Finance

The general concept of time value of money relies on the fact that the value of a dollar today is worth more than the value of a dollar in the future. We use time value of money concepts to compare the value of cash flows received at different times.

Annuities are periodic, fixed payments over a period of time. Present and future values are used in annuity calculations.

Investors will buy shares in a company when they believe they will receive a return on their investment, either in the form of dividends (that is, regular cash distributions of a corporation's profits) or an appreciation in the value of the stock (that is, they can sell the stock for more tomorrow than they would today). We use the dividend discount model and comparative models to value securities. See also: Financial Statement Analysis.

The CAPM looks at how a security’s expected return is related to its risk. This model is based on a market portfolio of securities.

The arbitrage pricing theory looks at how a security’s return is related to its risk. However, the arbitrage pricing theory looks at different factors that contribute to a securities risk. These factors may be systematic, such as interest rates, or unsystematic, such as the success or failure of a company’s research and development.

The rate of return expected by investors determines what the cost of debt is.

Determining the cost of a project is important when budgeting. Debt and equity are used to find the WACC.

Consider a company's assets and liabilities in the short term and what decisions will affect the business within the year.

• Cash Budgeting
• Inventory Management
• Accounts Receivable (Credit) Management
• Cash Management
• Management of Short-Term Liabilities

Capital budgeting is the term that describes the long-term planning and decision-making associated with investments such as new property, plants and machinery, replacing old machinery, creating new products, and undertaking research and development projects.

• Net Present Value (NPV)
• Flow to Equity (FTE) Approach
• Adjusted Present Value (APV) Approach
• Capital Budgeting Ratios
• Real Options Valuation
• Beta and Required Return of a Project

We look at theories such as Modigliani and Miller (M&M) Proposition I and II to explain how a firm's capital structure and tax shield from debt affect firm value; and how leverage affects the risk and return of a firm's stock.

A corporation's earnings may be paid out as dividends to shareholders instead of kept as retained earnings. Corporations may also use extra cash on hand to repurchase its own stock. Paying dividends, unlike repurchasing stock, reduces the value of a share by the amount of the dividend on the ex-dividend date.

As a company grows, its growth prospects will likely require additional financing. For many companies, raising new capital can be done by issuing more common stock. A company's first issue of common stock to the public is called an Initial Public Offering. Afterword, a corporation may issue new equity at any time in order to finance its growth. When new common shares are offered to existing shareholders first, this is called a rights offering.

• Rights Offering
• Initial Public Offering (IPO)

Bonds are a type of security; in essence, bonds are a corporation's promise to pay a specified amount at a future date. Investors buy bonds at an amount equal to the present value of this future payment (or the sum of the discounted future payments expected from the bond). They do this in order to earn interest from the purchase of the bond. By knowing the interest rate investors expect to return on the purchase of a corporate bond, we can calculate the price they would be willing to pay.

Many assets such as buildings, machinery and other equipment, may be leased or purchased outright. Lease vs. buy decisions are important financing decisions for businesses looking to acquire a new asset.

Derivatives are contracts that involve underlying assets and can be used for hedging the risk associated with the prices of these assets. Hedging risk plays an important role in driving the popularity of financial derivatives. As well, derivatives play a key role in supporting standardized and transparent trading of commodities in financial markets.

• Options
• Futures
• Swaps

Accounts receivables make up somewhere over 15 percent of all assets held by firms. As a result, decisions that affect how a company extends credit to consumers (consumer credit) and other firms (trade credit) have a significant impact on the financing activities of the firm.

There are three different legal variations of a merger and acquisition: merger/consolidation, acquisition of stock and acquisition of assets. Mergers often occur because of the synergy that can be created when two companies integrate their operations. Company takeovers can also occur as a result of proxy battles and leveraged buyouts.

Although debt provides a tax shield that increases the value of a firm, the use of debt is limited by what we call financial distress costs. Financial distress occurs when a firm has difficulty meeting its financial obligations. A firm may default on its interest payments, become insolvent, stop investing, restructure, and/or file for bankruptcy.

The fundamental value of a firm is based on its earnings. As analysts and financial managers, we use accounting concepts to better understand a firm’s earnings to evaluate where a company is doing well, where it can focus on improving, and how much growth and future earnings we can expect. Growth rates determined through a comprehensive analysis of a firm’s financial statements can be used to value the firm’s securities.

Multinational corporations (MNCs) have many issues to consider and opportunities available that a domestic company does not need to consider.

• Foreign Exchange Rates