FINANCE 1. Introduction

FINANCE1. Introduction

Solvay Business SchoolUniversité Libre de Bruxelles

DESG |2April 22, 2023

Qui suis-je?

• André Farber• Professeur de finance à la Solvay Business School depuis….• Actuellement

– Vice Recteur à la Stratégie et au Développement Institutionnel– Administrateur de CPH Banque & Fluxys


Organisation du cours

• Référence: FLOPFarber, A., Laurent, M-P., Oosterlinck, K ; Pirotte, H.Finance Pearson Education, 2004

• Site web: www.ulb.ac.be/cours/solvay/farber• Slides• Fichiers Excel• Anciens examens

• Cotation:• Examen à livre fermé

http://www.ulb.ac.be/cours/solvay/farber


Qu’est-ce que la finance?

• Trois grandes types de décisions:• INVESTISSEMENT

• FINANCEMENT

• DIVIDENDES


Vision comptable

• Bilan Compte de résultats

Chiffres d’affaires– Charges d’exploitation

= Résultat avant charges financières et impôts (EBIT)

– Intérêts– Impôts

= Bénéfice net• Bénéfice mis en réserve• Dividende

Actifs circulant

Immobilisés

Dettes à court terme

Dettes à moyen et

long terme

Fonds propres

Fonds de roulement

net


Flux financiers (Cash Flows)

Entreprise Marchés financiers

Emission de titresInvestissement

Cash flow opérationnel Dividendes,

intérêts

TEMPS et INCERTITUDE

Investisseurs


Vision financière

Actif total

Immobilisés

+

Fonds de roulement

net

Fonds propres

Dettes

Valeurs comptable Valeurs de marché

Capitalisation boursière

Valeur de la dette

Market capitalization

Création de valeur


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 valuepriceStock book(M/B)-to-Market

equity rs'StockholdeIncomeNet )(equity on Return ROE


Google Inc. (GOOG)(24/01/08) Stock price:$574.49


Google (suite)


Création de valeur

• L’objectif de ce cours est d’introduire les principales méthodes d’évaluation qui permettent d’identifier les décisions créatrices de valeurs.

• Il repose sur quelques principes fondamentaux:

– TIM: Time is money, le temps est de l’argent

– NFL: No free lunch, pas de repas gratuit (≠National Football League)

– RIRE: Risk – Return (pas drôle)

– NABO: No arbitrage opportunity, pas d’arbitrage possible (géant..)


Plan du cours

1. Introduction – Fondements (certitude) 2. Fondements (incertitude)3. Relation risque – rentabilité attendue4. Evaluation d’options5. Evaluation d’actions et d’entreprises6. Choix d’investissement 7. Structure financière et coût du capital8. Synthèse


Drivers of ROE

• PROFITABILITY (du Pont system)

• Three determinants :

EquityAssets

AssetsSales

SalesNet 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


Examples

Wal-Mart Vodafone TotalUS UK F

Rank 5 14 24MktValue 241,187 159,150 122,945M/ B 5.6 0.7 3.5P/ E 27 15 14Sales 258,681 61,259 127,796Profi t 8,861 11,364 8,968Assets 104,912 269,754 97,647ROE 20.20% 17.80% 24.10%Profi t margin 3.43% 18.55% 7.02%Turnover 2.47 0.23 1.31Leverage 2.39 4.23 2.62Source: Business Week July 26, 2004


Levers of Performance

Return on Equity

Return on Invested Capital Leverage

Profit Margin Asset Turnover


Summarized (managerial) balance sheet

Assets

Fixed assets (FA)

Working capital requirement (WCR)

Cash (Cash)

Liabilities

Stockholders' equity (SE)

Interest-bearing debt (D)

FA + WCR + Cash = SE + D

Working capital requirement : definition

+ Accounts receivable+ Inventories+ Prepaid expenses

- Account payable- Accrued payroll and other expenses

Interest-bearing debt: definition

+ Long-term debt+ Current maturities of long term debt+ Notes payable to banks


Net Working Capital

• Net working capital can be understood in two ways:• as an investment to be funded: Current Assets - Current Liabilities• as a source of financing=Stockholders' equity + LT debt - Fixed Assets

Fixed Assets

Current Assets

Stockholder’s equity

Long term debt

Current liabilities

Net Working Capital

Current ratio: a measure of NWC

Current ratio = Current assets / Current liabilites

Net working capital = Current assets - Current liabilites

Current ratio > 1 NWC > 0


Net Working Capital vs Working Capital Requirement

• Summarized balance sheet identity:• FA + WCR + CASH = SE + LTD + STD

• can be written as:• WCR + (CASH - STD) = (SE + LTD - FA)

• WCR + NLB = NWC

Working Capital

Requirement

Net Liquid Balance

Net Working Capital


Return on invested capital

• Return on assets (net)= Net income / Total assets• Advantage: fits with DuPont system

• ROE = ROA x Equity multiplier• Limitation: Net income = EBIT - Interest expense - Taxes

– Depends on capital structure:• 1. Interest expense: function of interest-bearing debt• 2. Interest expense : tax deductible

• Preferred measure: Return on Invested Capital (ROIC)

• NB: ROIC = ROA (gross) (1 - Tax rate) • = ROE of a all equity financed firm

debt bearingInterest equity rs'StockholdeTaxRate)-EBIT(1ROIC


Financial leverage

• Financial leverage magnifies ROE only when ROA (gross) is greater than the interest rate on debt.

• Balance sheet: TA = SE + D• Income statement: NI = EBIT - INT- TAX• Interest expense INT = r D (Interest expense = Interest rate x Interest-bearing debt)

• Taxes TAX = (EBIT - r D) Tc (Taxes = Taxable income x Tax rate)

• Remember : ROIC = ROAgross (1 - Tc)• ROE = ROIC + (ROAgross - r) (1-Tc) (D/SE)

SED

cTrSETA

TAcTEBIT

SENIROE

)1(

)1(

SED

TrROICROICROE c ))1((


Financial Leverage: example

Cost of debt 8%Tax Rate 40%

Balance sheetTotal asset 100.000Book Equity 60.000Debt 40.000

Income StatementEBIT 20.000Interest 3.200Taxes 6.720Net Income 10.080

Return on Equity 16,80%=

Return on Invested Capital ROIC 12,00%+

[ROIC - rD(1-Tc)] 7,20%X

Debt / Book Equity 66,67%

FINANCE 1. Introduction

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