Upload
ilomu
View
222
Download
0
Embed Size (px)
Citation preview
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 1/63
Wijantini Prasetiya Mulya Business School
corporate
finance
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 2/63
Wijantini Prasetiya Mulya Business School
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 3/63
Wijantini Prasetiya Mulya Business School
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 4/63
Wijantini Prasetiya Mulya Business School
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 5/63
Wijantini Prasetiya Mulya Business School
Pertamina -Investment Financing Plan2010-2014
2010 2011 2012 2013 2014 Total
Soft Loan 10% 2.3 2.9 3.4 4.0 4.4 17.1
Bank Loan 25% 5.7 7.4 8.6 10.1 11.0 42.7
Bond 50% 11.4 14.7 17.2 20.1 22.0 85.5
Project Financing 15% 3.4 4.4 5.2 6.0 6.6 25.6
Total 100% 22.8 29.5 34.4 40.3 44.0 171.0
(Rp. Triliun)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 6/63
Wijantini Prasetiya Mulya Business School
what is corporate finance?
introduction
what are main decisions of corporate finance?
any decisions made by business thataffect its finances
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 7/63Wijantini Prasetiya Mulya Business School
dividenddecision
investmentdecision
financingdecision
business decisions
recording
accounting
finance
What for?
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 8/63Wijantini Prasetiya Mulya Business School
SalesRevenues
OperatingCosts &
Taxes
RequiredInvestments
In Operations
FinancingDecisions
InterestRates
FirmRisk
MarketRisk
Free Cash Flows to the Firm
(FCFF)
Weighted AverageCost of Capital
(WACC)
Value of the Firm (V)V =
FCFF1
(1 + WACC)1
FCFF2
(1 + WACC)2
FCFF3
(1 + WACC)3
FCFF00
(1 + WACC)00+ + + ….
Maximizing Value of the Firm !
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 9/63Wijantini Prasetiya Mulya Business School
Pertamina – Kinerja Keuangan
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 10/63Wijantini Prasetiya Mulya Business School
role of the financial manager
financial
manager
firm's
operations
financial
markets
(1) cash raised from investors
(1)
(2) cash invested in firm
(2)
(3) cash generated by operations
(3)
(4a) cash reinvested
(4a)
(4b) cash returned to investors
(4b)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 11/63Wijantini Prasetiya Mulya Business School
Financial Markets
Primary Market
Issuance of a security for the first time
Secondary Markets
Buying and selling of previously issued securities
Securities may be traded in either a dealer or auctionmarket
•BEI (www.bei.co.id)
• NYSE (www.nyse.com)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 12/63Wijantini Prasetiya Mulya Business School
Financial Markets
Firms Investors
Secondary
Market
money
securitiesErnaJoy
Stocks and
Bonds
Money
Primary Market
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 13/63Wijantini Prasetiya Mulya Business School
Organizational Chart of a TypicalCorporation
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 14/63Wijantini Prasetiya Mulya Business School
who is the financial manager?
Chief Financial Officerresponsible for:Corporate PlanningFinancial Policy
Controller Treasurer
responsible for:
Capital Budgeting, Risk Management, CreditManagement, CashManagement, RaisingCapital,Banking Relationship
responsible for:
Accounting
Taxes
Preparation of Fin. Statement
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 15/63Wijantini Prasetiya Mulya Business School
past investment past
profit /surplus
future
profit /surplus
past future value
financefinancial accounting
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 16/63Wijantini Prasetiya Mulya Business School
value is …
accumulation of future reward for investors
accumulation of discounted future free cash flows
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 17/63Wijantini Prasetiya Mulya Business School
Goals of The Corporation
Value maximization and Social Welfare
Do managers maximize the value?
Benefit to Society?
Managers have many constituencies“stakeholders”
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 18/63Wijantini Prasetiya Mulya Business School
Ownership vs. Management
B. Difference inInformation
Signaling
Issues of shares andother financing(syndication loans)
Dividends
A. DifferentObjectives
Agency Problems
Managers vs. stockholders
Agency Costs Stockholders vs. banks and
lenders
When firm gets intotroubles
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 19/63Wijantini Prasetiya Mulya Business School
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 20/63Wijantini Prasetiya Mulya Business School
Tools to Ensure Management Pays Attention to the Value of the Firm
Board of directors
Manger’s actions are subject to the inquiry of theboard of directors.
Takeovers
Poor managers are likely to find they are forced out
by more energetic managers.Compensation Plan
Financial incentives such as stock options
Ownership vs. Management
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 21/63Wijantini Prasetiya Mulya Business School
Specialist Monitoring
Auditors
Ownership vs. Management
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 22/63Wijantini Prasetiya Mulya Business School
time value of money
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 23/63
Wijantini Prasetiya Mulya Business School
time value of money ….
A very important concept.
