Английский язык. Практический курс для решения бизнес-задач Пусенкова Нина

Corporate Finance for Beginners

The role of a corporation’s management is to increase the value of the firm to its shareholders while observing applicable laws. Corporate finance deals with the strategic financial issues associated with achieving this goal.

Balance Sheet Approach to Valuation

Managers can make better decisions if they can predict the impact of those decisions on the firm’s value. A simple way of valuing the equity of a company is to subtract its liabilities from assets. However, this book value has little resemblance to the real value of the company. First, the assets are recorded at historical costs. Second, assets such as trademarks, loyal customers, and talented managers do not appear on the balance sheet but may significantly affect the firm’s ability to generate profits.

Cash vs. Profits

Another way to value the firm is to consider the future flow of cash. Since cash today is worth more than the same amount of cash tomorrow, a valuation model based on cash flow can discount the value of cash received in future years. Decisions about finances affect operations and vice versa. The firm’s working capital flows in a cycle, beginning with cash that may be converted into equipment and raw materials. Additional cash is used to convert the raw materials into inventory, which then is converted into receivables and eventually back to cash, completing the cycle. The goal is to have more cash at the end of the cycle than at the beginning.

The change in cash is different from accounting profits. A company can report consistent profits but still become insolvent. For example, if the firm extends customers increasingly longer periods of time to settle their accounts, even though the reported earnings do not change, the cash flow will decrease.

Note also the distinction between cash and equity. Shareholders’ equity is the sum of common stock at par value, additional paid-in capital, and retained earnings. Shareholders’ equity is on the opposite side of the balance sheet from cash. Shareholder equity changes due to three things: 1) net income or losses; 2) payment of dividends; 3) share issuance or repurchase. Changes in cash are reported by the cash flow statement, which organizes the sources and uses of cash into three categories: operating activities, investing activities, and financing activities.

Cash Cycle

The duration of the cash cycle is the time between the date the inventory is paid for and the date the cash is collected from the sale of the inventory. A company’s cash cycle is important as it affects the need for financing. The cash cycle is calculated as:

days in inventory + days in receivables – days in payables

Financing requirements will increase if either of the following occurs:

– Sales increase while the cash cycle remains fixed in duration.

– Sales remain flat but the cash cycle increases in duration.

Revenue, Expenses, and Inventory

A firm’s income is calculated by subtracting its expenses from its revenue.

However, not all costs are considered expenses; accounting standards and tax laws prohibit the expensing of costs incurred in the production of inventory. These costs must be allocated to inventory accounts and appear as assets on the balance sheet. Once the finished goods are drawn from inventory and sold, these costs are reported on the income statement as the cost of goods sold (COGS).

Assets

Assets can be classified as current assets and long-term assets. It is useful to know the number of days of certain assets and liabilities that a firm has on hand:

Accounts receivable (A/R)

Number of days of A/R = (accounts receivable / annual credit sales) (365).

This also is known as the collection period.

Inventory

Number of days of inventory = (inventory / annual COGS) (365).

This also is known as the inventory period.

Payables

Number of days of accounts payable = (accounts payable / COGS) (365),

assuming that all accounts payable are for the production of goods (payables period).

Financial Ratios

A firm’s performance can be evaluated using various financial ratios (see lesson 37).

Bank Loans

Bank loans can be classified according to their durations. There are short-term loans (one year or less), long-term loans (also known as term loans), and revolving loans that allow one to borrow up to a specified credit level at any time over the duration of the loan. Some «evergreen» revolving loans automatically renew at maturity.

Sources and Uses of Cash

It can be worthwhile to know where a firm’s cash is originating and how it is being used. There are two sources of cash: reducing assets or increasing liabilities or equity. A company uses cash by increasing assets or decreasing liabilities or equity.

Firm Value, Equity Value, and Debt Value

The value of the firm is the value of its assets, or the present value of the unlevered free cash flow resulting from the use of those assets. In the case of an all-equity financed firm, the equity value is equal to the firm value. When the firm has issued debt, the debt holders have a priority claim on their interest and principal, and the equity holders have a residual claim. The sum of the value of the debt and the value of the equity then is equal to the value of the firm, ignoring the tax benefits from the interest paid on the debt. Considering taxes, the effective value of the firm will be higher since a levered firm has a tax benefit from the interest paid on the debt.

Capital Structure

The proportion of a firm’s capital structure supplied by debt and by equity is reported as either the debt to equity ratio (D/E) or as the debt to value ratio (D/V), the latter of which is equal to the debt divided by the sum of the debt and the equity.

