高级公司理财1

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1、ADVANCE FINANCIAL MANAGEMENTnDr.R.KabirnDepartment of Finance,Tilburg University,The NetherlandsnTeaching:nCorporate Finance/Financial ManagementnEmpirical Corporate FinancenSeminar in FinancenResearch:nCorporate finance,Corporate governance,Financial market regulationnInternet address:www.tilburgun

2、iversity.nlWhat is Finance?nFinance is usually concerned with the way in which funds for a firm are raised and investednFinance consists of four interrelated areas:n Corporate Finance(Financial Management)n Investments(Asset Pricing)n Financial Markets(Money and Capital Markets)n BankingWhat is(Corp

3、orate)Financial Management?nFinancial Management primarily addresses the following three questions:n1.What long-term investments should the firm engage in?n2.How can the firm raise the money for the investments?n3.How much short-term cash flow does a company need?nWe take the perspective of a financ

4、e manager of a firm to understand these issues.Role of the Finance ManagernStands between the firms operations and the financial marketsnInvolved with the flow of cash from investors to the firm and back to the investors againnInvolved with the use of cash to invest in firms real assetsRole of the F

5、inancial ManagerFinancialmanagerFirmsoperationsFinancialmarkets(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)Different forms of firmsnFirms are usually classified according to their form of owners

6、hip:nSole proprietorshipnPartnershipnCorporationTypical Features of a CorporationBoard of DirectorsManagementAssetsDebtEquityShareholdersDebtholdersAdvantages and disadvantages of corporationsnAdvantages:nSeparate legal entitynEasy transfer of ownershipnCorporation has unlimited lifenShareholders ha

7、ve limited liabilitynDisadvantages:nDouble taxation:corporate and personal income taxnSeparation of ownership and control leads to agency problems between managers and shareholdersObjectives/Goals of a businessnPopular objectivesnMaximisation of(accounting)profitnMaximisation of salesnMaximisation o

8、f return on investmentnSurvivalnStabilitynGrowthWhy not profit maximization?nThere are problems in the use of accounting profit(earnings)nIgnores time value of moneynIgnores risknCalculated on the basis of accounting rules“Creative Accounting”nIgnores investment/growth opportunities of a firmObjecti

9、ve/Goal of a Finance ManagernMaximize Market Value/Wealth for the Owners(Shareholders)nMarket value is the value that shareholders place on their securities today.It depends on the future cash flows that they expect to receive.nMarket value is forward looking.Why focus on Market Value?nThis objectiv

10、e takes into account the valuable features of all other objectivesnIt may not be a perfect description of what firms seek to achievenBut,it is probably the most objective measurenMarket value of shares is calculated as the share price multiplied by the number of outstanding shares.Why we do not focu

11、s on book value?nBook Value is the value of the firm according to the balance sheetnBook value of assets suffers from same problems like earningsnBook value of assets fails to consider inflation,technological change and organizational capitalnBook value ignores intangible assets,future liabilities(o

12、ff-balance sheet)nBook value is not a forward looking measure.Sources of FinancingnShort-term and Long-term sourcesnHow much short-term cash flow does a company need to pay its bills?nHow much long-term cash flow does a company need to pay for its investments?nInternal and External sourcesnHow much

13、of the earnings should be retained?nHow much should be financed by Equity,Debt(Bank debt,Bonds),Warrants,Convertibles,etc?Ways firms can issue sharesnInitial Public Offering(IPO):It is the first public equity issue made by a company.nPublic firms(those already listed on a stock exchange)can issue sh

14、ares in different ways:nPrivate placing nPublic issueGeneral Cash OfferRights Offering1.Dividend Valuation Model:nShare price equals the present value of all expected future dividends.PDivrDivrDivPrHHH01122111()().()Valuation of a common sharenIf we expect no growth of dividends,and plan to hold the