A Rupiah today is worth morethan a Rupiah tomorrow.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 24/63
Wijantini Prasetiya Mulya Business School
time value of money
Future Value
Present Value
Rates of Return
Amortization
Annuity
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 25/63
Wijantini Prasetiya Mulya Business School
Future Value (compounding)
For securing company’s fund, today (May 2012) you putmoney as much as $ 25,000 in Bank.The deposit interest rate is around 3% p.a (net). Let’s say,the company needs the fund in May 2022, how muchmoney will you receive on that day?
Future Value
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 26/63
Wijantini Prasetiya Mulya Business School
Spreadsheet Solution
Use the FV function: see spreadsheet
in Example.xls .
= FV(Rate, Nper, Pmt, PV)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 27/63
Wijantini Prasetiya Mulya Business School
For examples:a. In May 2015, your company plans to build smallhall.The cost of land & building is $ 75,000. With expected
average deposit interest rate around 3% p.a (net).How much money do you have to save now?
Present Value
Present Value (discounting)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 28/63
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 29/63
Wijantini Prasetiya Mulya Business School
b. One Real Estate gives a very interesting advertisingwritten in a very colorful banner as follows:
“Buy now, Get 1 free house 7 years later”
If the price of land is $200.000 while the price of building is$100.000
With expected average deposit interest rate around 3% p.a
(net), how much discount do actually you get ?
Present Value
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 30/63
Wijantini Prasetiya Mulya Business School
series of equal payment (PMT)
Annuity
Annuity
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 31/63
Wijantini Prasetiya Mulya Business School
Annuity
Ordinary Annuity vs Annuity Due
series of equal payment (PMT)at the END of the period
series of equal payment (PMT) atthe BEGINNING of the period
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 32/63
Wijantini Prasetiya Mulya Business School
Ordinary Annuity
PMT PMTPMT
0 1 2 3
i%
PMT PMT
0 1 2 3i%
PMT
Annuity Due
The difference between an ordinary
annuity and an annuity due
PV FV
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 33/63
Wijantini Prasetiya Mulya Business School
Spreadsheet Solution
Use the PV function: see spreadsheet.
= PV(Rate, Nper, Pmt, Fv)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 34/63
Wijantini Prasetiya Mulya Business School
a. Present Value of ANNUITY
In order to increase its sales, INDOFOOD gave a lucky draw prize to
the first winner.The prize was “to be a millioner”. In other words, once you won theprize, INDOFOOD promised to send money as much as Rp.1.000.000,- per month until you die. A young professional won the prize. She was 25 years old. Based onresearch, the woman expectancy life in Indonesia is around 70 andwith expected average deposit interest rate around 5% p.a (net).
Do you have idea the present value of the prize at the time shereceived?
Annuity
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 35/63
Wijantini Prasetiya Mulya Business School
Spreadsheet Solution
Use the FV function: see spreadsheet.
= FV(Rate, Nper, Pmt, Pv)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 36/63
Wijantini Prasetiya Mulya Business School
You plan to go to France in May 2017.To minimize the currency risk, you plan to buy € 360 per year.If the expected average deposit interest rate around 2% p.a(net).How much money will be available for your holiday?
Annuity
a. Future Value of ANNUITY
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 37/63
Wijantini Prasetiya Mulya Business School
A bank offers to lend you $ 85,000; the loancalls for payments of $120,000 for 4 years.What interest rate is the bank charging you?
Rates of return
Rates of return
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 38/63
Wijantini Prasetiya Mulya Business School
Spreadsheet Solution
Use the RATE function:
= RATE (Nper, Pmt, PV, FV)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 39/63
Wijantini Prasetiya Mulya Business School
You plan to borrow money to build house for children. Thehouse price is Rp 260.000.000Bank’s quotation for borrowing interest rate is 8% p.a. If you want to repay the loan within 3 years, how much moneydo you need to pay your mortgage every year?
Amortization
Amortization Loans
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 40/63
Wijantini Prasetiya Mulya Business School
Amortization
PMT PMTPMT
0 1 2 316%
-260,000
3 16 -260,000 0INPUTS
OUTPUT
N I/YR PV FVPMT
115,767
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 41/63
Wijantini Prasetiya Mulya Business School
0 1 2 3
115,767Interest
41,600
Principal Payments74,167
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 42/63
Wijantini Prasetiya Mulya Business School
Amortization tables are widelyused--for home mortgages, autoloans, business loans, retirementplans, and so on.
They are very important!
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 43/63
Wijantini Prasetiya Mulya Business School
What is the PV of this uneven cash
flow stream?
0
100
1
300
2
300
310%
-50
4
90.91
247.93
225.39-34.15
530.08 = PV
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 44/63
Wijantini Prasetiya Mulya Business School
Spreadsheet Solution
Excel Formula in cell A3:
=NPV(10%,B2:E2)
A B C D E
1 0 1 2 3 42 100 300 300 -50
3 530.09
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 45/63
Wijantini Prasetiya Mulya Business School
interest rate
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 46/63
Wijantini Prasetiya Mulya Business School
Nominal rate (iNom)
Stated in contracts, and quoted by banksand brokers.
Not used in calculations or shown on timelines
Periods per year (m) must be given.
