2. What will we learn?
Week 1: Introduction to corporate
finance
- What is the finance, corporate
finance?
-Summary history of managerial
finance
-The financial manager’s responsibility
-The goals of the corporation
3. What will we learn?
Week 2: An overview of managerial finance
Week 3: Financial forecasting (Demand and
sales forecast)
• Questionnaire method
• Forecast by using economic indicators
relation
• International comparison
4. What will we learn
Week 4: Financial forecasting (Demand and
sales forecast) continuation…
• Income elasticity of demand method
• Graphic method
• Least squares method
• Correlation and regression methods (Please check on
your statistics notes)
Week 5: Market share calculation
Week 6: Profit planning
• Break Even Analysis
• Operating Leverage
• Financial Leverage
5. What will we learn
Week 7: Profit planning (Continuation)
• Break Even Analysis
• Operating Leverage
• Financial Leverage
Week 8: Working capital management
Week 9: Capital budgeting
• Payback Period
• Net Present Value
• Internal Rate of Return
• Sensitivity Analysis
Week 10:Capital budgeting (Continuation)
6. What will we learn
• Week 11: Student presentations
• Week 12: Student presentations
7. What are we going to acquire?
• Learning forecasting of sales (demand).
• If you know your future sales, you can make
profit planning and know how much fund do
you need for working and fixed capital.
• Learning how to evaluate and choose the
best investment opportunity by applying
some methods.
8. What kind of resources can we use
when we doing research?
1. All finance books
2. All articles about finance
3. www.ssrn.com
4. Essentials of Managerial Finance, J. Fred Weston
and Eugene Brigham, Harcourt Brace&Company
International Edition, 1992
5. Kuhlman Bruce, David W. Wiley and H. Kent Baker,
Business Fundamentals, Schweser Institute
certificate Program, Publisher: Dearborn Trade, A
Kaplan Professional Company, ISBN: 9781419528965
(Electronic book), 2005.
9. What kind of resources can we use
when we doing research?
6. http://en.wikipedia.org/wiki/Demand_foreca
sting
7. http://www.angelfire.com/mn3/apse/entles
3.htm
8. Brealey Richard A., Stewart C. Myers and
Franklin Allen, Principles of Corporate
Finance, The McGraw Hill Companies
International edition 2008, ISBN: 978-007-
126327-6
10. What kind of resources can we
use when we doing research?
9. http://etufan.wordpress.com
10.http://en.wikipedia.org/wiki/Demand_foreca
sting
11.http://en.wikipedia.org/wiki/Questionnaire_
construction
11. What is the finance?
• Money
• Stock exchange
• Banks
• What else?
• How about the companies?
• Balance sheet
12. What is the finance?
• To achieve the goals of company;
1. Finding funds from the most suitable
sources
2. Using them effectively and
3. Control the results…
13. An Overview of Managerial Finance
• A Short History of Managerial Finance
• 1930s: Liabilities and equity http://www.youtube.com/watch?
v=TpfY8kh5lUw
• 1940 and 1950s: Assets, quantitative methods,
discounted cash flow methods http://www.youtube.com/watch?
v=5KPCl9wh1G4
• 1960 and 1970s: Optimization of assets and
liabilities and equity, statistical methods
• 1980s: Globalization, interest rate and exchange
risk http://www.youtube.com/watch?v=4pjSlIkNxXg
• 1990-2000s to today: More risk, more computer,
new financial instruments and methods
15. An Overview of Managerial
Finance
• The Financial Manager’s Responsibility
• Forecasting and planning
• Major investment and control
• Coordination and control
• Dealing with the financial markets
16. An Overview of Managerial Finance
• The goals of the corporation
• Managerial incentives to maximize
shareholder wealth
• Social responsibility
• Stock price maximization and social
welfare
17. Managerial incentives to maximize
shareholder wealth
•Stockholders
•Make the highest
money from the
company
•Do not want to
share theirs company
with others.
•Managers
•Having autonomy
•Protect themselves from
a hostile takeover or a
proxy fightHostile
takeover.doc Example
•Try to maximize stock
prices in reasonable level
18. Social responsibility
• Ethical responsibility to provide a safe working
environment
• To avoid polluting water and air
• Produce safe products
• But social responsibility has a cost
• If the other firms in its industry do not follow
suit, their prices and costs will be lower
• Most investors do not like to buy socially
oriented companies shares.
