1 Introduction MMBM 110512

7/31/2019 1 Introduction MMBM 110512

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Wijantini Prasetiya Mulya Business School

corporate

finance













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)




what is corporate finance?

introduction

what are main decisions of corporate finance?

any decisions made by business thataffect its finances


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?



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 !



Pertamina – Kinerja Keuangan



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)



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)



Financial Markets

Firms Investors

Secondary

Market

money

securitiesErnaJoy

Stocks and

Bonds

Money

Primary Market



Organizational Chart of a TypicalCorporation



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



past investment past

profit /surplus

future

profit /surplus

past future value

financefinancial accounting



value is …

accumulation of future reward for investors

accumulation of discounted future free cash flows



Goals of The Corporation

Value maximization and Social Welfare

Do managers maximize the value?

Benefit to Society?

Managers have many constituencies“stakeholders”



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





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




Specialist Monitoring

Auditors




time value of money




time value of money ….

A very important concept.

A Rupiah today is worth morethan a Rupiah tomorrow.




time value of money

Future Value

Present Value

Rates of Return

Amortization

Annuity




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




Spreadsheet Solution

Use the FV function: see spreadsheet

in Example.xls .

= FV(Rate, Nper, Pmt, PV)




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)






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




series of equal payment (PMT)

Annuity

Annuity




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




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





Use the PV function: see spreadsheet.

= PV(Rate, Nper, Pmt, Fv)




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





Use the FV function: see spreadsheet.

= FV(Rate, Nper, Pmt, Pv)




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




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





Use the RATE function:

= RATE (Nper, Pmt, PV, FV)




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




Amortization

PMT PMTPMT

0 1 2 316%

-260,000

3 16 -260,000 0INPUTS

OUTPUT

N I/YR PV FVPMT

115,767




0 1 2 3

115,767Interest

41,600

Principal Payments74,167




Amortization tables are widelyused--for home mortgages, autoloans, business loans, retirementplans, and so on.

They are very important!




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





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




interest rate




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)




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%.




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.




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




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.




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.




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.




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%.




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%.




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.




When is each rate used?

iNom: Written into contracts, quoted

by banks and brokers. Notused in calculations or shownon time lines.




iPer: Used in calculations, shown ontime lines.

If iNom has annual compounding,then iPer = iNom/1 = iNom.




EAR = EFF%: Used to comparereturns on investmentswith different payments

per year.




Notes:

B l Sh t M d l




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




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




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)



( 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

Documents

1 Introduction MMBM 110512