Examples:
8%; Quarterly
8%, Daily interest (365 days)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 47/63
Wijantini Prasetiya Mulya Business School
Periodic rate (iPer )
iPer = iNom/m, where m is number ofcompounding periods per year. m = 4 forquarterly, 12 for monthly, and 360 or 365
for daily compounding. Used in calculations, shown on time lines.
Examples:
8% quarterly: iPer = 8%/4 = 2%.8% daily (365): iPer = 8%/365 =
0.021918%.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 48/63
Wijantini Prasetiya Mulya Business School
Will the FV of a lump sum be larger or
smaller if we compound more often,holding the stated I% constant? Why?
LARGER! If compounding is morefrequent than once a year--forexample, semiannually, quarterly,
or daily--interest is earned on interestmore often.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 49/63
Wijantini Prasetiya Mulya Business School
FV Formula with Different CompoundingPeriods (e.g., $100 at a 12% nominal rate with
semiannual compounding for 5 years)
= $100(1.06)10 = $179.08.
FV = PV 1 .+i
m
nNom
mn
FV = $100 1 +0.12
25Se
2x5
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 50/63
Wijantini Prasetiya Mulya Business School
FV of $100 at a 12% nominal rate for 5years with different compounding
FV(Annual)= $100(1.12)5 = $176.23.
FV(Semiannual)= $100(1.06)10=$179.08.
FV(Quarterly)= $100(1.03)20 = $180.61.
FV(Monthly)= $100(1.01)60 = $181.67.
FV(Daily)= $100(1+(0.12/365))(5x365)
= $182.19.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 51/63
Wijantini Prasetiya Mulya Business School
Effective Annual Rate (EAR = EFF%)
The EAR is the annual rate which causes PVto grow to the same FV as under multi-periodcompounding Example: Invest $1 for oneyear at 12%, semiannual:
FV = PV(1 + iNom/m)m
FV = $1 (1.06)2 = 1.1236.
EFF% = 12.36%, because $1 invested for one
year at 12% semiannual compounding wouldgrow to the same value as $1 invested for oneyear at 12.36% annual compounding.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 52/63
Wijantini Prasetiya Mulya Business School
An investment with monthlypayments is different from onewith quarterly payments. Must
put on EFF% basis to comparerates of return. Use EFF% onlyfor comparisons.
Banks say “interest paid daily.”Same as compounded daily.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 53/63
Wijantini Prasetiya Mulya Business School
How do we find EFF% for a nominal
rate of 12%, compoundedsemiannually?
EFF% = - 1(1 + )iNom
m
m
= - 1.0(1 + )0.122
2
= (1.06)2
- 1.0= 0.1236 = 12.36%.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 54/63
Wijantini Prasetiya Mulya Business School
EAR (or EFF%) for a Nominal Rate of
of 12%
EARAnnual = 12%.
EARQ = (1 + 0.12/4)4 - 1 = 12.55%.
EARM = (1 + 0.12/12)12 - 1 = 12.68%.
EARD(365) = (1 + 0.12/365)365 - 1 = 12.75%.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 55/63
Wijantini Prasetiya Mulya Business School
Can the effective rate ever be equal to
the nominal rate?
Yes, but only if annual compoundingis used, i.e., if m = 1.
If m > 1, EFF% will always be greater
than the nominal rate.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 56/63
Wijantini Prasetiya Mulya Business School
When is each rate used?
iNom: Written into contracts, quoted
by banks and brokers. Notused in calculations or shownon time lines.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 57/63
Wijantini Prasetiya Mulya Business School
iPer: Used in calculations, shown ontime lines.
If iNom has annual compounding,then iPer = iNom/1 = iNom.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 58/63
Wijantini Prasetiya Mulya Business School
EAR = EFF%: Used to comparereturns on investmentswith different payments
per year.
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 59/63
Wijantini Prasetiya Mulya Business School
Notes:
B l Sh t M d l
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 60/63
Wijantini Prasetiya Mulya Business School
Balance Sheet Model
Current
Assets
Fixed Assets
1 Tangible
2 Intangible
Investing
Shareholders’ Equity
Current
Liabilities
Long-Term
Debt
Financing
The Investment (Capital Budgeting) Decision
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 61/63
Wijantini Prasetiya Mulya Business School
The Investment (Capital Budgeting) Decision
Current
Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders
’ Equity
CurrentLiabilities
Long-Term
Debt
What long-term
investmentsshould thefirm choose?
The Capital Structure (Financing) Decision
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 62/63
Wijantini Prasetiya Mulya Business School
The Capital Structure (Financing) Decision
How should the
firm raise funds
for the selected
investments?
Current
Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders
’ Equity
CurrentLiabilities
Long-Term
Debt
Short-Term Asset (Working Capital)
7/31/2019 1 Introduction MMBM 110512
http://slidepdf.com/reader/full/1-introduction-mmbm-110512 63/63
( g p )Management
How shouldshort-termassets be
managed andfinanced?
Net
Working
Capital
Shareholders’ Equity
CurrentLiabilities
Long-Term
Debt
Current
Assets
Fixed Assets
1 Tangible
2 Intangible