théorie financière 2007-2008 1. introduction professeur andré farber
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Théorie Financière2007-20081. Introduction
Professeur André Farber
Tfin 2007 01 Introduction |2April 18, 2023
Organisation du cours
• Ouvrages de référence:Brealey, R., Myers, S. and Allen, F.
Principle of Corporate Finance8th ed., McGraw-Hill 2006
Farber,A. Laurent, M-P., Oosterlinck, K., Pirotte, H. (FLOP)Finance
Pearson Education, 2004
• Site web: www.ulb.ac.be/cours/solvay/farber• Copie des transparents (PowerPoint)• Glossaire anglais - français• Notes pédagogiques, exercices, anciens examens• Liens vers d’autres sites
• Examen(s)
Tfin 2007 01 Introduction |3April 18, 2023
Exercices
• Assistants:
• Benoit Dewaele
• Ritha Sukadi
• 6 séances (Vendredi 10-12), 4 groupes
• Groupe 1: A à F
• Groupe 2: G à L
• Groupe 3: M à P
• Groupe 4: Q à Z
Semaines 2, 4, 6, 9, 11, 13
Semaines 3, 5, 8, 10, 12, 14
Tfin 2007 01 Introduction |4April 18, 2023
Plan du cours
• 1. Introduction
• 2. Valeur actuelle
• 3. Cash flows, planning financier
• 4. Evaluation d’entreprises
• 5,6. Analyse de projets d’investissement
• 7,8. Rentabilité attendue et risque
• 9,10. Options
• 11, 12. Evaluation et financement
Tfin 2007 01 Introduction |5April 18, 2023
What is Corporate Finance?
• INVESTMENT DECISIONS: Which REAL ASSETS to buy ? • Real assets: will generate future cash flows to the firm
• Intangible assets : R&D, Marketing, ..
• Tangible assets : Real estate, Equipments,..
• Current assets: Inventories, Account receivables,..
• FINANCING DECISIONS: Which FINANCIAL ASSET to sell ?• Financial assets: claims on future cash flows
• Debt: promise to repay a fixed amount
• Equity: residual claim
• DIVIDEND DECISION: How much to return to stockholders?
Tfin 2007 01 Introduction |6April 18, 2023
Accounting View of the Firm
• Balance sheet Income statement
Sales
– Operating expenses
= Earnings before interest and taxes (EBIT)
– Interest expenses
– Taxes
= Net income (earnings after taxes)
• Retained earnings
• Dividend payments
Current assets
Fixed assets
Current liabilites
Long-term debt
Shareholders’ equity
Net Working Capital
Tfin 2007 01 Introduction |7April 18, 2023
Cash Flows of the Firm
Firm Financial markets
Firm issue securitiesFirm invest
Cash flow from operations Dividend and
debt payments
Timing of cash flows + uncertainty
Investors
Tfin 2007 01 Introduction |8April 18, 2023
Market Value of the Firm
Total capital
Fixed Assets
+
Net Working Capital
Book equity
Debt
Book values Market values
Market value of equity
Market value of
debt
Market capitalization
Tfin 2007 01 Introduction |9April 18, 2023
Value creation
• Market value added (MVA)• = Market value of the firm’s capital – Total capital employed
• VALUE CREATION : 2 strategies• Strategy 1
• Buy assets at a cost lower than the value of the future revenues– real assets– financial assets
• Strategy 2• Sell financial assets for a price higher than the value of future
payments
Market value of equity + Market value of debt
Stockholders’ equity + Financial debt
Tfin 2007 01 Introduction |10April 18, 2023
Examples
Microsoft Wal-Mart
Market Cap $billion (Sept 18, 2006) 267.69 201.03
Stockholders’ Equity $b 40.10 53.17
Revenues 44.28 315.65
Net Income $b 12.6 11.2
Price/Book 6.67 3.78
Return on Equity (ROE) 31.42% 21.12%
Price-Earnings Ratio (P/E) 21.25 17.90
Tfin 2007 01 Introduction |11April 18, 2023
The Cost of Capital
• The firm can always give cash back to the shareholders
• Capital employed by the firm has an opportunity cost
• The opportunity cost of capital is the expected rate of return offered by equivalent investments in the capital market
• The weighted average cost of capital (WACC) is the (weighted) average of the cost of equity and of the cost of debt
Project Cash
StockholderInvestment opportunities in capital markets
?
