Finance MBA 13.01.2016

Welcome to
Finance
Andreas Bange Diplom Betriebswirt (FH)
+++ MCO 201 +++ Finance +++ Spring 2016 +++
Grading
Breaks
Internet
1. Assignment
Fairness

Cleanliness
2. Presenta8on
Punctuality

A4endance List 3. Final
Instructor reserves the right to make changes
20%
30%
50%
Course Overview
Corporate Finance & the Financial Manger
Finance! What is it?
Individuals are taking charge of their personal nances with

decisions such as:
When to start saving and how much to save for re8rement
Whether a car loan or lease is more advantageous
Whether a par8cular stock is a good investment
How to evaluate the terms of a home mortgage
Finance?
In your Business Career, you may face such ques8ons such as:
Should your rm launch a new product?
Which supplier should your rm choose?
Should your rm produce a part or outsource produc8on?
Should your rm issue new stock or borrow money instead?
How can you raise money for your start-up rm?
Finance?
3 Business Activities
Financing Aktivity
Capital
Borrowed
Capital = Assets
2
Investing Activity
Assets
Making Business
3
Operating Activity
Qwn
Investment & Financing Decisions by the Financial Manger
The 4 Types of Firms
Partnerships
Limited Liability Companies

CorporaCons
Sole Proprietorships
Sole Proprietorships:
StraighQorward and many new businesses use this
organiza8onal form
Principal limita8on is that there is no separa8on between the
rm and the owner
The rm can have only one owner
The owner has unlimited personal liability for any of the rm s
debts
The life of a sole proprietorship is limited to the life of the
owner
It is dicult to transfer ownership of a sole proprietorship
Partnership:
More than one owner
All partners are liable for the rm s debt
A lender can require any partner to repay all the rm s
outstanding debts
The partnership ends on the death or withdrawal of any single
partner
Partners can avoid liquida8on if the partnership agreement
provides for alterna8ves such as a buyout of a deceased or
withdrawn partner
Partnership:
A limited partnership is a partnership with two kinds of
owners, general partners and limited partners
General Partners
Have the same rights and privileges as partners in any
general partnership
Are personally liable for the rm s debt obliga8ons

Limited Partners
Have limited liability and their ownership interest is
transferable
They have no management authority
Limited Liability Companies:

No general partner
All the owners have limited liability, but they can also run the
business
CorporaCons:
A Corpora8on is a legally dened, ar8cial being, separate
from its owners
It has many of the legal powers that people have
It can enter into contracts, acquire assets, incur
obliga8ons, and it enjoys protec8on under the U.S.
Cons8tu8on against the seizure of its property
A corpora8on is solely responsible for its own obliga8ons
The owners of a corpora8on are not liable for any obliga8ons
the corpora8on enters into
The corpora8on is not liable for any personal obliga8ons of its
owners

CorporaCons:
Forma8on of a Corpora8on
Must be legally formed
Must be chartered in the state in which it is incorporated
Corporate charter species the ini8al rules that govern
how the corpora8on is run
More costly than seXng up a sole proprietorship
Ownership of a Corpora8on
No limit on the number of owners
The en8re ownership stake of a corpora8on is divided into
shares known as stock
The collec8on of all the outstanding shares
of a corpora8on is known as the equity of
the corpora8on
CorporaCons:
Ownership of a Corpora8on
No limit on the number of owners
The en8re ownership stake of a corpora8on is divided into
shares known as stock
The collec8on of all the outstanding shares of a corpora8on is
known as the equity of the corpora8on
An owner of a share of stock in the corpora8on
is known as a shareholder, stockholder, or equity holder
Shareholders are en8tled to dividend payments
Usually receive a share of the dividend payments that is
propor8onal to the amount of stock they
own
No limita8on on who can own its stock

Types of U.S. Firms
Investment & Financing Decisions

Common Finance Terminology
Real Assets
Financial Assets
Financial claims to the income generated by the

rm s Real Assets.
Investment Decisions
Purchase of Real Assets.
Financing Decisions
Sale of Financial Assets
Capital BudgeCng Decisions
Assets used to produce goods and services.
Decision to invest in tangible or intangible Assets.

also called the Investment Decision
also called Capital Expenditures or (CAPEX)
Common Finance Terminology