Risk Premiums

Business risk is the risk associated with a firm’s operations. It is the undiversifiable volatility in the operating earnings (EBIT). Business risk is affected by the firm’s investment decisions. A measure for the business risk is the asset beta, also known as the unlevered beta. The return on assets of a firm can be expressed as a function of the risk-free rate and the business risk premium (BRP):

rA = rF + BRP

Financial risk is associated with the firm’s capital structure and magnifies the business risk of a firm. Financial risk is affected by the firm’s financing decision.

Total corporate risk is the sum of the business and financial risks and is measured by the equity (levered) beta. The business risk premium (BRP) and financial risk premium (FRP) are reflected in the levered (equity) beta, and the return on levered equity can be written as:

rE = rF + BRP + FRP

Debt beta is a measure of the risk of a firm’s defaulting on its debt. The return on debt can be written as:

rD = rF + default risk premium

Cost of Capital

The cost of capital is the rate of return that must be realized in order to satisfy investors. The cost of debt capital is the return demanded by investors in the firm’s debt; this return largely is related to the interest the firm pays on its debt. Managers used to believe that equity capital had no cost if no dividends were paid; however, equity investors incur an opportunity cost in owning the equity of the firm and they demand a rate of return comparable to what they could earn by investing in securities of comparable risk.

The return required by debt holders is found by applying the CAPM:

rD = rF + betadebt (rM– rF)

The required rate of return on assets can be found using the CAPM:

rA = rF + betaunlevered (rM– rF)

Using the CAPM, a firm’s required return on equity is calculated as:

rE = rF + betalevered (rM– rF)

Under the Modigliani-Miller assumptions of constant cash flows and constant debt level, the required ROE is

rE = rA + (1-t)(rA– rD)(D/E)

where t is the corporate tax rate.

The overall cost of capital is a weighted-average of the cost of its equity capital and the after-tax cost of its debt capital:

WACC = rE (E/VL) + rD (1 – t)(D/VL)

Assuming perpetuities for the cash flows, the WACC can be calculated as:

WACC = rA (1– t(D/VL))

Neglecting taxes, the WACC would be equal to the expected ROA because the WACC is the return on a portfolio of all the firm’s equity and debt, and such a portfolio essentially has claim to all of the firm’s assets.

Estimating Beta

In order to use the CAPM to calculate ROA or ROE, one needs to estimate the asset (unlevered) beta or the equity (levered) beta of the firm. The beta that often is reported for a stock is the levered beta for the firm. When estimating a beta for a particular line of business, it is better to use the beta of an existing firm in that exact line of business (a pure play) rather than an average beta of several firms in similar lines of business. Expressing the levered beta, unlevered beta, and debt beta in terms of the covariance of their corresponding returns with that of the market, one can derive an expression relating the three betas. This relationship between the betas is:

betalevered = betaunlevered (1 + (1– t) D/E)– betadebt(1 – t) D/E

betaunlevered = (betalevered + betadebt(1 – t) D/E) / (1 + (1– t) D/E)

The debt beta can be estimated using CAPM given the risk-free rate, bond yield, and market risk premium.

Unlevered Free Cash Flows

To value the operations of the firm using a discounted cash flow model, the unlevered free cash flow is used. The unlevered free cash flow represents the cash generated by the firm’s operations and is the cash that is free to be paid to stock and bond holders after all other operating cash outlays have been performed.

Terminal Value

The value of the firm at the end of the last year for which unique cash flows are projected is known as the terminal value. The terminal value is important because it can represent 50% or more of the total value of the firm.

Three Discounted Cash Flow Methods for Valuing Levered Assets

APV (Adjusted Present Value) Method

The APV approach first performs the valuation under an unlevered all-equity

assumption, then adjusts this value for the effect of the interest tax shield:

VL = VU + PVITS

where VL = value if levered;

VU = value if financed 100% with equity;

PVITS = present value of interest tax shield.

The unlevered value is found by discounting the unlevered free cash flow at the required return on assets. The present value of the interest tax shield is found by discounting the interest tax shield savings at the required return on debt, rD.

The APV method is useful for valuing firms with a changing capital structure since the return on assets is independent of capital structure. For example, in a leveraged buyout, the debt to equity ratio gradually declines, so the required ROE and the WACC change as the lenders are repaid. However, when calculating the terminal value it may be appropriate to assume a stable capital structure, so in calculating the terminal value in a leveraged buyout situation the WACC method may be a better approach.

Flows to Equity Method

The flows to equity method sums the NPV of the cash flows to equity and debt.

Then,

VL = E + D

WACC Method

The WACC method discounts the unlevered free cash flow at the weighted average cost of capital to arrive at the levered value of the firm.