15、 share indefinitely,we will then value the share as follows:nPo=Div/rnIf dividends are expected to grow at a constant rate,we will then value the share as follows:nPo=Div1/(r-g)nThis formula is popularly known as Gordon Growth ModelValuation of a common shareValuation of a common sharenAn Example:nC

16、urrent forecasts are for XYZ Company to pay dividends of$3,$3.24,and$3.50 over the next three years,respectively.nAt the end of three years you anticipate selling your stock at a price of$94.48.nWhat is the price of the stock given a 12%expected return?Valuation of a common sharePVPV3001 123241 1235

17、094 481 1200123.(.).(.).(.)$75.Valuation of a common shareIf we forecast no growth of dividend of$3,and plan to hold the stock indefinitely,we will then value the stock as a PERPETUITY.PerpetuityPDivrorEPSr011Assumes all earnings are paid to shareholders.250.123rDP 02.Comparable Firm Valuation Model

18、:nMany relate price-earnings(P/E)ratio of comparable firms to determine the current share price.n Po=Expected EPS x P/EnAnalysts also relate variables other than P/E ratio to share pricenPrice/Cash Flow RationPrice/Sales RationPrice/Book(or,Market to Book)RatioValuation of a common sharenHow to find

19、 comparable firms?nUse firms operating in the same industrynWhat constitutes an industry?nThere is still potential for misuse with comparable firmsValuation of a common share3.Discounted Cash Flow Model:nCurrent share price is derived from the value of a business which is usually computed as the dis

20、counted value of future Free Cash Flows of the firm.nIn practice,people use the following approach:HHHHrPVrFCFrFCFrFCFPV)1()1(.)1()1(2211PV(free cash flows for a certain number of years)PV(horizon value)Valuation of a common shareExampleGiven the following free cash flows,calculate the PV of near te

21、rm cash flows,PV(horizon value),and the total value of the firm.r=10%and g=6%1.891.791.681.59.23-.20-1.39-1.15-.96-.80-FlowCash Free51.3173.2905.2847.2643.2374.2028.1740.1400.1200.10ValueAsset 10987654321YearExample4.2206.10.59.11.11 value)PV(horizon66.31.123.1.120.1.139.11.115.11.196.1.1.80-PV(FCF)

22、65432Example$18.822.4-3.6 value)PV(horizonPV(FCF)s)PV(businesEvaluating the Discounted Cash Flow approach to valuationnStrengthsnRecognizes that value is created when invested capital earns returns above its opportunity costsnAttempts to value directly the benefits that accrue to investorsnCan be ap

23、plied to all types of firmnWeaknessesnForecasting future cash flows is not easynEstimating cost of capital for a private firm is not easyFree Cash Flow approach to valuationnWhen valuing a business,Free Cash Flows(FCF)should be the theoretical basis for all Present Value(PV)calculations.nFCF is a mo

24、re accurate measurement of PV than either Dividend or Earnings Per Share.Framework for Valuation(Copeland,Koller and Murrin)nSteps in valuationnForecast free cash flowsnAfter-tax operating earnings+non-cash expenses(depreciation)-investmentsnEstimate cost of capitalnCost of equity and cost of debtnT

25、arget weights(based on market value)nEstimate continuing valuenCalculate and Interpret resultsCase Study:KPNnFollow DCF approach onlynConsider forecast assumptions(longterm prospects)nForecast cash flows 1993-1998nAfter-tax operating earnings+non-cash expenses(depreciation)-investmentsnEstimate weig

26、hted average cost of capitalnCost of equity(CAPM)and cost of debt(7.1%)nTarget weights(based on market value)nEstimate continuing value(1999 up to infinity)nCalculate value per share of KPNInitial Public Offering(IPO)nBasic features nGoing public involves the shares of a company getting quotation(li

27、sting)on a stock exchange.nAll IPOs are cash offers.nTwo ways shares are made available to public:n“Old shareholders are selling out=secondary offeringnCreation of new shares(increase in share capital)=primary offeringWhy IPO(Go Public)?nTo raise additional capital(for further expansion like new inv

