Corporate Financial Management

Module 1
Singapore

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Maximizing Your Educational ROI
How to get the most out of this class
§ Actively attend and participate in classroom discussions
§ Cold calling will be the class standard
§ Read the cases and be prepared

§ Think about what questions you should be asking if you were the CEO, a
board member or an investor with an economic stake in any outcome
associated with the decision at hand – think like a boss

§ Read about business – textbook, books, WSJ, FT, articles, blogs, newsletters
(I read everything Howard Marks writes)

§ Question me if anything is unclear and doesn’t make sense

§ Apply what you learn immediately and across other class discussions – this
knowledge can be highly perishable until you build “muscle memory”

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Corporate Financial Management
What is the goal of the firm?

§ Maximize value to all stakeholders?

§ Maximize job creation?

§ Operate profitably while incorporating ESG goals?

§ Maximize shareholder value?

§ Who are the shareholders?

§ How do we measure shareholder value?

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Corporate Financial Management
Who are the stakeholders?

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Corporate Financial Management
How do we maximize the value of firm?

Maximize market
Maximize Maximize estimate of equity
firm value equity value value

Assets Liabilities
Existing Investments Fixed Claim on cash flows
Generate cashflows today Assets in Place Debt Little or No role in management
Includes long lived (fixed) and Fixed Maturity
short-lived(working Tax Deductible
capital) assets

Expected Value that will be Growth Assets Equity Residual Claim on cash flows
created by future investments Significant Role in management
Perpetual Lives

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Corporate Financial Management
The argument against shareholder wealth creation

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Corporate Financial Management
Owners vs. The Board vs. Management

§ Theoretically, shareholders should have significant control over management. Two

mechanisms for disciplining management are (i) the annual meeting and (ii) the
Board of Directors. Specifically, we assume that

§ The Board of Directors (“BoD”) is selected and elected by shareholder vote

§ BoD is accountable to shareholders for management’s performance and reserve

the right to hire and fire executives

§ Stockholders who are dissatisfied with managers and consequently the BoD can
express their disapproval at the annual meeting and use their voting power to
keep the BoD and management in check

§ In practice, either mechanism is as effective in disciplining management as theory

posits.

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Corporate Financial Management
The Annual Meeting

• The power of stockholders to act at annual meetings is diluted by three factors

• Most small stockholders do not attend meetings because the cost of attending
often exceeds the value of their holdings

• Incumbent management starts off with a clear advantage when it comes to the
exercise of proxies. Proxies that are not voted becomes votes for incumbent
management

• For large stockholders, the path of least resistance, when confronted by

managers that they do not like, is to vote with their feet

• Annual meetings are also tightly scripted and controlled events, making it difficult
for outsiders and rebellious shareholders to bring up issues that are not to the
management’s liking

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Corporate Financial Management
Shareholders are becoming more active in governance

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Corporate Financial Management
The Lehman example

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Corporate Financial Management
SVB, an “A” for ESG but what about corporate governance?

- The Daily Mail, March 13, 2023

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Corporate Financial Management
Board Assessment Test

• Are a majority of directors outsiders?

• If so, how independent are the directors from the firm’s management?

• Is the Chairman of the Board independent of the company and not the CEO of the
company?

• Are the compensation and audit committees composed entirely of outsiders?

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Corporate Financial Management
What are the main activities of the firm?

Functions How Does it Happen

Strategy Leadership

Management
Investing
Decision Making
Financing
Negotiations

Operating Other

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Corporate Financial Management
Value creation sequence

Strategy > Investment > Financing > Operations > Payout

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Corporate Financial Management
Strategy
§ What industry are we in?

§ What business are we in?

§ Who is our target market?

§ What is our competitive advantage?

§ How do we create and capture value?

§ What distribution channels do we use?

§ How should we promote and position our product or service?

§ How do we price our goods or services?

§ What is our growth strategy?

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Corporate Financial Management

Maximize the value of the business (firm)

The Investment Decision The Financing Decision The Dividend Decision

Invest in assets that earn a Find the right kind of debt If you cannot find investments
return greater than the for your firm and the right that make your minimum
minimum acceptable hurdle mix of debt and equity to acceptable rate, return the cash
rate fund your operations to owners of your business

The hurdle rate The return How much How you choose
should reflect the The optimal The right kind
should reflect the cash you can to return cash to
riskiness of the mix of debt of debt
magnitude and return the owners will
investment and and equity matches the
the timing of the depends upon depend on
the mix of debt maximizes firm tenor of your
cashflows as well current & whether they
and equity used value assets
as all side effects. potential prefer dividends
to fund it. investment or buybacks
opportunities

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Corporate Financial Management
Investing
§ Should we start this business or enter this industry?

§ What is my expected return on this investment?

§ How risky is the investment?

§ Should we invest/divest in the business or technology?

§ How do I choose between investments?

§ How should we grow this business?

§ Should we buy or build a new business?

§ How much should we paid to acquire another business

§ What is my cost of capital?