Cash Flows to Debt and Equity

When calculating the amount of cash flowing to debt and equity holders, it is not appropriate to use the unlevered free cash flows because these cash flows do not reflect the tax savings from the interest paid. Starting with the UFCF, add back the taxes saved to obtain the total amount of cash available to suppliers of capital.

Hurdle Price

At times a firm may wish to know at what price it would have to sell its product for a particular investment to have a positive NPV. To determine this price, express the operating cash flow in terms of price. Write out the expression for the NPV using the appropriate discount rate. For the longer operating period, one can calculate an annuity factor to multiply by the operating cash flow expression. Solve the expression for the cash flow that would result in an NPV of zero. Since the operating cash flow was written in terms of price, the price now can be found.

Debt Valuation

While debt may be issued at a particular face value and coupon rate, the debt value changes as market interest rates change. The debt can be valued by determining the present value of the cash flows, discounting the coupon payments at the market rate of interest for debt of the same duration and rating. The final period’s cash flow will include the final coupon payment and the face value of the bond.

Optimal Capital Structure

The total value of a firm is the sum of the value of its equity and the value of its debt. The optimal capital structure is the amount of debt and equity that maximizes the value of the firm.

Share Buyback

If a firm has extra cash on hand it may choose to buy back some of its outstanding shares. This decision can be based on information that the firm has and that the market does not have. Therefore, a share buyback could serve as a signal that the share price has potential to rise at above average rates.

Source: www.quickmba.com

Essential Vocabulary

1. historical cost – историческая стоимость (фактическая стоимость приобретения актива)

2. trademark n – торговая марка

3. accounting profit – учетная (бухгалтерская) прибыль

4. paid-in capital – авансированный (оплаченный) капитал

5. cash flow statement – отчет о движении денежных средств

6. operating activities – операционная деятельность

7. investing activities – инвестиционная деятельность

8. financing activities – финансовая деятельность

9. cash cycle – денежный цикл

10. payables n., pl – кредиторская задолженность

11. expensing of costs – вычитать расходы для целей налогообложения

12. income statement – отчет о прибылях и убытках

13. cost of goods sold (COGS) – себестоимость реализованной продукции

14. current assets – текущие (краткосрочные) активы

15. collection period – средний срок инкассации поступлений

16. inventory period – средний срок реализации запасов

17. payables period – средний срок покрытия кредиторской задолженности

18. financial ratio – финансовый коэффициент

19. short-term loan – краткосрочный кредит

20. term loan – срочный (с фиксированным сроком) кредит

21. revolving loan – возобновляемый (револьверный) кредит

22. evergreen loan – «вечнозеленый» кредит (регулярно возобновляемая кредитная линия без требования периодического полного погашения и с фиксированным общим сроком, после чего она может быть снова возобновлена)

23. unlevered a – безрычаговый (без привлечения заемных средств)

24. all-equity financing – финансирование только на основе собственного капитала

25. debt to equity (D/E) ratio – отношение заемного капитала к собственному

26. debt to value (D/V) ratio – отношение заемного капитала к ценности компании

27. Earnings before Interest and Tax (EBIT) – прибыль до уплаты процентов и налогов

28.risk premium – премия за риск

29. opportunity cost – цена возможности, упущенная прибыль

30. Capital Assets Pricing Model (CAPM) – модель оценки фиксированных активов

31. perpetuity n – бессрочное владение, пожизненная рента

32.pure play – «чистая игра» (компания, занимающаяся почти исключительно одним видом деятельности)

33. Adjusted Present Value (APV) – скорректированная приведенная ценность

34. leveraged buyout (LBO) – рычаговый выкуп (выкуп в кредит)

35. hurdle price – «пороговая» цена

36. annuity n – аннуитет, рента (регулярно поступающие равные платежи)

37. coupon rate – купонная ставка

Exercise 1. Answer the following questions.

1. Is the balance sheet method an appropriate way to value a company? 2. What is the essence of the valuation method based on cash flows? 3. Why is a company’s cash cycle important? 4. How can you calculate the number of days of assets and liabilities that a firm has on hand? 5. How can you determine firm value, equity value and debt value? 6. What are the risk premiums? 7. How can you calculate cost of capital? 8. How can you estimate different betas of a company? 9. What DCF methods can be used for valuing levered assets? 10. What is the hurdle price? 11. What is the optimal capital structure? 12. What are the implications of share buyback?

Exercise 2*. Find terms in the text that match definitions given below and make sentences of your own with each term.

