Finance

Page history last edited by Brian D Butler 6 mos ago

Table of Contents:

What is the cost of different capital sources:
1. Subordinated Mezzanine Debt:
Managerial finance decisions to make:
Uses of Financing
Key issues in Finance:
Financial Markets
Corporate Finance
Financial Statement Analysis
International Finance
1. Benchmark interest rates
Other great sources of info from the Web
1. Finance
2. Concepts to consider
Financial Services Industry
Finance
Investing
1. Valuation
2. Investment Analysis
Corporate Finance (raising money)
1. Fund Raising
  1. Debt Financing
  2. Equity Financing
2. Internal Financing
International Finance
1. Benchmark interest rates
Financial Analysis
Accounting
1. Management / Cost Accounting
2. Choosing an Accountant
Links

What is the cost of different capital sources:

The rate of return that an equity investors expects is (of course) higher than that of a debt financer. This makes sense: a banker that lends you money under strict terms, and expects payments every month in interest (perhaps with assets such as inventory as security) should feel safer, and demand less of a return on his investment than an equity investor that will only profit if the business is a success.

Based on this logic: equity capital should be the most "expensive", and debt capital should be the least expensive, as shown here:

Subordinated Mezzanine Debt:

see info here:

subordinated mezzanine debt

see our discussion on mezzanine debt and WACC (weighted average cost of capital) for more info

Managerial finance decisions to make:

1. What long term investments should the company pursue? (capital budgeting decision)

2. How can cash be raised for these investments? (capital structure decision for a firm.

3. How much short-term cash does the company need to pay its bills? (net working capital decision)

Uses of Financing

Whether your goal is a management buyout, growth financing, recapitalization, or a turnaround, our Uses of Financing section can start you on the right path. It explains the basics of common corporate transactions and the types of financing associated with each, describes the team you'll need to assemble and the best approaches to take to execute your strategy.

Acquisition Financing

One of the most powerful ways to propel your company's growth, leapfrog your competition and enhance the value of your company is to make a series of acquisitions. To accomplish this, you must have in place a team of professionals and financing sources that will move rapidly and aggressively to support your acquisition strategy.

Employee Buyout

Increasingly, employees have come to expect ownership of the company for which they work. Employees are able to team up with private equity investors to buy their company. These employee buyouts have substantial tax and cash flow benefits that can make a mediocre company fast-growing and highly competitive.

Use our employee buyout section if you are an owner interested in selling your company to your employees or if you are an employee and want to buy your company.

ESOP Financing

Countless studies have shown that employee ownership motivates employees to improve productivity, the quality of their work and the competitiveness of their company. It also lowers a company's corporate taxes. Learn more in our ESOP financing section.

Growth Financing

The most common use of financing is to fund a company's growth. Whether the need is to fund construction of a new facility, to increase working capital or to finance a new product line, American Capital can help you to determine the optimal capital structure and provide appropriate financing.

Management Buyout

Managers often team up with private equity investors to purchase an entire company, a subsidiary, a division or a product line. Often, a combination of debt and equity financing is used. If you are interested in selling your company to your managers, or if you are a manager interested in pursuing a buyout, please enter our Management Buyout section.

Recapitalization

Occasionally, a private business will have several owners, and one or more may want to sell a portion or all of his or her stock. The remaining owners will have to come up with the money needed to buy out their co-owner. If the funds aren't readily available, a recapitalization of the company will be necessary. Regional banks--the primary source of financing to small and midsize companies--typically won't extend a business loan for a recapitalization.

Rollups

A rollup is a strategy of buying several companies in one industry at once or in rapid succession to gain a variety of advantages for your business, such as economies of scale, a broader product line and customer base, and cheaper access to capital. Rollups tend to be complicated transactions and should be implemented by an experienced team of financial professionals.

Turnarounds

A turnaround entails the purchase of a company that is in bankruptcy or has had an extended run of poor performance. Financing these companies often includes senior and subordinated debt and equity. It is also common for a new management team to be hired at or about the time of the change in ownership.

Key issues in Finance:

Timing of Cash Flows

One of the key concepts of finance is that cash today is worth more than cash tomorrow. This is because cash today could be invested and grown to more cash tomorrow. Also, its becasue there is no risk in having cash today, but a cash flow tomorrow has some risk (perhaps the person wont pay, or maybe the money wont be worth anything tomorrow?).

When valuing a project (or a company), it is important to look at the value of their expected cash flows.