Tfin 2007 01 Introduction |12April 18, 2023
Stockholders’ problem
equity rs'Stockholde
IncomeNet ROE
InvestmentInitial
GainCapitalDivr
1
Capital marketCompany
ROEReturn on Equity
rExpected return
Tfin 2007 01 Introduction |13April 18, 2023
How to measure value creation ?
• 1. Compare market value of equity to book value
• Value creation if M/B > 1
• 2. Compare return on equity to the opportunity cost of equity
• Value creation if ROE > Opportunity Cost of Equity
shareper Book value
priceStock book(M/B)-to-Market
equity rs'Stockholde
IncomeNet )(equity on Return ROE
Tfin 2007 01 Introduction |14April 18, 2023
Value creation: Example
• Data:
• Book value of equity = € 10 b
• Net income = € 2 b / year
• Cost of equity r = 10%
• Return on equity ROE = 2 / 10 = 20% > 10%
• Market value of equity = NI / r = 2 / 10% = € 20 b
• Market value added: MVA = 20 – 10 = €10 b
• Market to Book M/B = 20 / 10 = 2
Tfin 2007 01 Introduction |15April 18, 2023
M/B vs ROE
• Simplifying assumptions:
• · Expected net income income = constant
• · Net income = dividend
• Market value determination:
• Net income = Expected return Market value of equity
• NI = r MVeq
• ROE (definition):
• Return on equity = Net income / Book value of equity
• ROE = NI / BVeq
• = r MVeq / Bveq
• Conclusion: in this simplified setting,
– M/B = MVeq/BVeq > 1 ROE> r
Tfin 2007 01 Introduction |16April 18, 2023
Drivers of ROE
• PROFITABILITY (du Pont system)
• Three determinants :
Equity
Assets
Assets
Sales
Sales
Net IncomeROE
EquityBook
IncomeNet ROE
Financial Leverage
Asset Turnover
Profit Margin
Tfin 2007 01 Introduction |17April 18, 2023
Example
Microsoft Wal-Mart
Return on Equity (ROE) 31.42% 21.12%
Profit Margin 28.45% 3.56%
Asset Turnover 3.50 3.43
Leverage 0.32 1.73
Foundations of Finance
Tfin 2007 01 Introduction |19April 18, 2023
Theory of finance
• A young science
• Finance has been around for many centuries, of course…
• Main problem: calculation!!
• Imagine having to calculate the future value of 1 euro invested for 13 years when the annual interest rate is 4.35% (with annual compounding):
Future value = (1.0435)13
• A nightmare…..
• This problem disappeared after WWII with the development of computers.
• Now we have calculators and spreadsheets….
• We also have large data bases
Tfin 2007 01 Introduction |20April 18, 2023
Irving Fisher
• Finance has its roots in economics
• Irving Fisher laid the foundations of modern theory of finance.