1. anything owned by a business or individual that has commercial or exchange value

2. financial statement that presents a «snapshot» of what the business owns, what it owes, and what equity it has on a given date

3. indicates how quickly your customers pay you

4. a discipline dealing with the firm’s operations with regard to investing and financing

5. figure representing the cost of buying raw materials and producing finished goods

6. cash or other assets you expect to use in the operation of the firm within one year

7. distribution of earnings to shareholders

8. value of a firm’s raw materials, work in process, supplies used in operations, and finished goods

9. measures the firm’s use of borrowed funds versus those funds provided by the shareholders or owners

10. amount owing to creditors for goods and services on an open account

11. amount due from customers for merchandise or services purchased on an open account

12. a company’s purchase of its outstanding stock

13. a loan for a specified amount for a fixed period of time (usually 1 to 10 years) and often with a fixed periodic repayment

Exercise 3*. Fill in the blanks using terms given below.

Introduction into the DCF Analysis

The notion that money has…… is a basic concept of finance. The sooner funds are received, the sooner they can be put to work in other new…… If funds are received later rather than sooner, the recipient forgoes the……. that could have been earned in the meantime. Therefore, to analyze the economic worth of investment opportunities, managers must take into account the timing of…….. as well as their amounts.

The rate of interest represents the rate at which……. funds can be exchanged for…… funds, and vice versa. The interest rate is the rate of exchange over time and is the tool for…….. cash flows to account for differences in timing. Time affects cash flows through the……… of compound interest.

The future value of a sum of money equals its present value…….. forward through time at the appropriate interest rate. Similarly, the present value of a future sum is its future value……….. back to the present. The present value of a……… of payments is the sum of the present values of its separate elements. In the case of level streams (……….), the computation of present value can be simplified using present-value tables.

The general DCF……. expresses the value of an asset as the sum of all payments the asset will generate, discounted to their present value. Using DCF techniques, a complex……. of cash flows extending over many time periods can be reduced to a single figure that is equivalent in value. The present value of a stream of cash…….. can be compared to the……… required to generate it. Similarly, two or more……… investments (each of which generates a complex cash flow stream) can be reduced to present values and compared directly. DCF techniques greatly simplify the……… of complex cash flow patterns.

Terms:

stream, valuation, adjusting, annuities, outlay, time value, discounted, investments, inflows, future, model, interest, cash flows, alternative, present, mechanism, pattern, compounded

Exercise 4. You are a Harvard Business School graduate hired as CFO by a major Russian company. Its CEO has heard about DCF analysis and wants to use it for valuing investment projects of his company. You have to explain to him the advantages and disadvantages of this method. Invent a dialogue between these two individuals using the following briefing materials.

What are the Pluses and Minuses of the DCF Analysis?

Advantages

Arguably the best reason to like DCF is that it produces the closest thing to an intrinsic stock value. The alternatives to DCF are relative valuation measures, which use multiples to compare stocks within a sector. While relative valuation metrics such as P/E, EV/EBITDA and price to sales ratios are fairly simple to calculate, they aren’t very useful if an entire sector or market is over– or undervalued. A carefully designed DCF, by contrast, should help investors steer clear of companies that look inexpensive against expensive peers.

Unlike standard valuation tools such as the P/E ratio, DCF relies on free cash flows. For the most part, FCF is a trustworthy measure that cuts through much of the arbitrariness and «guesstimates» involved in reported earnings. Regardless of whether a cash outlay is counted as an expense or turned into an asset on the balance sheet, free cash flow tracks the money left over for investors.

Best of all, you can also apply the DCF model as a sanity check. Instead of trying to come up with a fair value stock price, you can plug the company’s current stock price into the DCF model and, working backwards, calculate how quickly the company would have to grow its cash flows to achieve the stock price. DCF analysis can help investors identify where the company’s value is coming from and whether or not its current share price is justified.

Disadvantages

Although DCF analysis certainly has its merits, it also has its share of shortcomings. For starters, the DCF model is only as good as its input assumptions. Depending on what you believe about how a company will operate and how the market will unfold, DCF valuations can fluctuate wildly. If your inputs – free cash flow forecasts, discount rates and perpetuity growth rates – are wide of the mark, the fair value generated for the company won’t be accurate, and it won’t be useful when assessing stock prices.

DCF works best when there is a high degree of confidence about future cash flows. But things can get tricky when a company’s operations lack what analysts call «visibility» – that is, when it’s difficult to predict sales and cost trends with much certainty. While forecasting cash flows a few years into the future is hard enough, pushing results into eternity (which is a necessary input) is nearly impossible. The investor’s ability to make good forward-looking projections is critical – and that’s why DCF is susceptible to error.