19. Stock price maximization
and social welfare
What requires stock price maximization?
1. Efficient, low-cost plants that produce high-
quality goods and services at the lowest
possible cost
2. Development of products that consumers want
and need, so the profit motive leads to new
technology, to new products, and to new jobs
Example Example 2
20. An Overview of Managerial
Finance
• The Financial Manager’s Responsibility
•Forecasting and planning
• Major investment and control
• Coordination and control
• Dealing with the financial markets
22. Some Financial Forecasting Methods
• Questionnaire method
• Forecast by using economic indicators
relation
• International comparison
• Income elasticity of demand method
• Graphic method
• Least squares method
23. Financial forecasting:
Questionnaire
Simple things:
• Quantitative marketing researches and social
sciences
• Especially, if it is known specific target
consumer
• By phone, by email, web, go to houses and
malls…
24. Take into consider for
questionnaire
1. Determining research aims, example size,
duration, human resources, permissions, and
privacy before applying questionnaire,
2. Determining natural answers,
3. Questionnaires should be directly related
with research’s aims,
4. Applying questionnaire to right participants is
very important,
5. Determining questionnaire’s type…
25. Take into consider for questionnaire
• Questions and answers should be neutral,
• Ranking and grouping of questions’ should be
right,
• Questions’ should be basic and non-technical,
• No double meaning and negative sentences,
• Every question should ask just one subject,
• Put “other” option,
• Questions’ should be daily communication
sentences,
26. Take into consider for questionnaire
• Do not ask private questions,
• Carefully use colours, graphics or pictures,
• Give numbers to your questions.
27. An example
(This example has been derived from Güvemli Oktay, Yatırım Projelerinin Düzenlenmesi,
Değerlendirilmesi ve İzlenmesi, Atlas Kitabevi Yayınları, İstanbul:2008, pp.89-90, ISBN
9789756574065)
We would like to search demand of honey
consumption of Karvina. We chose an area as
example which represents whole Karvina. In
this area, there are 200 houses. So we
prepared a basic questionnaire and asked
questions’ below:
1.Does your family consume honey?
2.If so, how much do you consume per month?
3.How many people live in your family?
28. An example (Continuation…)
Answers:
1.Yes we consume (150 family), No (50 family)
2.500 gram per month
3.4 people
If we assume that Karvina’s population is
70.000, the demand could be calculated as:
29. An example (Continuation…)
Family count in Karvina: 70.000/4=17.500 Family
Percentage of families who are bought honey=
(150 family/200 Family)x100=75%
Count of families who are bought honey=
17.500 Family x 75%= 13.125 Family
Yearly consumption per family: 500 Gramx12
month=6.000 Gram=6 kg
Yearly consumption= 13.125 family x 6 Kg
=78.750 Kg.
30. An example (Continuation…)
If Karvina’s population growth rate is +0.41%;
We can predict honey consumption:
Year Family count Honey buy Yearly consumption
family count
2011 17.571 13.178* 79.068**
2012 17.643 13.232 79.392
2013 17.715 13.286 79.716
2014 17.787 13.340 80.040
*(17.571x75%), **(13.178x6kg)
31. Financial forecasting: Economic
indicators relation
Finding data which correlated each other for
searched sector/subject.
Examp: Weather Crop Bread price
Demand estimation using correlated data.
32. Plasterboard Demand Example
(Source: Güvemli Oktay, Yatırım Projelerinin Düzenlenmesi, Değerlendirilmesi ve İzlenmesi, Atlas Kitabevi Yayınları,
İstanbul:2008, pp.90, ISBN 9789756574065)
33. Example (Continuation…)
Plasterboard or also called gypsum board are
panels made of gypsum plaster pressed
between two thick sheets of paper, the panels
are used to make interior walls and ceilings.
(http://en.wikipedia.org/wiki/Drywall).
As Sweet Home Company, we would like to
produce and enter plasterboard market in
Karvina. Lets calculate demand with using
house counts and floor space!
34. Example (Continuation…)
• Internal walls two faces are averagely equal
250 m2
for 100 m2
house while external walls
faces are averagely equal 130 m2
. There are
20% gaps these walls for windows and doors.
