acctg & fin 1-31-13 introduction to the course (1)
TRANSCRIPT
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Accounting & Finance
Introduction to the Course
1/31/13
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Overview
What would you say is thebroadest goal is for a (profit-
oriented) company; thatmanagers should primarily be
concerned with?
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Overview - Basics
Overall goal should beValue Creation
When this occurs obviouslyother good things also happen
For example jobs are added,factories and other assets are
put to productive use etc
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Overview - Basics
We will use the first severalsessions to learn basic principles of
accounting and finance such thatyou will gain an understanding ofhow the Corporate financial
manager helps to participate in thevalue creation process
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Overview
After that we will primarily usethe Case Study approach
This is viewed as the optimalmethod of appl icat ionof the
Principles of Accounting andFinance
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Overview
Point is that we will doAccounting and Finance not so
much for the academicexercise but for understanding
the process of value creation /preservation
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Overview
What are some typical waysto create / preserve value?
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Overview
For example Innovation but this is not so much aFinancial approach
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Overview
Nonetheless who can thinkof some companies with
significant Contrast inValueCreationvsValue
Destruction
by virtue ofcontrasting approaches toinnovation
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Overview
How about Apple vs RIM oreven HP?
What is a good metric tomeasure value creation vs
value destruction?
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What else?
More in the category of apurely Financial approach?
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Lowering the Cost of Capital?
In fact we will learn how can afirm arrive at the lowest
possible cost of capital?
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What is Capital Structure /Funding?
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Mix of Long Term Debt vsEquity
What would you say is moreexpensive Debt or Equity
Funding?
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Equity! Why? How so?
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Investors in debt securitiesissued by a companyreceive a stated return ontheir investment.
Whats this called?
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The coupon or stated interestrate.
What about investors in thecommon stock issued by a
company i.e., theequityinvestors? What are they
entitled to receive?
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If you bought Facebook stockwhat would you be entitled to
receive as a return on yourinvestment?
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NOTHING
Hence what can youdeduce from this in terms
of risk to the investor?
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Equity investing (funding to the company)is a lot riskier to the investor (vs debt)
The natural consequence of this is thatequity funding is more expensive for thecompany even though this seemscounterintuitive in terms of actual costs to
the company. We will explore this in more detail.
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Whats another reasonthat debt funding is lessexpensive than equityfunding?
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TAXES!
What do you know about the
tax consequences of companypayments of interest to debt
investors vs dividends tostockholders?
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Interest is tax deductible but commonstock dividends are not.
Hence the after-tax cost of interest isa lot lower than common stockdividends paid to shareholders.
We will have applications where wesee this issue.
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What is the dividend onFacebook stock?
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Nada!
Hence why would aninvestor buy this stock?
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Stock appreciation but rightnow FB is doing what to
value?
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Destroying it.
$38 at issuance vs roughly$30 today.
On the other hand theoriginal investors in FBmade a fortune.
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We will come back to these issues as partof the case studies on IPOs
All this is consistent with idea thatinvesting in common stock is risky sincethe company promises to return nothing toinvestors
But the corollary is that investors incommon stock have a much higherrequired rate of return to buy the stock.
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We will come back to
these issues as wereview the various case
studies.
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What about debt? What arethe problems that the company
might have with debt funding?
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Debt issued by a corporationcreates firm obligations that a
corporation must pay or facethe prospect of Bankruptcy
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Intro
If company cant meet itsinterest and / or maturing principal
payment obligations on maturingdebt
How do we refer to this type offinancial trouble?
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Financial Distress
We will see case studies involving
such situations and how realcompanies adopted the mostappropriateFinancialStrategiesincluding
Special Security design
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In order to be able to fully grasp andunderstand these financial strategies
its critical to be able to understand1. Accounting and
2. Finance concepts
And how to apply these to FinancialStmt analysis
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Hence first few classes willcover important Accounting
and finance concepts These will be critical to
success
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Also be sure to be proficient inEXCEL
Group presentations will need to bedone in PPoint with support forconclusions using EXCEL
EG. In lieu of a company payingdividends How do we performvaluation?
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Should understand percentageof sales method of projecting
cash flows in order to do a_discounted cash
flow______________analysis?
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Any idea what is the mostcritical variable / aspect of
the DCF?
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The discount rate
As level of risk increases what
should happen to the discountrate?
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As the discount rateincreases what happens to
value?
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In lieu of dividends DCF is ameasure of the flow of cash
that should accrue toshareholders on a PV(present
value ) basis We will see cases involving
these elements.
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What is another approach toValue Creation
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Expansion projects
What does this fall under?
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Expansion Project(s) whichfall under category of
Capital Budgeting
And what are some ways to
fund expansion?
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IPOS; i.e. stock
Or debt issuanceWe will see this in case
studies
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What other ways arethere to enhance value?
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M & A
Who can name some recentM & A deals?
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What techniques areoften used for M & Adeals?
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Stock Swaps.
Why?
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Stock swaps are tax freeto the investor.
Whats another form of
M & A activity?
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Leveraged Buyouts
We will see casesinvolving all of the above.
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Whats often importantdriving force for M & Aactivity?
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Synergies. ()
Note the CAPM(capital asserts
pricing model) is important toderive value.
We will use this includingEMRP, beta etc
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CAPM is based in part onthe principle that there is a
Risk Freeasset namely US Treasury
Securities. Why are they considered to
be risk free?
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Other important basicconcepts to learn include:
Sustainable growth
What is it?
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Rate at which the company (in theory)can grow without resorting toexpensive external funding yet keep
its optimal capital structureunchanged
The point is that GROWTH is a
Financial Strategy to create value
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Note we will see that firmsgrowing too fast can be a reckless
even dangerous approach
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Other related areas that wewill cover include:
Venture Capital and;
Security Design
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Growing while protecting aportfolio of assets falls under
category ofRiskManagement
We will have a case coveringthis area of Finance
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By the time we are done youshould have a good sense of
the practical use of accountingand finance for purposes of
understanding CorporateFinance
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In addition you should become amore educated investor and be
able to discern where you wouldlike to invest all the money youwill be making
EG you may become devotees oftheBenjamin Grahamschool
of investing
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Somewhat beyond the scopeof this course
Maybe a good foundation forthe discipline ofFinancial
Engineering
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Finally what is another FinancialStrategy that we have seen
recently very prominently in thenews?
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Business Law
Apple vs Samsung usingPatent or intellectualproperty law
We may be able to squeezein?
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Other current topics
In this all time low interest rate
environment we have seenrecord debt issuance what
might be a financial strategyrelated to this phenom?
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Issue debt to buy back equity we will have a case on LBOs
same principle Other more advanced accounting
/ finance concepts such as FAS
157 = Fair Valuation one of thecases will incorporate this
approach
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For next time read HorngrenChapters 15-17