Capital BudgeCng Decisions
Investment
Financing
Liquidity
Choose the
best Projects

Capital Budge8ng
Choose source of
Financing for
Investment

Capital Structure
Ensure to have
enough Cash and
Inventory

Short-Term
Financial Planning
The Balance Sheet Model of the Firm
In June, 2011, Glencore Interna8onal, a global commodi8es and raw

materials rm, announced its nancial results for the rst quarter. In
June 2011, the company had $36.69 billion in tangible non-current
assets and only $150 million in intangible non-current assets. Current
assets amounted to $46.75 billion and current liabili8es (liabili8es
due within one year) were $39.16 billion. Glencore had $20.81 billion
in non-current liabili8es.

What is the Balance Sheet model?
The Capital Structure
Filtronic, the Bri8sh wireless investment rm, raised 1.3 million in

2011 by issuing new shares to investors.
Filtronic could also have borrowed 1.3 million from a bank or issued
bonds worth 1.3 million as debt.
Why did the rm choose to issue new equity?
Clearly the decision was based on what would maximise the value of
the rm and in Filtronic s case, equity was the most sensible op8on.
The share issue followed an annual loss of 7 million in 2011 and a
loss of 1 million in 2010. It would have been excep8onally dicult
to get anyone to lend to the rm aler such poor performance and
so equity shares were the only choice they had.
This is a good 8me to use the internet to see how Filtronic has
performed since the share issue.
The Financial Manager
How Cash Flows
Midland plc is an Irish rm that renes and trades gold.

At the end of the year, it sold 2,500 ounces of gold for
1.67 million. The company had acquired the gold for
1 million at the beginning of the year. The company paid cash for
the gold when it was purchased. Unfortunately it has yet to collect
from the customer to whom the gold was sold.
Accounting Flow
Sales
- Costs
Profit
1.670.000
1.000.000
670.000
Cash Flow
Inflow
o
- Outflow 1.000.000
- 1.000.000
Accoun8ng Flow vs. Cash Flow
The Italian rm, Montana SpA, is anemp8ng to choose between two

proposals for new products. Both proposals will provide addi8onal
cash ows over a four-year period and will ini8ally cost 10,000. The
cash ows from the proposals are as follows:
Year
Which is Best?
1
2
3
4
Total
New
New
Product Product
A
B
0 4,000
0
4,000
0
4,000
20,000
4,000
20,000 16,000
Timing of Cash Flow
The Norwegian rm, Fjell ASA, is considering expanding opera8ons

overseas, and it is evalua8ng the Netherlands and South Africa as possible
sites. The Netherlands is considered to be rela8vely safe, whereas opera8ng
in South Africa is seen as considerably more risky. In both cases the
company would close down opera8ons aler one year.
Aler undertaking a complete nancial analysis, Fjell has come up with
the following cash ows of the alterna8ve plans for expansion under three
scenariospessimis8c, most likely, and op8mis8c:
PessimisCc
Netherlands
South Africa
Most Likely
OpCmisCc
NOK750,000 NOK1,000,000 NOK1,250,000

0 1,500,000 2,000,000
Which is the Best?
The Risk of Cash Flow
The Goal of Financial Management
Maximise Value
of Owners Equity
What are the Financial Markets
Investment
Decision
Financing
Decision
Short-Term
Capital Management
Finance! So What is it?
The Financial Manager has three main tasks:

Make investment decisions
Make nancing decisions
Manage cash ow from opera8ng ac8vi8es
Making Investment Decisions

The Financial Manager must weigh the costs and benets
of each investment or project
They must decide which investments or projects qualify as
good uses of the stockholders money
Making Financing Decisions

The nancial manager must decide whether to raise more
money from new and exis8ng owners by selling more shares
of stock or to borrow the money instead
Managing Short-Term Cash Needs

The nancial manager must ensure that the rm has enough
cash on hand to meet its obliga8ons at each point in 8me
This job is also known as managing working capital
The Goal of the Financial Manager

The overriding goal of nancial management is to maximize
the wealth of the stockholders
Stockholders own the corpora8on but rely on Financial Managers to

ac8vely manage the corpora8on
The Board of Directors and the management team headed by
the CEO possess direct control of the corpora8on
The Corporate Management Team
Board of Directors
A group of people elected by shareholders who have the
ul8mate decision-making authority in the corpora8on
Chief ExecuCve Ocer (CEO)
The person charged with running the corpora8on by
ins8tu8ng the rules and policies set by the
Board of Directors