• Lets calculate how much wall surface for
plasterboard do we have for a 100 m2
houses?
35. Example (Continuation…)
• Internal walls two face surface is equal (250 m2
x 80%) = 200 m2
• External walls two face surface is equal (130 m2
x 80%) = 104 m2
• Whole surface which it can be applied
plasterboard is equal (200 + 104 ) 304 m2
.
We assume that demand for buildings could be
5% for first year and later 7%, 10%, 12%
respectively.
36. Example (Continuation…)
It is being predicted new buildings counts which
will be built in four years and theirs’ surface is:
Years Buildings Surface (m2)
1 160.000 16.000.000
2 175.000 17.500.000
3 190.000 19.000.000
4 210.000 21.000.000
37. Example (Continuation…)
Plasterboard demand:
Years Building Estimated plasterboard Plasterboard
Counts demanded buildings demand
1 160.000 x (5%) 8.000 *2.432.000
2 175.000 x (7%) 12.250 3.724.000
3 190.000 x (10%) 19.000 5.776.000
4 210.000 x(12%) 25.200 7.660.800
* 1. year demand = 8.000 x 304 m2
= 2.432.000 m2
38. International comparison
This method based on comparing two countries Gross
Domestic Product (GDP) per capita and demands
which one of them is developed while another
developing and assumed that developing country’s
demand is going to reach to developed country’s
demand in the future .
Step 1: Determining developed country’s demand for
a specific good and GDP per capita
Step 2: Assuming that developing country’s demand
will be equall developed country’s demand in the
future.
39. International comparison (Example)
Resource: This example has been derived from Güvemli, pp.92.
In France, GDP per capita is 30.000€ and orange
juice consumption is 15 liter. In Czech
Republic GDP per capita is 10.000 € and
orange juice consumption is 3 liter. The
population is 11.000.000.
40. Example (Continuation…)
Years GDP per capita in Czech Consumption per capita
1 10.000 3
2 15.000 4,5
3 17.000 7,5
4 18.000 9,3
5 22.000 11,2
6 28.000 13,1
7 30.000 15,0
* 7th year data is equal to France current data.
41. Example (Continuation…)
Years Population of Czech (000) Tot. Juice
consumption
0 11.000 x 3 liter = 33.000 (Current)
1 11.500 x 3,6 = 41.400
2 11.800 x 4,5 = 53.100
3 12.000 x 7,5 = 90.000
4 12.400 x 9,3 = 115.320
5 12.900 x 11,2 = 144.480
6 13.000 x 13,1 = 170.300
7 13.000 x 15,0 = 195.000
42. Income elasticity of demand
Example: (Güvemli pp.95)
Rate of increment of GDP per capita = 3,5%
Coefficient of income elasticity of product = 2
Rate of increment of product’s yearly per capita
demand = 7% (3,5% x 2)
Note: Income elasticity is calculated by dividing rate of
increment of demand to rate of increment income.
43. Income elasticity of demand
Example 1:
Past periods 2007 2008 2009
Sale of product “A” (Unit) 150.000 180.000 220.000
Yearly rate of increment 20% 22%
Average rate of increment ((0,20+0,22)/2) = 21%
GDP rate of increment 3,5% 4% 3,6%
GDP average rate of increment = (0,035 + 0,04 +
0,036) / 3 = 3,7%
Coefficient of income elasticity (21%/3,7%) = 5,6
44. Income elasticity of demand
Demand of product “A”?
Next periods 2010 2011 2012 Averg.
Predicted GDP
rate of increment ((4% + 4,2% + 4,4%)/3)= 4,2%
Coefficient of income elasticity = 5,6
Yearly rate of increment= (4,2% x 5,6) = 23,5%
Demand of product “A”
(2010 period) = 220.000 x 123,5% = 271.700
(2011 period) = 271.700 x 123,5% = 335.550
(2012 period) = 335.550 x 123,5% = 414.404
45. It is your turn!
Question:
Dogtas Company is a Turkish company which produces
home inner products such as furniture. Dogtas
company sold 80.000 furniture in 2007, while 125.000
in 2008 and 100.000 in 2009 respectively. In same
period GDP rate of increment was 7%, 9% and 5%
respectively. Because World economic crisis, it is
being expected GDP rate of increment will be -2% in
2010 while 3% in 2011 and 5% in 2012. So, please
calculate Dogtas Company’s furniture demands in
2010, 2011 and 2012.
