ADMN 3116: Financial Management 1 Lecture 1: Introduction

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© ADMN 3116, Anton Miglo

ADMN 3116: Financial Management 1

Lecture 1: Introduction

Anton Miglo

Fall 2014

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Organizational comments Blackboard: course outline, grades,

announcements, PPT slides Class notes Assignments (cases and projects): no late

assignments Investment game: teams Excel

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Organizational comments Grades: additional points It has two parts: first 5% are given to everybody in the

beginning of the course. This can only be reduced in the following cases:

Irrespective behaviour Disruptive behaviour Missing classes

Second 5% will be given at my discretion for class participation. Since any direct control of attendance is difficult and inefficient the following criteria are typically used:

Questions in class Questions outside of class (office hours, not e-mail).

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Investment game

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Topics covered

Introduction Time Value of Money Basic Valuation of Bonds and Stocks Investment Criteria Risk and Return Introduction to Portfolio Management Introduction to Cost of Capital and Capital

Structure Introduction to Options

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Lecture 1:

Money and finance Types of business organization Financial decisions and corporate

organization chart Financial information versus accounting

reports Introduction to Excel Additional readings: B ch. 1

Topics Covered

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Money and Finance

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Timelines

Projects

Securities

100–50% 400–30% -200 50– 50% 200–70%

Year

0 1 2

50 100

Year

0 1 2

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Forms of Business OrganizationSole proprietorship

Partnership Corporation

Ease of formation/termination

Easy Relatively Easy Complex

Life of a firm Termination or death

Death or withdrawal of partners

In perpetuity

Owners liability Unlimited Usually unlimited Limited

Separate legal entity

No Yes

Degree of control Complete Strong Separation of control and ownership

Taxes Based on personal Income taxes Corporate Income Tax & tax on dividends

Transfer of ownership

Limited Requires agreement of the partners

Unlimited

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Organization Chart

Board of Directors

CFO GM Production

Treasurer:raising capital

banking relationship

CEO

GM Marketing

Controller:Prepares financial statements

and budgets,

Internal accounting, taxes

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The Balance Sheet (Accounting View)

=

Cash 42

Receivable 86

Inventory 14

Short-term

Investments 15

Fixed Assets 902

Intangible Assets 85

Total Assets 1,144

Bank loan 40Ac. Payable 120Bonds 60Long Term Bank Debt 464Capital 110 Additional capital 40Retained earnings 310

Liab&Shareholders’ Equity 1,144

ASSETS LIAB&EQUITY

Book Values!!!!

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The Financial View of the Firm

=

Assets in place 1,144

Growth Assets 140

Total Assets 1,284

Debt 684

Equity 600

Liab&Shareholders’ Equity 1,284

ASSETS LIAB&EQUITY

Market Values!!!!

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Income Statement Sales 1,301.00

Cost of Googs sold 1,031.00

EBITDA 270.00

Depreciation & Amortization 140.00

EBIT 130.00

Net interest expense 10

Income Before Taxes 120.00

Income Taxes 29.00

Net Income After Taxes 91.00

Cash Dividends 22.00

Retained earnings 69.00

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Books

3. Corporate finance: basic theory and advanced topics, A. Miglo, Xlibris, 2012

2. Principles of Finance with Excel, Benninga

1. Fundamentals of Corporate Finance, Can. Ed. 8th ed. Brealey, Myers,…

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Excel!

Absolute and relative copying

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Getting started

You’ve managed to open ExcelExcel button Office buttonon desktop

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Try to put important variables in one place

12345

6789

1011121314151617181920

A B C D E F G H I

Interest rate 8%Annual deposit 12,000.00Annual cost of college 35,000

BirthdayIn bank on birthday,

before deposit/withdrawal

Deposit or withdrawal at

beginning of year

End of year before

interest

End of year with interest

10 0.00 12,000.00 12,000.00 12,960.0011 12,960.00 12,000.00 24,960.00 26,956.8012 26,956.80 12,000.00 38,956.80 42,073.3413 42,073.34 12,000.00 54,073.34 58,399.2114 58,399.21 12,000.00 70,399.21 76,031.1515 76,031.15 12,000.00 88,031.15 95,073.6416 95,073.64 12,000.00 107,073.64 115,639.5317 115,639.53 12,000.00 127,639.53 137,850.6918 137,850.69 -35,000.00 102,850.69 111,078.7519 111,078.75 -35,000.00 76,078.75 82,165.0520 82,165.05 -35,000.00 47,165.05 50,938.2521 50,938.25 -35,000.00 15,938.25

NPV of all payments 6,835.64 <-- =C7+NPV(B2,C8:C18)

SAVING FOR COLLEGECritical parameters (sometimes called "value drivers") are in the upper left-hand corner. The actual of saving for a college education is discussed in Chapter 2.

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Don’t hard-wire numbers

Use formulas instead of numbers

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Avoid using blank columns to accommodate cell “spillovers”

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Do not forget to name your spreadsheets

UGLY!! You can name sheets by clicking on the sheet tab.

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Adding “Getformula” to your spreadsheet

All PFE spreadsheets embed a small program called Getformula that allows you to see what you’ve written in a cell

When you open a PFE spreadsheet, Excel will ask you if you want to open Getformula:

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You may have to tinker with your spreadsheet Security settings! See PFE, Chapter 1 for details.

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Formatting the numbers

Mark numbers to be formatted Press right mouse button and choose Format Cells

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Relative versus absolute copying

Relative copying Absolute copying

1

2345678

A B C D

Number of units

Price per unit Sales

3 22.32 66.96 <-- =B3*A315 18.99 284.85 <-- =B4*A422 31.22 686.84 <-- =B5*A518 17.50 315.00 <-- =B6*A6

1,353.65 <-- =SUM(C3:C6)

RELATIVE COPYING123

456789

A B C

Price per unit 15.25

Number of units Sales

12 183.00 <-- =A5*$B$222 335.50 <-- =A6*$B$2

152 2,318.00 <-- =A7*$B$2

2,836.50 <-- =SUM(B5:B7)

ABSOLUTE COPYING

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First spreadsheet

How does an investment of $1000 grow over time with 15% annual interest?

Note formula in cell and in Formula Bar

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Copying the formula by dragging

123456789

10111213

A B C

Year Bank balance0 10001 11502 1322.53 1520.8754 1749.006255 2011.3571886 2313.0607667 2660.019888 3059.0228639 3517.87629210 4045.557736

COMPOUND INTEREST

The result

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Formatting: Look at the toolbar

You can change the fontsYou can change the cell alignmentYou can merge cells, wrap textYou can do number formats

PLAY AROUND WITH THIS! IT’S EASY!

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Last slide:

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ADMN 3116: Financial Management 1 Lecture 1: Introduction