28、estments,acquisitions;repay debt)nTo allow the owners to sell their stakes(diversification-risk sharing benefits)nTo increase liquidity benefits to shareholders nTo escape control/monitoring of banks nTo enhance companys visibility,status and prestige nTo provide incentive compensation scheme for ma

29、nagers/employees Benefits and Costs of IPOnBenefitsnAccess to new sources of financenMore liquidity for existing shareholdersnEnhanced company image and employee motivationnCostsnDirect cost(investment bank fees,legal,administrative)nIndirect cost(obligation to provide information)nOngoing costnAgen

30、cy costnDanger of loss of controlProfile of an IPO candidaten“Old shareholders wish to cash inn“Old shareholders wish to keep controln“Old shareholders want an internal restructuring of current shareholder structurenCompany needs additional equitynDifficulties to find a suitable financial and indust

31、rial partnerMechanics of going public nThe choice of a market(stock exchange)nProducing a prospectus(Registration)nMarketing(undertake road shows)nPricing(Fixed or Variable)nAllocation(Fair or Discriminatory)nOffer/Flotation method(Private or Public)Offer/Flotation/Introduction methods nPrivate Plac

32、ement:customers(usually institutional investors)are invited to participate in an issue.nFixed Price Method:offer for sale at fixed pricenIssuing firm pre-announces price and number of shares soldnIndividual investors specify number of shares they wantnIf oversubscription,rationing takes placenIf und

33、ersubscription,part of shares remains unsoldnOne-stage/Two-stage(Bookbuilding)fixed pricenPrice Driven Method/Auction/Tender method:offer for sale by tendernPublic is invited to bid at a price over a stated minimum pricenThe issuing price is determined at a level where demand equals supply (principl

34、e practice?)Offer/Flotation/Introduction methods Role of investment bankernInvestment banking services(syndication,book-building,allocation,etc.)are specified in the underwriting contractn“Firm commitment clausenInvestment banker commits to purchase all unsold shares at predetermined price(below pre

35、-announced offer price)n“Best efforts clausenInvestment banker only takes care of the practical realisation of the offer(e.g.collect and process the bids of the investors)Empirical Issues(1)nWhich factors affect the likelihood of an IPO?nWhen do firms go public?nIs IPO volume determined by growth op

36、portunities and/or stock market valuation?nDo firms have timing ability?Empirical Issues(2)nInitial underpricingnHow to measure it?nWhat are the explanations?nLong-run underpricingnHow to measure it?nWhat are the explanations?nLong-run underperformancenHow to measure it?nWhat are the explanations?nR

37、ead“Stylized Facts”by Jenkinson and LjungsvistnIf you are interested and have time tonight,then read the two recommended papersFor tomorrowWhy do companies go public?(Pagano,Panetta&Zingales,JF 1998)nPurposenAnalyse ex-ante characteristics of IPO companiesnAnalyze ex-post consequences of IPOnDatan11

38、 years:1982-1992nCompares Firms eligible to go public vs Firms went public n139 new listings on the MSEnEliminated:bank,insurance,financial companiesnFinal sample:69 firms of which 29 are curve-outsnClustering of IPOs in 1986 and 1987Testable predictionsnInformation asymmetry hypothesisnThe probabil

39、ity of going public should be positively related with the age and/or the size of a firmnFinancing constaint hypothesisnThe probability of going public should be positively related with investments,leverage and growth of a firmnDiversification hypothesisnThe probability of going public should be posi

40、tively related with the riskiness of a firmPPZ(1998)nMedian IPO is twice as large as the median potential IPO,but not more profitableDoes the decline in managerial ownership(associated with an IPO)mean a decline in company performance?nMikkelson,Partch&Shah(JFE 1997)nThere is a decline in operating

41、performance only in the first year of IPO,but not later onnOperating performance is unrelated to managerial ownershipnDoes this mean that other control mechanisms play a more important role after IPO?nBoard composition has no relationship with operating performancenPerhaps takeover threat;stock-based compensation;