46. Graphic method
In this method, demand of product and dates are
being located on a graphic. Then taking account
the numbers density and draw a line.
This method is very basic but not reliable.
47. Graphic method (Example)
Date (2009) Demand
January 2500
February 2800
March 3050
April 3476
May 3899
June 1257
July 1289
August 3456
September 4900
October 5600
November 7988
December 3678
January 8899
February 7654
March 7889
April 9900
May 6754
June 5678
July 6754
August 7654
September 9876
October 7654
November 7865
December 8888
48. Least squares method
We can use Excel to estimate the demand of our
product(s) with applying least squares
method.
49. Least squares method
Step 1: Open an Excel page and click
fx (functions) and chose “Statistics”
Step 2: Chose “forecast”. Then you
will see three spaces.
Step 3: For first space chose estimated
year (In our examp. 10), for second
space chose demand numbers and for
third space chose years (In our
example from 1 to 9)
Step 4: Click to Enter and get the
result. Example
Years Demand
1 1250
2 1578
3 3234
4 7500
5 3456
6 2200
7 4578
8 6543
9 2134
10 4926
50. How to calculate market share?
There are two ways to calculate market share:
I. Percentage of sale units: Company’s sale
units/Total sale units in the market
II. Percentage of income: Total income of the
company / Total income of the sector which
the company belongs
51. How to calculate market share?
Example: Our company produces cheese in
Çanakkale. In 2009 it has produced 70 ton
cheese in the city and sold them at 70.000 Euro.
In same period our company produced 7 ton
cheese and sold it 12.000 Euro. So;
Our market share as a unit is:
(7 Ton / 70 Ton)x100= 10%
Our market share as a sale:
(12.000 Euro/70.000 Euro)x100= 17,14%
54. Financial managers use profit planning for;
• Determine at least how much products should
be produced to get profit with using sale and
cost information,
• Which products should be produced and how
much?
• Determine the price of the product
56. Data
• Unit sale price of the product
• Sale volume of the product
• Sale composition of the products
• Unit variable cost
• Total fixed costs
57. Assumptions of profit planning
• Costs are divided into two such as fixed and
variable but there is one more which is half
variable costs
• There is only one price and stable
• Input prices are fixed
• At the end of the financial term, there is no
inventory
60. We can use Break Even Analysis…
• To decide producing a new product and it’s sale volume
to get profit
• To decide company’s to grow or non-grow situation
• To decide to realise modernisation and automation
investments
• To measure effect of variation of price, fixed and variable
costs on profit
It can be applied both graphic and mathematics methods...
61. Graphic Method
Amount of production
Income-cost
Break even point
loss
Profit
Total Income
Total costs
63. Mathematical Method
Production level in Break Even Point: Q=F/P-V
Sale level in Break Even Point: S=F/1-(V/P)
Q: Production level in Break Even Point
F: Fixed costs
P: Unit price
V: Unit variable costs
64. Example (1) for Break Even Analysis
Microsoft Company’s sale is 5.000.000 Euro when
production is 20.000 unit, variable costs are 3.000.000
Euro and fixed costs are 1.000.000 Euro. In this case,
what is the production level in break even point?
Unit price: 5.000.000/20.000=250 Euro
Unit variable cost: 3.000.000/20.000=150 Euro
Q=1.000.000/250-150
= 10.000 Unit
65. Example (II)
If it is being used same data with first example
sale level in break even point=?
S=F/1-(V/P)
=1.000.000/1-(150/250)
=2.500.000 Euro
66. Different approach to calculate break
even point: Additive margin
Additive margin = Unit price-Unit variable costs
Amount of production in break even point= Total fixed
costs/Unit additive margin
Additive rate=(Unit price-Unit variable costs) /
Unit price
Amount of sale in break even point= Total fixed costs/Additive
rate
67. Example III
Amount of production in break even point= Total fixed
costs/Unit additive margin
Unit additive margin = 250-150
= 100
Amount of production in break even point =
1.000.000/100
= 10.000 unit
69. Break even point and target profit
Amount of production in break even point which is
being taken consider target profit=
(Fixed costs + EBIT)/(Unit price-Unit variable cost)
The company is targeting 2.000.000 Euro profit. So,
what is the amount of production in break even
point
=(1.000.000+2.000.000)/(250-150) Additive rate
= 30.000 Unit
How about break event point in sale?