Investing

see our page on "investing" and asset management

Investment Analysis

net present value

payback period

average accounting return

IRR Internal Rate of Return

profitability index

Valuation

valuing a firm

Valuation Estimator - excellent for high tech startups

business valuation

Business valuation methods

Angel investor valuation method:

Venture Capital Method of Valuation

Financial Markets

Corporate Finance

Most corporations are organized with a CFO (chief financial officer) who supervises two distinct areas:

1. Treasurer - who manages the cash flows, approves capital expenditure plans, and makes overall financial plans for the firm

(a) cash manager (net working capital decisions),

(b) credit manager,

(d) financial planning

2. Controller - who manages the accounting functions, including taxes, cost and financial accounting, and information systems.

(a) cost accounting manager,

(b) tax manager,

(d) data processing manager

In addition, the CFO will need to lead the financial strategy for the firm. They will need to be good at understanding venture capital and Mergers and Acquisitions activity. The CFO is in charge of managing the risks of the firm, including interest rate risks, liquidity risks, and currency exchange risks. When dealing with shareholders, and stakeholders, the CFO will need to be a clear communicator.

How the corporate finance departments create value for a firm

1. By investing in projects that create cash flows greater than they cost, and

2. By selling bonds and stocks that raise more money than they cost

Corporate firm, and why it exists

The corporation is one way of organizing people to complete complex tasks. One of the main functions and reasons for organizing people into corporations is to raise money. A company that is structured as a corporation has a large advantage in that it can easily raise large amounts of money by issuing shares of equity. There are, however, many other types of organizations that we discuss in Business Forms and Structures.

While looking at the corporation, one key issue that arises is that of control, and how to make sure that corporate officers are acting in the best interests of the owners of the firm. This separation of ownership and management gives corporations an advantage over other structures, but it also raises some very important conflicts of interest between shareholders and managers of corporations. Some of these issues arise because shareholders want the value of the firm to increase, and the stock price to rise, but the managers of the firm may be more concerned about increasing their own personal salaries, or job security. The potential conflict of interest between owners and shareholders is a major concern for investors in a firm.

Fund Raising

raising money

Sources of funding for a business

Debt Financing

bond valuation - using NPV

Equity Financing

equity (stock)

Internal Financing

Factoring - accounts receivable financing

Working Capital

Financial Statement Analysis

financial statement analysis

If accounting is about making the financial statements, then finance is about analyzing them. In this way, Finance and Accounting are very similar topics, but seen from different perspectives.

International Finance

Currency

Carry Trade

Eurobond

International Finance markets

FDI - Foreign Direct Investment

global macro hedge funds

macro economics - national & international level (fiscal & monetary policy)

Microfinance

Benchmark interest rates

LIBOR - London Interbank Offered Rate

prime rate- Wall Street Journal prime rate

federal funds rate

Fed discount rate

FOMC

Other great sources of info from the Web

Finance

As per Professor Damodaran of NYU, all of finance can be divided into three main areas. The first is corporate finance, which is the study of how businesses should make financial decisions. It covers the spectrum from making investment choices, to assessing the right mix of debt and equity to use to how much a firm should return to its owners. The second is valuation, which is the analysis of how the decisions a firm make get reflected in its overall value. The third is portfolio management, where investors try to pit their estimates of value against the market, hoping to win. Since my classes, books, papers and spreadsheets are built around these three areas, you can get to any of them from this section:

Topic	Introduction	More detail	Classes	Books	Spreadsheets
Corporate Finance	What is it? Podcast Getting Started	Detail	Full Semester MBA Executive Version	Corporate Finance Applied Corporate Finance	Spreadsheets
Valuation	What is it? Podcast Getting Started	Detail	Full Semester MBA Executive Version	Damodaran on Valuation Investment Valuation The Dark Side of Valuation	Spreadsheets
Portfolio Management	What is it? Podcast Getting Started	Detail	MBA Class	Investment Management Investment Philosophies Investment Fables

Concepts to consider

external links

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U.S. Economic Cycles - Economic cycles, sometimes referred to as business cycles, are the fluctuations in economic activity that occur in any developed economy. Theoretically, any deviation... read more 1272 views \| Related: Air France ADS (AKH), Alcoa (AA), Altria Group (MO)	Yield Curve - The yield curve describes the relationship between various short- and long-term interest rates (i.e., the "term structure"), and is often represented as a graph showing the... read more 472 views \| Related: Apple (AAPL), BlackRock (BLK), Countrywide Financial (CFC)

Financial Services Industry

Finance

If accounting is about making the financial statements, then finance is about analyzing them. In this way, Finance and Accounting are very similar topics, but seen from different perspectives.