The Financial Managers Place in the Corpora8on
The Financial Func8on within a Corpora8on
Ethics and Incen8ves in Corpora8ons

Agency Problems
When managers put their own self-interest ahead of the
interests of those shareholders
The CEO s Performance
When the stock performs poorly:
The board of directors might react by replacing the CEO
A corporate raider may ini8ate a hos8le takeover

The Financial Managers Place in the Corpora8on
The Investment Trade-O
Each stockholder wants three things:

To be as rich as possible, that is, to maximize his or her
current wealth.
To transform that wealth into the most desirable 8me
panern of consump8on either by borrowing to spend now
or inves8ng to spend later.
To manage the risk characteris8cs of that consump8on
plan.

Goals of the Corpora8on
Prot maximiza8on is not a well-dened nancial objec8ve, for

at least two reasons:
Maximize prots? Which year s prots? A corpora8on
may be able to increase current prots by cuXng back on
outlays for maintenance or sta training, but that may add
value. Shareholders will not welcome higher short-term
prots if long-term prots are damaged.
A company may be able to increase future prots by
cuXng this year s dividend and inves8ng the freed-up
cash in the rm. That is not in the shareholders best
interest if the company earns less than the opportunity
cost of capital.

Goals of the Corpora8on
Whose Company is It?
** Survey of 378 managers from 5 countries

3
97
17
Germany
83
22
France
United Kingdom
78
29
United States
24
0
The Shareholders
All Stakeholders
20
Japan
71
76
40
60
80
% of responses
100
120
Dividends vs. Jobs
Japan
97
40
Germany
41
France
United Kingdom
Job Security
59
89
89
11
0
Dividends
60
11
United States
** Survey of 399 managers from 5 countries.

Which is more important...jobs or paying dividends?
20
40
60
80
% of responses
100
120
Financial Ins8tu8ons
En88es that provide nancial services, such as taking
deposits, managing investments, brokering nancial
transac8ons, or making loans
The Financial Cycle
1. People invest and save their
money
2. Through loans and stock, that
money ows to companies
who use it to fund growth
through new products,
genera8ng prots and wages
3. The money then ows back
to the savers and investors
Financial InsCtuCons
Financial Ins8tu8ons
Types of Financial Ins8tu8ons
Insurance Companies
Mutual Funds
Pension Funds
Hedge Funds
Venture Capital Funds
Private Equity Funds
Financial conglomerates/nancial services rms combine more

than one type of ins8tu8on

Banks and Credit Unions
Financial Ins8tu8ons and their Role in the Financial Cycle

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Welcome to

+++ MCO 201 +++ Finance +++ Spring 2016 +++

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

Corporate Finance & the Financial Manger

Andreas Bange Diplom Betriebswirt (FH)

Finance! What is it?

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Corporate Finance & the Financial Manger

Individuals are taking charge of their personal nances with

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

Corporate Finance & the Financial Manger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

Corporate Finance & the Financial Manger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

Investment & Financing Decisions by the Financial Manger

The 4 Types of Firms

Limited Liability Companies

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

Corporate Finance & the Financial Manger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Corporate Finance & the Financial Manger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Corporate Finance & the Financial Manger

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Corporate Finance & the Financial Manger

Limited Liability Companies:

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Corporate Finance & the Financial Manger

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Corporate Finance & the Financial Manger

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Corporate Finance & the Financial Manger

Andreas Bange Diplom Betriebswirt (FH)

The 4 Types of Firms

Investment & Financing Decisions by the Financial Manger

Andreas Bange Diplom Betriebswirt (FH)

Types of U.S. Firms

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Investment & Financing Decisions by the Financial Manger

Investment & Financing Decisions

Financial claims to the income generated by the

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)

Assets used to produce goods and services.

Investment & Financing Decisions by the Financial Manger

Investment & Financing Decisions

Decision to invest in tangible or intangible Assets.

+++ MCO 201 +++ Finance +++ Spring 2016 +++

Andreas Bange Diplom Betriebswirt (FH)