72. We can use operating leverage…
• To search how much fixed and variable costs
can be accepted by using relationship
between them
• To estimate extra productions effect on profit
when production exceeds a certain level
• To decide if a company based on labour force
or capital
75. Example
Student Agency Company’s variable costs
are 3.000.000 € at 5.000.000 € sales level.
EBIT is 1.000.000 €. If we assume that
sales can be increased 10%, EBIT will be
1.200.000 €. So,
This means, profit will increase 2 € if sales
increase 1 € at 5.000.000 € sales level.
2
000.000.5/)000.000.5000.500.5(
000.000.1/)000.000.1000.200.1(
=
−
−
=OP
82. Example
Student Agency Company’s capital is
20.000.000 €, total debts are 10.000.000
€. Debts are 8% interest rate bank loans.
EBIT is 15.000.000 €.
Please calculate financial leverage of the
company and make comments on the
result.
83. Example
Interest cost = 10.000.000 € x 8% = 800.000 €
If other company’s financial leverage is 1.5 this means our
company has less risk.
If the company use more debt does it good for it?
We are in an economic crises. So, what do you think our
company’s situation if we compare other one in our
example?
costInreterestC
CEBIT
EBIT
FL
=
=
−
=
−
= 05.1
000.800000.000.15
000.000.15
87. The conversion cycle
Real Time Computer Corporation (RTC), which in
early 1992 introduced a new super
minicomputer that can perform 15 million
instructions per second and that will sell for
$250.000. The effects of this new product on
RTC’s working capital position were analyzed in
terms of the following five steps:
88. Continuation…
1. RTC will order and receive the materials it
needs to produce the 100 computers that are
expected to be sold. Because RTC and most
other firms purchase materials on credit, this
transaction will create an account payable.
However, the purchase will have no
immediate cash flow effect.
89. Continuation…
2. Labor will be used to convert the materials
into finished computers. However, wages will
not be fully paid at the time the work is done,
so accrued wages will build up.
3. The finished computers will be sold but on
credit, so sales will create receivables, not
immediate cash inflows.
90. Continuation…
4. At some point during the cycle, RTC must pay off its
accounts payable and accrued wages. Because these
payments will be made before RTC has collected cash
from its receivables, a net cash outflow will occur, and
this outflow must be financed.
5. The cycle will be completed when RTC’s receivables
have been collected. At that time, the company will be
in a position to pay off the credit that was used to
finance production, and it can then repat the cycle.
91. Cash conversion cycle model
Inventory conversion period (ICP): It is the
average length of time required to convert
materials into finished goods then sell those
goods.
Inventory conversion period= Inventory / Sales per day
For example: If average inventories are $2
million and sales are $10 million;
ICP=$2.000.000/($10.000.000/360) = 72 days
92. Continuation…
Receivables collection period (RCP): It is the
average length of time required to convert the
firm’s receivables into cash, that is, to collect
cash following a sale.
RCP= Receivables / (sales/360)
If receivables are $666,667 and sales $10 million,
RCP= $666,667 / ($10,000,000/360)= 24 Days
93. Continuation…
Payables deferral period (PDP): It is the average
length of the time between the purchase of
materials and labour and the payment of cash for
them.
PDP= Payables/ Credit purchases per day
= Payables/ (cost of goods sold /360)
If the firm on average has 30 days to pay for labour
and materials, if its cost of goods sold are $8
million per year, and if accounts payable average
$666,667;
PDP= $666,667 / ($8,000,000/360) = 30 days
94. Continuation…
Cash conversion cycle (CCC): It nets out the periods
just defined and which therefore equals the length
of time between the firm’s actual cash
expenditures to pay for productive resources
(labour and materials) and its own cash receipts
from the sale of products.
CCP= Inventory conversion period + receivables
collection period - payables deferral period
96. Result
With calculating and finding 66 days, RTC knows
when it starts producing a computer that it will
have to finance the manufacturing costs for a
66 day period. The firm’s goal should be to
shorten its cash conversion cycle as much as
possible without hurting operations.