§ What are the cash flows associated with this investment?

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Corporate Financial Management
Financing
§ How should we finance our investments?

§ What is our optimal mix of debt and equity?

§ Should we raise debt from the banks or bondholders?

§ Should we issue common or preferred stock

§ What happens if we cannot service our debt?

§ What do we do with excess cash?

§ What is our dividend policy?

§ What is our capital structure policy?

§ How do macro economic events affect our company and decision making?

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Corporate Financial Management
Operating
§ How should we organize the company?

§ How do we manage our people?

§ How do we design the jobs in our company?

§ How do we identify and recruit good employees?

§ How do we compensate employees?

§ How do we manage our working capital?

§ How do we manage our inventory and supply chain?

§ How do we manage our IT?

§ How many units do we need to sell to break even?

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Corporate Financial Management
Where do we see the results of these activities?

§ Financial Reporting

§ Letter to Shareholders

§ Media Coverage

§ Analyst Reports (Equity and Debt)

§ Earnings Calls

§ Press Releases

§ Investor Conferences

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Where Do We See The Results?
Financial reporting

§ Annual Report (10-K)

§ Interim Report (10-Q)

§ Current Report (8-K)

§ Proxy Statement (14A)

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Financial Reporting
Annual report

§ Business description

§ Risk factors

§ Stock performance

§ Selected or summary financial data

§ Management Discussion and Analysis (“MD&A”)

§ Financial statements

§ Footnotes to the financial statements

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Financial Reporting
Financial Statements

§ Statement of Financial Position (Balance Sheet)

§ Statement of Operations (Income Statement)

§ Statement of Cash Flows

§ Statement of Shareholders’ Equity

§ Statement of Other Comprehensive Income

§ Notes to the Financial Statements

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Financial Statements
Who uses them and why?

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Financial Statements?
Who uses them and why?
Who? Why?

Investors – current and potential Invest or divest

Lend money
Creditors
Supply company/set credit terms
Suppliers

Management Monitor debt covenants

Employees/Unions Employment concerns/negotiations

Analysts Recommendations
Government Taxes
Regulators
Securities regulation
Customers
Monitor/benchmark competition
Competitors
Endowment
Donors – non-profit
Board of Directors Execution of strategic plan

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Financial Statements
Why are they useful?
§ Understandability

§ Relevance

§ Reliability

§ Comparability

§ Consistency

§ Materiality

§ Conservatism

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Financial Statements
Balance Sheet: Assets

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Starbucks
Balance Sheet: Liabilities and Shareholders’ Equity

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Starbucks
Income Statements

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Corporate Financial Management
How do we get where we need to be?

Financial Forecast
Financial Statement Financial
Function Statements Analysis Statements Endgame

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Financial Statement Analysis
Financial statements reflect business models
§ Analyze an industry or company

§ Identify opportunities

§ Determine trends

§ Guide management decisions

§ Analyze effect of management decisions

§ Decide whether to enter or exit an industry or market

§ Help predict the future

§ Determine exposure to risk

§ Determine compliance

§ Others?

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Financial Statement Analysis
Questions to ponder
§ Are changes in the firm’s strategy, economic conditions, competition, or other
factors causing its profitability and risk to change?

§ What causes differences between the firm’s profitability and risk and those of
its competitors?

§ What are the firm’s growth opportunities?

§ Is the firm financially stable?

§ Are the operating results acceptable?

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Financial Statement Analysis
Tools
§ MD&A

§ Auditor Letter

§ Financial Statements
§ Components
§ Trends

§ Ratio Analysis
§ Growth
§ Profitability
§ Activity
§ Liquidity
§ Leverage

§ Other information
§ Newspaper
§ Press releases
§ Tax returns

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Financial Statement Analysis
Ratio Analysis
§ Look at the the whole picture, not individual ratios

§ Ratios by themselves provide little information

§ Have a benchmark
§ Same company over time – horizontal analysis
§ Comparable firms at the same time – vertical analysis
§ Industry average
§ Stated targets – planned ratio for the period

§ Industry specific

§ Use common sense

§ Don’t be concerned with the precision of the number
§ Don’t presume we are trying to maximize or minimize the value of the ratio
§ More of a craft than a science
§ Different users will draw different conclusions
§ Goal is to form general impressions about the firm and help you to ask more questions about
operations, process, results and future plans
§ Not all ratios apply to all organizations
§ People may calculate them differently so make sure you know and understand how ratios are
calculated

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Financial Statement Analysis
Areas of Focus
§ Growth
§ Trends
§ Opportunities

§ Profitability
§ Margins
§ Efficiency

§ Risk
§ Liquidity
§ Solvency

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Common Sized Financial Statements

§ Improves comparability across organizations as it abstracts from size

§ Express balance sheet amounts as a percentage of total assets

§ Express income statement amounts as a percentage of revenue (margin) and

costs (expense or cost ratio)

§ Identifies growth and cost savings opportunities

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