finance map

FINANCE MAP

By

Gaylen K. Bunker

Objectives of WorkshopPrinciples:• Time lag between investment and return.• Compounding versus Summing• Value = Discounted future cash flows.• Decisions: Convert into today’s dollars• Discount rate = Cost of Capital• Finance focus on Cash Flows• Cost & Return are the same thing.

CAPITAL FUNCTIONS

$Financing

Liabilities

& EquityInvestingPP&E

Operating

Revenue

Expense

Profit

A/R & Inv A/P

Operate

Balance Sheet

Income Statement

Financing Decisions

$Financing

Liabilities

& EquityInvestingPP&E

Operating

Revenue

Expense

Profit

A/R & Inv A/P

Operate

Balance Sheet

Income Statement

Financing Decisions

$Financing

Liabilities

& Equity

Revenue

Expense

Profit

Income Statement Capital Structure

Cost of Capital

Financial Leverage

WACC

Cost of Debt (Interest)

Cost of Equity (Stock)

Dividend Discount Model

Capital Asset Pricing Model

(Dividend Yield & Growth)

(Risk-free rate, Beta, Market Return)

Risk and Return Trade-offD E

Risk

Return

Investing Decisions

$Financing

Liabilities

& EquityInvestingPP&E

Operating

Revenue

Expense

Profit

A/R & Inv A/P

Operate

Balance Sheet

Income Statement

Investing Decisions

InvestingPP&E

Revenue

Expense

Profit Operate

Income Statement Capital Budgeting

Capital Rationing

Free Cash Flow

Net Present Value

Internal Rate of Return

Profitability Index

Payback

FCFInv

Inv Inv Inv Inv Inv

Met

rics

Operating Decisions

$Financing

Liabilities

& EquityInvestingPP&E

Operating

Revenue

Expense

Profit

A/R & Inv A/P

Operate

Balance Sheet

Income Statement

Operating Decisions

Operating

Revenue

Expense

Profit

A/R & Inv A/P

Income Statement

Working Capital

Credit Management

Days Sales Outstanding

Cash Discounts

Just-in-time Systems

Financial Ratios

EBIT

Operating Leverage

NOPAT

Free Cash Flow

Capital Charge

Economic Value Added

Valuation Decision

$Financing

Liabilities

& EquityInvestingPP&E

Operating

Revenue

Expense

Profit

A/R & Inv A/P

Operate

Balance Sheet

Income Statement

Free-Cash-Flow; Net Invested and Operating Capital

Time Value of Money; Present Value; Future Value; & Annuities

WACC; and Future Growth

VALUE =

Future Free Cash Flows Summarized in Today’s Dollars

94.81

10 20 25 30 30 20

2008 2009 2010 2011 2012 20032007

9.0916.5318.7820.4918.6311.29

Fundamental Building-blocks

FV = PV x (1 + r)

PV = FV / (1 + r)