97. It is your turn!
Dardanel A.Ş. Produces frozen and canned food such
as sea fishes, octopus and mussel. The company will
produce new product namely blue fish which lives
only in Istanbul Bosporus and Canada. So the
product is very valuable and expensive.
It has also market in Europe. A canned food be
produced in 20 minutes and work hours are 8 hours
per day. Marketing department says 90% of the
production will be sold .The price will be 10 Euros
per canned food. Average inventories are 8.000
Euro. (330 working days assumed but year 360 days.
98. Continuation…
Other things related with sales:
• Labour get salary 30 days after the work
• Payments for raw material are done 45 days
later
• 80% of sales are done cash while 20% of sales
are credit.
• Cost of goods are sold is 28.800 Euro
• Accounts payable is 12.200 Euro
Please calculate effects of this new product on
Dardanel Company’s working capital position:
100. Capital budgeting
(Strategic Long-Term Investment Decisions)
• Generating ideas for capital projects
• Who creates the capital budgeting projects?
• Do we need to be an entrepreneur?
• Two questions for testing being entrepreneur
(CV and address book)
101. Strategic Long-Term Investment
Decisions
• Project classifications
1. Replacement: Maintenance of business
2. Replacement: Cost reduction
3. Expansion of existing products or markets
4. Expansion into new products or markets
5. Safety and/or environmental projects
6. Other
102. Project classifications
• Replacement: Maintenance of business
• One category consists of expenditures to
replace worn-out or damaged equipment
used in the production of profitable
products.
• Should we continue to produce these products
or services?
• Should we continue to use our existing
production processes?
103. Project classifications
• Replacement: Cost reduction
• This category includes expenditures to
replace serviceable but obsolete
equipment.
• The purpose here is to lower the costs of
labour, materials, or other inputs such as
electricity.
104. Project classifications
• Expansion of existing products or markets
• Expenditures to increase output of
existing products, or to expand outlets or
distribution facilities in markets now
being served are included here.
105. Project classifications
• Expansion into new products or markets
• These are expenditures necessary to
produce a new product or to expand into
a geographic area not currently being
served.
106. Project classifications
• Safety and/or environmental projects
• Expenditures necessary to comply with
government orders, labour agreements,
or insurance policy terms fall into this
category.
107. Project classifications
• Other project investments
• This catch all includes office
buildings, parking lots, executive
aircraft, and so on.
108. Strategic Long-Term Investment
Decisions
• Similarities between capital
budgeting evaluation techniques
1. Project cost
2. Expected cash flows estimation
3. Estimation of project riskiness
4. Cost of capital decision
5. Measurement of present value of cash inflows
6. Present value of the expected cash inflows
and required outlay
111. Payback period
• Project (S)
Uncovered cost at start of year
Payback=Year before full recovery +
Cash flow during year
100
Payback Period (S)= 2 + = 2,333 Years
300
114. Net Present Value (NPV)
• To implement this method, it should be
proceeded as follows:
• Find the present value of investment and its
future cash flows with discounting at the
project’s cost of capital
• Sum discounted investment and cash flows
• If the NPV is positive then we accept the
project. If we have to choose a project among
the alternate projects, we should take into
consider the highest NPV
115. Net Present Value (NPV)
n
n
k
CF
k
CF
k
CF
CFNPV
)1(
..............
)1()1( 2
2
1
1
0
+
++
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+
+
+=
∑= +
=
n
t
t
t
k
CF
0 )1(
116. Capital Budgeting Evaluation
Techniques
• Internal rate of return (IRR)
• The IRR is defined as that discount rate
which equates the present value of a
project’s expected cash inflows to the
present value of its expected costs.
117. Internal rate of return (IRR)
0
)1(
..............
)1()1( 2
2
1
1
0 =
+
++
+
+
+
+ n
n
IRR
CF
IRR
CF
IRR
CF
CF
0
)1(0
=
+
=∑=
n
t
t
t
IRR
CF
118. Example of NPV, IRR and Sensitivity
• Small Scale Flower Cultivation Project in
India
• This project has written by Weitz Center (Israel)
experts for an area in India.
• The project covers an area about one acre. The
aim is producing and selling flowers. Project’s
cost will be covered by a bank loan. All costs
and sale data have been collected and realised
that target sales could be achieved. Cost benefit
analysis Flower.xls
