Upload
gyala
View
62
Download
3
Embed Size (px)
DESCRIPTION
Théorie Financière 2004-2005 1. Introduction. Professeur André Farber. Organisation du cours. Ouvrages de référence: Brealey, R. and Myers, S. Principle of Corporate Finance 7th ed., McGraw-Hill 2003 Farber,A. Laurent, M-P., Oosterlinck, K., Pirotte, H. (FLOP) Finance - PowerPoint PPT Presentation
Citation preview
Tfin 2004 01 Introduction |2August 23, 2004
Organisation du cours
• Ouvrages de référence:Brealey, R. and Myers, S.
Principle of Corporate Finance7th ed., McGraw-Hill 2003
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 2004 01 Introduction |3August 23, 2004
Exercices
• Assistants:
• Céline Vaessen
• Benjamin Lorent
• 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
New
Semaines 2, 4, 6, 8, 10, 12
Semaines 3, 5, 7, 9, 11, 13
Tfin 2004 01 Introduction |4August 23, 2004
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 2004 01 Introduction |5August 23, 2004
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 2004 01 Introduction |6August 23, 2004
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 2004 01 Introduction |7August 23, 2004
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 2004 01 Introduction |8August 23, 2004
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 2004 01 Introduction |9August 23, 2004
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 2004 01 Introduction |10August 23, 2004
Example: Microsoft (MSFT)
• Balance sheet - 30 June 2004
• (billion USD)
• Cash 49
• WCR -8
• Fixed assets 20
• Total assets 61
• Stockholders’ equity 61
• Income statement
• Revenue 32
• Net Income 10
• WCR = Working Capital Requirement
• Source: http://finance.yahoo.com
• Market Value -1 Sept. 2004
• Market cap 297
• Enterprise value 248
• MVA 236
Tfin 2004 01 Introduction |11August 23, 2004
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 2004 01 Introduction |12August 23, 2004
Stockholders’ problem
equity rs'Stockholde
IncomeNet ROE
InvestmentInitial
GainCapitalDivr
1
Capital marketCompany
ROEReturn on Equity
rExpected return
Tfin 2004 01 Introduction |13August 23, 2004
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 2004 01 Introduction |14August 23, 2004
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 2004 01 Introduction |15August 23, 2004
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 2004 01 Introduction |16August 23, 2004
The Top Companies 2004
Mkt Value$ bil.
Price/Book
ROE%
1 GE US 328 4.3 21.62 Microsoft US 284 4.0 10.63 Exxon US 284 3.1 21.64 Pfizer US 270 3.9 2.15 Wal-Mart US 241 5.6 20.36 Citigroup US 239 2.4 19.17 BP UK 193 2.6 14.18 American Intl US 191 2.5 13.29 Intel US 185 4.8 16.810 Royal Dutch NL/UK 175 2.3 17.311 Bank of America US 170 2.5 22.312 Johnson & J. US 165 5.8 26.713 HSBC Hold. UK 163 2.1 16.0
Source:Business Week, July 14 2003
Tfin 2004 01 Introduction |17August 23, 2004
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
•Microsoft - 2004 US$ bil.•Net Income 10•Sales 32•Assets 61•Book equity 61
16.4%
31.0% 0.52 1.00
Tfin 2004 01 Introduction |18August 23, 2004
Example
Wal-Mart Vodafone Total
US UK F
Rank 5 14 24
MktValue 241,187 159,150 122,945
M/ B 5.6 0.7 3.5
P/ E 27 15 14
Sales 258,681 61,259 127,796
Profi t 8,861 11,364 8,968
Assets 104,912 269,754 97,647
ROE 20.20% 17.80% 24.10%
Profi t margin 3.43% 18.55% 7.02%
Turnover 2.47 0.23 1.31
Leverage 2.39 4.23 2.62
Source: Business Week July 26, 2004
Tfin 2004 01 Introduction |20August 23, 2004
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 2004 01 Introduction |21August 23, 2004
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 2004 01 Introduction |22August 23, 2004
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 2004 01 Introduction |23August 23, 2004
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
0110
01
01
0 11WQDFQ
Wr
YY
r
Tfin 2004 01 Introduction |24August 23, 2004
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
Tfin 2004 01 Introduction |25August 23, 2004
Net Present Value
NPV = -I + DF1 C1
Consider investment project:
Initial cost: I
Future cash flow: C1
Budget constraint with project:
NPVWCYvIYQvQ )()( 1110110
Tfin 2004 01 Introduction |26August 23, 2004
Economic foundations of net present value
100
105
200Euros now
Euros next year
50
165
207
NPV
Slope = - (1 + r) = - (1 + 5%)
-50
I. Fisher 1907, J. Hirshleifer 1958
Perfect capital markets
Separate investment decisions from consumption decisions
Tfin 2004 01 Introduction |27August 23, 2004
Entreprise Value Maximisation
0
Investment
Euros today
Euros next year
NPV
Investment opportunities
Market value of company
Numerical example!!!
Tfin 2004 01 Introduction |28August 23, 2004
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 2004 01 Introduction |29August 23, 2004
1 period, uncertainty
• 2 possible states of the economy: prosperity and depression
• 2 financial assets: one riskless bond and one stock
Current price
Prosperity Depression
Bond v 1 1
Stock S SP SD
States Price P D Expected returnsProbability 0.5 0.5Bond 0.9524 1 1 5.00%Stock 50 100 25 25.00%
Tfin 2004 01 Introduction |30August 23, 2004
Contingent claims
• Consider 2 securities that pay 1€ in one state and 0€ in the other state.
• They are named: contingent claims, Arrow Debreu securities, states prices
Current Price
Prosperity Depression
CC prosperity vP 1 0
CC depression vD 0 1
Tfin 2004 01 Introduction |31August 23, 2004
Computing state prices
• Financial assets can be viewed as packages of financial claims.
• Law of one price:
v1 = vP 1 + vD 1
S = vP SP + vD SD
• Complete markets: # securities ≥ # states
• Solve equations for find vP and vD
DP
PD
DP
DP
SS
SSvv
SS
SvSv
1
1
Tfin 2004 01 Introduction |32August 23, 2004
Example
States Price P D Expected returnsProbability 0.5 0.5Bond 0.9524 1 1 5.00%Stock 50 100 25 25.00%
Contingent claimsCC P 0.3492 1 0CC D 0.6032 0 1
Project -50 120 40 80.00
Tfin 2004 01 Introduction |33August 23, 2004
Capital budgeting under uncertainty
• Consider the following investment project:
• Initial cost: I
• Future cash flows: CP or CD depending on state of the world.
• How do we compute the NPV for this project?
• NPV of project
• A straightforward extension of previous formula.
DDPP CvCvINPV
Tfin 2004 01 Introduction |34August 23, 2004
Example
States Price P D Expected returnsProbability 0.5 0.5Bond 0.9524 1 1 5.00%Stock 50 100 25 25.00%
Contingent claimsCC P 0.3492 1 0CC D 0.6032 0 1
Project -50 120 40 80.00
Present values 41.90 24.13NPV 16.03
Tfin 2004 01 Introduction |35August 23, 2004
References
• Corporate finance textbooks (MBA level)
– Brealey, Richard and Steward Myers, Principles of Corporate Finance, xth edition, McGraw-Hill 2000
– Ross, Stephen A., Randolph W. Westerfield and Jeffrey F. Jaffe, Corporate Finance, 6th edition, McGraw-Hill Irwin 2002
– Damorada, 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