Transcript Dear user, - Solvay Brussels School of Economics and

Théorie Financière
2003-2004
1. Introduction
Professeur André Farber
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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Organisation du cours
• Ouvrage de référence:
Brealey, R. and Myers, S.
Principle of Corporate Finance
7th ed., McGraw-Hill 2003
• 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
• Cas
• Examen(s)
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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Cas
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2 cas
Groupe de maximum 5 étudiants
Solution écrite
20% de la cote finale
Discussion du cas en groupes
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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Plan du cours
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1.
2.
3.
4.
5,6.
7,8.
9,10.
11, 12.
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Introduction
Valeur actuelle
Cash flows, planning financier
Evaluation d’entreprises
Analyse de projets d’investissement
Rentabilité attendue et risque
Options
Evaluation et financement
A.Farber Tfin 2003-2004 01 Introduction
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What is Corporate Finance?
• INVESTMENT DECISIONS: Which REAL ASSETS to buy ?
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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?
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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Accounting View of the Firm
•
Balance sheet
Net
Working
Capital
Income statement
Current
liabilites
Current
assets
Long-term
debt
Fixed
assets
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Shareholders’
equity
Sales
– Operating expenses
= Earnings before interest and taxes
(EBIT)
– Interest expenses
– Taxes
= Net income (earnings after taxes)
• Retained earnings
• Dividend payments
A.Farber Tfin 2003-2004 01 Introduction
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Cash Flows between the Firm and the Financial Markets
Firm issue
securities
Firm invest
Firm
Cash flow from
operations
Financial
markets
Investors
Dividend and
debt payments
Timing of cash flows + uncertainty
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A.Farber Tfin 2003-2004 01 Introduction
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Financial markets
• Primary markets
• Secundary markets
• Stock exchanges
• Over-The-Counter (OTC)
• Direct financing
• Intermediate financing: banks, insurance companies
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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Market values
Total capital
employed
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Equity
Market
value of
equity
Debt
Market
value of
debt
Cash flow
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Value creation
• Market value added (MVA)
• = Market value of the firm’s capital – Total capital employed
Market value of equity
+ Market value of debt
Stockholders’ equity
+ Financial debt
• 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
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The Capital Investment Trade-off
• The firm can always give cash back to the shareholders
?
Project
Cash
Stockholder
Investment
opportunities in
capital markets
• 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
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A.Farber Tfin 2003-2004 01 Introduction
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Economic Value Added (EVA)
• EVA = Earnings after tax – WACC  Total capital
Example:
EVA calculation
Equity
Debt
Total capital
$10b
$10b
$20b
EBIT
Tax rate
WACC
$2.5b
40%
11%
Earnings after tax = $2.5b (1-0.40) = $1.5b
EVA = $1.5b – 11%  $20b
= $1.5b – $2.2b
= – $700m
(EVA is explained RWJ Chapter 12 – Appendix)
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How to measure value creation ?
• 1. Compare market value of equity to book value
Stock price
Market- to - book(M/B)
Book valueper share
• Value creation if M/B > 1
• 2. Compare return on equity to the opportunity cost of equity
Net Income
Return on equity ( ROE) 
Stockholders' equity
• Value creation if ROE > Opportunity Cost of Equity
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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M/B vs ROE
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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

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ROE> r
A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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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%
• EVA = 2 – 10 × 10% = € 1 b / year
• 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
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The Top Companies 2003
1
2
3
4
5
6
7
8
9
10
11
12
13
GE
Microsoft
Exxon
Pfizer
Wal-Mart
Citigroup
Johnson & J.
Royal D./Shell
BP
American Intl
IBM
Vodafone
Intel
US
US
US
US
US
US
US
UK
UK
US
US
UK
US
Mkt
Value
$ bil.
Price/
Book
ROE
%
286
264
245
245
232
211
161
158
153
151
149
148
136
4.3
4.7
3.3
9.9
5.7
2.5
6.7
2.7
2.2
2.4
6.2
0.7
3.8
22.5
17.1
21.2
48.0
20.2
18.2
28.4
15.6
6.8
8.8
22.8
3.2
8.7
Source:Business Week, July 14 2003
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A.Farber Tfin 2003-2004 01 Introduction
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The Top Companies 2002
Mkt Cap
$ billions
Price/Book
ROE %
1
General Electric
US
309
5.6
26.6
2
Microsoft
US
276
5.8
13.4
3
Exxon Mobil
US
271
3.7
16.7
4
Wal-Mart Stores
US
241
6.7
19.3
5
Citigroup
US
223
2.7
19.2
6
Pfizer
US
217
11.9
45.3
7
Royal Dutch / Shell
EU
194
3.5
19.4
8
BP
EU
192
2.6
13.3
9
Johnson & Johnson
US
187
7.7
24.3
10
Intel
US
185
5.2
4.9
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Solvay Business School – Université Libre de Bruxelles
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Q&D financial analysis
• PROFITABILITY (du Pont system)
Net Income
ROE 
Book Equity
• Three determinants :
ROE 
17.1%
Profit
Margin
•Microsoft - 2003 US$ bil.
•Net Income
7,829
•Sales
28,365
•Assets
67,646
•Book equity
45,784
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Net Incom e

Sales
27.6%
Sales

Assets
Asset
Turnover
Financial
Leverage
0.42
1.48
A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
Assets
Equity
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References
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Corporate finance textbooks (MBA level)
– Brealey, Richard and Steward Myers, Principles of Corporate Finance, xth edition, McGrawHill 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
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A.Farber Tfin 2003-2004 01 Introduction
Solvay Business School – Université Libre de Bruxelles
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