Finance & Financial Management

Lecture 1

Introduction

Brahim Saadouni

Lecture slides are based on the textbook and accompanying slides of

Hillier, Ross, Westerfield, Jaffe, and Jordan “Corporate Finance”.
European Edition, 3rd Edition, McGraw-Hill, 2016, (Copyright © The
McGraw-Hill Companies 2016)
Introduction
What is Corporate Finance-Financial
Overview of Lecture
Management?
The Balance Sheet
Overview
Model
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the Firm

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 Example
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• In June, 2011, Glencore International, a global
commodities and raw materials firm, announced its
financial results for the first 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 liabilities (liabilities due
within one year) were $39.16 billion. Glencore had
$20.81 billion in non-current liabilities.

• What is the Balance Sheet model?

Example
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Capital
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Structure
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 TheOverview
Firm as a Pie
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Value of Firm = Value of Bonds + Value of Shares

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 Example
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• Filtronic, the British wireless investment firm, 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 firm choose to issue new equity?
• Clearly the decision was based on what would maximise the
value of the firm and in Filtronic’s case, equity was the most
sensible option. The share issue followed an annual loss of £7
million in 2011 and a loss of £1 million in 2010. It would have
been exceptionally difficult to get anyone to lend to the firm
after such poor performance and so equity shares were the
only choice they had.
• This is a good time to use the internet to see how Filtronic has
performed since the share issue.
The Financial
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HowOverview
Cash Flows…
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 AccountingOverview
Flow vs Cash
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Flow

Midland plc is an Irish firm that refines 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 vs Cash Flow

Accounting Flow Cash Flow

The Midland plc The Midland plc
Accounting View Financial View
Income Statement Income Statement
Year End December 31 Year Ended December 31

Sales €1,670,000
Cash inflow € 0
Costs €1,000,000 Cash outflow -€1,000,000
Profit € 670,000 €1,000,000
 Timing of Cash Flows

The Italian firm, Montana SpA, is attempting to choose

between two proposals for new products. Both proposals
will provide additional cash flows over a four-year period
and will initially cost €10,000. The cash flows from the
proposals are as follows:
Year New New
Product A Product B

1 € 0 € 4,000
2 0 4,000
Which is Best? 3 0 4,000
4 20,000 4,000
Total €20,000 €16,000
 The Risk
Overview
of Cash of
Flows
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The Norwegian firm, Fjell ASA, is considering

expanding operations overseas, and it is evaluating
the Netherlands and South Africa as possible sites.
The Netherlands is considered to be relatively safe,
whereas operating in South Africa is seen as
considerably more risky. In both cases the company
would close down operations after one year.
After undertaking a complete financial analysis, Fjell
has come up with the following cash flows of the
alternative plans for expansion under three
scenarios—pessimistic, most likely, and optimistic:
 The Risk of Cash Flows

Pessimistic Most Likely Optimistic

Netherlands NOK750,000 NOK1,000,000 NOK1,250,000

South Africa 0 1,500,000 2,000,000

Which is the Best?

The Goal of Financial Management
What are the Financial Markets
How Overview
Markets Work
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Primary vsOverview
SecondaryofMarkets
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Primary Markets Secondary Markets

Corporate and
Overview
FinancialofRegulators
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Examples Overview
of Stock Exchanges
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Stock Exchanges
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around
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World
European Firm
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Characteristics
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Corporate Finance
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in Action:
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Google
So What
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is Finance?
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