rates? They're the interest rate for a loan that's made today. Now typically there's a different spot rate for loans of different maturities and different risks.
截屏2022-07-07 下午12.50.37.png
Discounted Cash Flow: Decision Making
截屏2022-07-07 下午1.55.05.png
3. Discounted Cash Flow Analysis
FCF - Free Cash Flow
截屏2022-07-07 下午10.55.52.png
自由现金流量，就是企业产生的、在满足了再投资需要之后剩余的现金流量，这部分现金流量是在不影响公司持续发展的前提下可供分配给企业资本供应者的最大现金额。
FCF - free cash flow
截屏2022-07-07 下午11.19.40.png
FCFF和FCFE的区别是：前者只是公司股权拥有者（股东）可分配的最大自由现金额，后者是公司股东及债权人可供分配的最大自由现金额。
截屏2022-07-07 下午11.26.12.png
Depreciation: add back because deduction before tax, and there are not actual cash reduction.
Capital Expenditures: investment
Strategic decisions are going to affect our market share and our revenue. They're going to affect our cost, our investment decisions, right? Investment decisions, our operations, inventory, and the like. All of these strategic decisions are going to impact our unlevered free cash flow.
Financing decisions are going to impact our leverage choice, the after-tax interest expense, the net borrowing.
Forecast Drivers
Forecast Drivers are the assumptions used to populate our free cash flow forecasts.
截屏2022-07-08 上午7.27.58.png
截屏2022-07-08 上午7.29.50.png
截屏2022-07-08 上午7.30.52.png
截屏2022-07-08 上午7.32.03.png
截屏2022-07-08 上午7.34.12.png
Forecasting Free Cash Flow
截屏2022-07-08 上午7.45.43.png
截屏2022-07-08 上午7.50.35.png
截屏2022-07-08 上午7.55.22.png
建议下载阅读：
https://www.coursera.org/learn/wharton-finance/supplement/zvEXK/tablet-case-spreadsheet
4. Discounted Cash Flow Analysis and ROI
Decision Criteria
截屏2022-07-09 上午7.03.44.png
NPV: convert to current value and sum it. (assume R is 12%)
折现率(discount rate) : 折现率是指将未来有限期预期收益折算成现值的比率。
截屏2022-07-09 上午7.09.07.png
What that means is that firm value, debt plus equity, is going to increase by $708.42 million in expectation if the project is undertaken. That's what the NPV Rule tells us. It says accept all projects with a positive NPV, reject all projects with a negative NPV.
截屏2022-07-09 上午7.16.30.png
截屏2022-07-09 上午7.17.19.png
- IRR and yield: （refer https://zhuanlan.zhihu.com/p/154032597）
前面讲NPV时说了NPV为0的情况，当累计NPV等于0时的折现率或收益率就是内部收益率IRR，是投资者可接受的最小收益率。 在这个收益率下，投资者不亏不赚，货币得到保值。
既然IRR是NPV为0的收益率，那么IRR有可比性吗，IRR高或低有什么不一样，不都是赚不到钱？如果IRR小于通胀或者一些其他投资产品的IRR，那么其他你去买其他产品的的风险更小。
而 Yield，所谓到期收益，是指持有到偿还期所获得的收益，包括到期的全部利息和证券本身的市场溢价。又称最终收益率，即投资者获得的未来现金流量的现值等于当前市价的贴现率。它相当于投资者按照当前市场价格购买并且一直持有到满期时可以获得的年平均收益率。
And so what the IRR Rule says is accept all projects whose IRR is greater than R, and reject all projects whose IRR is less than R, where R is our hurdle rate.
截屏2022-07-09 上午7.28.29.png
R is estimate one, so if it fall in the range before IRR, the project is acceptable.
Payback period, which is the duration or the time until the cumulative free cash flows turn positive. but it's ignoring the time value of money and risk of cash flows, the first sin that we learned way back at the start of the course.
the payback period rule, it says accept all projects with payback periods less than the threshold, reject all projects with payback periods greater than that threshold.
The discounted payback period of a project is just the duration until the cumulative discounted free cash flows turn positive.
This is helpless for us to choose between several prjs with same payback period. so payback period has some shortcomings.
Sensitivity Analysis
Break even analysis finds the parameter value that sets the NPV of the project equal to zero holding fixed all other parameters.
break even analysis I think is a useful tool for gauging how much room we have one dimension at a time before the project becomes value destructive. (but it only change one param at a time, that maybe not reasonable)
Comparative statics are going to quantify the sensitivity of the valuation to variation in a parameter holding fixed all other parameters.
截屏2022-07-09 上午8.06.15.png
截屏2022-07-09 上午8.08.30.png
截屏2022-07-09 上午8.09.28.png
Comparative statics implicitly assume parameters are independent of one another.
What scenario analysis is going to do, it's going to quantify the sensitivity of the valuation to variation along multiple dimensions.
We can answer some important questions that are going to come up in discussions. Here's one for example. Imagine strategy wants to reduce the price by $30. In order to increase the initial market penetration from 25% to 30% by their estimates. Does this make sense?
Simulation Analysis, we're going to perform the valuation for a large number of scenarios. A whole bunch of different parameter values.
截屏2022-07-09 上午8.18.25.png
Return on Investment
Can we compare projects using NPV or IRR?
截屏2022-07-09 上午9.01.31.png
these two prjs are diff at loan. The first plan, 100 will be charged at the first year, but the other one charge 20 the first year, and 35 each year after.
截屏2022-07-09 上午9.02.47.png
Well, it's terrible. Cisco's charging us a higher interest rate than our cost of capital. In other words, we can go to the capital markets and raise the money for a loan at 12%, as opposed to implicitly borrow from Cisco at 15.
Cisco is lending us money at an interest rate that's greater than our cost of capital. So the IRR spiked because we have this smaller up front investment.
IRR projects can mislead when we're deciding among projects.
NPV will not mislead in comparisons. The larger the NPV, the greater the value.
截屏2022-07-09 下午8.07.17.png