• Takes into account the time dimension of financial decisions
• Main ideas:
• Decisions should based on present value
• Net Present Value (NPV): a measure of additional wealth
• With perfect capital markets: independent of preferences
Tfin 2007 01 Introduction |21April 18, 2023
Present value: 1 period, certainty
• Perfect capital market
• Interest rate: r
• Future cash flow C1
• Present value:
• or: r
CCPV
1)( 1
1
PV(C1) = DF1 C1
Interpretation: DF1 = discount factor
price of 1€ to be received in one year
price of unit zero coupon
with r
DF
1
11
Tfin 2007 01 Introduction |22April 18, 2023
Microeconomics: a review
• Consumption over time:
• 1 periods, certainty
• Perfect capital markets => budget constraint
» Slope = -(1+r)
» Intercept = W0(1+r)
• Optimum:
» Marginal Rate of Substitution (MRS) = 1+r
» Optimal consumption independent of timing of income
1 10 0 0
0 1 1 0
1 1
Q YQ Y W
r rQ DF Q W
Tfin 2007 01 Introduction |23April 18, 2023
Economic foundations of net present value
100
105
200Euros now
Euros next year
50
165
Slope = - (1 + r) = - (1 + 5%)
I. Fisher 1907, J. Hirshleifer 1958
Perfect capital markets
Separate investment decisions from consumption decisions
157.5
52.5
150
Y0
Y1
Tfin 2007 01 Introduction |24April 18, 2023
Net Present Value
NPV = -I + DF1 C1
= -50 + 0.9524 60 = 7.14
Consider the following investment project:
Initial cost: I (50)
Future cash flow: C1 (60)
Budget constraint with project:
0 1 1 0 1 1 1 0( ) ( )Q DFQ Y I DF Y C W NPV
Tfin 2007 01 Introduction |25April 18, 2023
Fisher Separation Theorem
100
105
200Euros now
Euros next year
50
165
207.14
NPV
Slope = - (1 + r) = - (1 + 5%)
-50
I. Fisher 1907, J. Hirshleifer 1958
Perfect capital markets
Investment decision independent of:- initial allocation- preferences (utility functions)
Tfin 2007 01 Introduction |26April 18, 2023
Enterprise Valuation
Suppose an all equity financed company is created for this project.
Step 1: Creation
Step 2: Equity offering + investment
t = 0 t = 1-50 +60
Assets 50 Equity 50 t = 0 t = 1+60
Cash flows
Assets 0 Equity 0
Market Cap.
6050 7.14
1.05 NPV =
I+NPV =60
57.141.05
Tfin 2007 01 Introduction |27April 18, 2023
0
C1
-I
Slope = -(1+r)
NPV
Market value of company
Tfin 2007 01 Introduction |28April 18, 2023
Entreprise Value Maximisation
0
Investment
Euros today
Euros next year
NPV
Investment opportunities
Market value of company
Numerical exampler = 5%
Project CF0 CF1 NPV1 -100 115 9.52 -100 110 4.83 -100 105 0.04 -100 103 -1.9
CF1 MktVal Inv NPV1 115 109.5 100 9.5
1,2 225 214.3 200 14.31,2,3 330 314.3 300 14.3
1,2,3,4 433 412.4 400 12.4
Tfin 2007 01 Introduction |29April 18, 2023
Uncertainty: 1952 – 1973- the Golden Years
• 1952: Harry Markowitz*
– Portfolio selection in a mean –variance framework
• 1953: Kenneth Arrow*
– Complete markets and the law of one price
• 1958: Franco Modigliani* and Merton Miller*
– Value of company independant of financial structure
• 1963: Paul Samuelson* and Eugene Fama
– Efficient market hypothesis
• 1964: Bill Sharpe* and John Lintner
– Capital Asset Price Model
• 1973: Myron Scholes*, Fisher Black and Robert Merton*
– Option pricing model
Tfin 2007 01 Introduction |30April 18, 2023
References
• Corporate finance textbooks (MBA level)
– Brealey, Richard, Steward Myers and Franklin Allen, Principles of Corporate Finance, 8th edition, McGraw-Hill 2006
– Ross, Stephen A., Randolph W. Westerfield and Jeffrey F. Jaffe, Corporate Finance, 6th edition, McGraw-Hill Irwin 2002
– Damoradan, Aswath, Corporate Finance: Theory and Practice, Wiley 1997
• Ouvrages de référence en français:
– Bodie, Z. et Merton, R. Finance (édition française dirigée par C. Thibierge) Pearson education 2000
• Corporate finance texts for executives
– Bertoneche, Marc and Rory Knight, Financial Performance, Butterworth Heinemann 2001
– Hawawini, Gabriel and Claude Viallet, Finance for Executives: Managing for Value Creation, South-Western College Publishing, 1999
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