Valuations are particularly sensitive to assumptions about the perpetuity growth rates and discount rates. DCF analysis is a moving target that demands constant vigilance and modification.

Also, the model is not suited to short-term investing as DCF focuses on long-term value. A well-crafted DCF may help you avoid buying into a bubble, but it may also make you miss short-term share price run-ups that can be profitable. Moreover, focusing too much on the DCF may cause you to overlook unusual opportunities. For example, Microsoft seemed very expensive back in 1995, but its ability to dominate the software market made it an industry powerhouse and an investor’s dream soon after.

DCF is a rigorous valuation approach that can focus your mind on the right issues, help you see the risk and help you separate winning stocks from losers. But bear in mind that while the DCF technique can help reduce uncertainty, it won’t make it disappear.

Source: investopedia.com

Exercise 5. Translate into English.

Оценка денежного потока инвестиционного проекта

От того, насколько точно рассчитан экономический эффект инвестиционного проекта, во многом зависит будущий успех компании. При этом одной из самых сложных задач является правильная оценка ожидаемого денежного потока. Если его рассчитать неправильно, то любой метод оценки инвестиционного проекта даст неверный результат, из-за чего эффективный проект может быть отвергнут как убыточный, а экономически невыгодный принят за сверхприбыльный. Именно поэтому важно грамотно составить план денежного потока компании.

Для оценки эффективности инвестиционных проектов, как правило, применяются стандартные методы расчета: чистой приведенной (дисконтированной) стоимости – NPV (net present value), срока окупаемости – PB (payback period), индекса рентабельности – PI (profitability index) и внутренней нормы доходности – IRR (internal rate of return). Названные показатели вычисляются на основе плана денежного потока инвестиционного проекта.

Показатели эффективности инвестиционных проектов

Наиболее надежным и часто используемым является метод чистой приведенной стоимости (NPV). Он показывает разницу между суммой всех дисконтированных денежных потоков и начальными инвестициями. Согласно теории проект принимается, если значение NPV положительное, и отвергается, если NPV отрицательное. Этот показатель рассчитывается следующим образом:

где r – ставка дисконтирования;

I – начальные инвестиции;

Pk – денежные потоки за период с 1 по n-й год.

Другим классическим методом оценки эффективности инвестиций является внутренняя норма доходности (IRR). IRR – это значение ставки дисконтирования, при котором все денежные расходы по проекту равны всем денежным доходам. Иначе говоря, IRR = r, при котором NPV = 0.

Экономический смысл этого показателя заключается в следующем. IRR показывает ту норму доходности инвестиций, при которой для инвестора не имеет значения – инвестировать срества в проект или нет. Согласно теории финансов проект следует принимать только в том случае, если его IRR выше стоимости капитала. Расчет индекса рентабельности (PI) используется, когда необходимо выбрать один проект из ряда альтернативных, имеющих примерно одинаковое значение NPV. Индекс рентабельности определяется по формуле:

Самый популярный метод оценки инвестиций – срок окупаемости (PB). Он показывает, через сколько лет окупятся затраты на проект: PB = N, где N – число лет, при котором:

Иногда сроки окупаемости рассчитываются с учетом временной стоимости капитала, то есть с использованием дисконтирования. В этом случае: PB = N, где N – число лет, при котором:

Под денежным потоком (cash flow) инвестиционного проекта понимают поступления и выплаты денежных средств, связанные исключительно с реализацией этого проекта. К денежным потокам проекта не относится движение денежных средств, возникающее в результате текущей деятельности предприятия.

Денежный поток проекта всегда разбивается по временным периодам (месяцам, кварталам, годам). При этом все платежи и поступления денежных средств включаются в денежный поток того периода, когда они были зачислены на денежные счета или списаны с них, независимо от того, к какому периоду относятся соответствующие затраты или доходы.

Информация о денежных потоках по проекту обычно представляется в виде плана, который называют прогнозным отчетом о движении денежных средств. На основе этого плана, который составляется за каждый период отдельно, и формируется денежный поток всего инвестиционного проекта.

План денежного потока, или прогнозный отчет о движении денежных средств, состоит из трех частей: денежные потоки от операционной (текущей) деятельности предприятия, от инвестиционной деятельности и связанные с финансовой деятельностью.

В первой части отражаются поступления денежных средств от реализации товаров, работ и услуг, а также авансов от покупателей и заказчиков. В качестве оттока денежных средств показываются платежи за сырье, материалы, коммунальные платежи, выплаты заработной платы, уплаченные налоги и сборы и т. д.

Во второй части показываются денежные потоки, связанные с приобретением и продажей имущества долгосрочного пользования, то есть основных средств и нематериальных активов.