Introduction .................................................... 7
1 The essence of finance management ........................... 11
1.1 Main goal of the company ............................... 11
1.2 Finance management functions ........................... 14
1.3 Main instruments of finance management ................. 16
1.3.1 Future value ................................... 16
1.3.2 Present value ................................... 19
1.3.3 Future and present value of cash flow ........... 22
1.3.4 The case of identical cash flows ................ 25
1.4 Relationships between real and nominal value ........... 31
Control questions .......................................... 35
Bibliography ................................................ 35
2 Financial analysis in corporate finance management .......... 37
2.1 Introductory remarks ................................... 37
2.2 Main characteristics and scope of the financial
analysis ............................................... 39
2.3 Analysis of financial statements ....................... 44
2.3.1 The balance sheet ............................... 46
2.3.1.1 Vertical balance-sheet analysis ....... 50
2.3.1.2 Horizontal balance sheet analysis ...... 54
2.3.1.3 Analysis of capital-assets
interrelationships ..................... 57
2.3.2 The profit and loss account ..................... 61
2.3.2.1 Vertical analysis of the profit and
loss account ........................... 66
2.3.2.2 Horizontal analysis of the profit
and loss account ....................... 68
2.3.3 The cash flow statement ......................... 71
2.3.4 The statement of changes in equity .............. 79
2.3.5 Making allowances for inflation in the
financial analysis .............................. 81
2.4 Ratio analysis ......................................... 83
2.4.1 Liquidity ratios .............................. 85
2.4.2 Debt ratios ..................................... 89
2.4.3 Ratios of effectiveness ........................ 94
2.4.4 Profitability ratios ........................... 105
2.4.5 Market value ratios ............................ 108
2.5 Comprehensive financial analysis ...................... 1ll
2.6 The analysis of bankruptcy threat ..................... 116
Control questions ......................................... 118
Bibliography ............................................... 119
3 Forecasting and planning of financial needs ................ 121
3.1 Introductory remarks .................................. 121
3.2 Role of forecasting in the company's management ....... 122
3.3 Planning capital needs ................................ 126
3.3.1 Scope of financial planning .................... 126
3.3.2 Application of "pro forma" financial
statements ..................................... 128
3.3.3 Application of statistical methods ............. 137
3.3.3.1 The single-equation model ........... 138
3.3.3.2 The multi-equation model .............. 145
3.3.4 The sensitivity analysis ....................... 153
3.3.5 Empirical example of the sensitivity
analysis ....................................... 169
3.4 Other problems connected with financial planning ...... 177
3.4.1 The leverage effect in profit planning ......... 177
3.4.2 Analysis of product profitability impact on
the company's profit ........................... 184
3.4.3 Choice of a depreciation method ................ 191
3.4.4 The cash plan of the company ................... 194
Control questions ......................................... 204
Bibliography ............................................... 204
4 Planning and evaluation of investment project
profitability .............................................. 207
4.1 Introductory remarks .................................. 207
4.2 Main characteristics of the financial analysis of
an investment project ................................. 208
4.3 Financial projection of an investment project ......... 211
4.3.1 Income flows forecasting ....................... 212
4.3.2 Costs flow forecasting ......................... 214
4.3.2.1 Main cost of an investment project .... 214
4.3.2.2 Reserves for increased outlays ........ 215
4.3.3 Demand for working capital ..................... 216
4.3.4 Forecast of operating costs .................... 219
4.3.5 Financing plan of an investment project ........ 220
4.4 Appraisal of an investment project's profitability .... 222
4.4.1 Payback of investment outlays .................. 224
4.4.2 The break-even point analysis .................. 229
4.4.3 The net present value .......................... 241
4.4.4 The profitability ratio ........................ 245
4.4.5 The internal rate of return .................... 247
4.4.6 Application of NPV and IRR measures ............ 253
4.4.7 The modified internal rate of return ........... 257
4.5 Making allowances for inflation ....................... 259
4.6 Analysis of an investment project's sensitivity ....... 265
Control questions ......................................... 267
Bibliography ............................................... 267
5 Circulating capital management in the company .............. 269
5.1 Introductory remarks .................................. 269
5.2 General characteristics of circulating capital ........ 270
5.3 Stock management ...................................... 277
5.4 The credit policy ..................................... 287
5.4.1 Credit terms ................................... 291
5.4.2 Collection and monitoring of receivables ....... 295
5.5 Cash management ....................................... 301
5.6 Sources of circulating capital financing .............. 311
5.6.1 Strategies of circulating capital financing .... 312
5.6.2 Main sources of short-term financing ........... 318
5.6.2.1 Permanent liabilities ................ 318
5.6.2.2 Short-term bank credits ............... 321
5.6.3 Other forms of financing ....................... 326
5.6.3.1 Factoring of receivables .............. 327
5.6.3.2 Short-term commercial papers .......... 332
5.6.3.3 Securitisation ........................ 336
Control questions .......................................... 338
Bibliography ............................................... 338
6 Capital market in corporate finance management ............. 341
6.1 Introductory remarks .................................. 341
6.2 Risk of investment in the capital market .............. 342
6.3 Factors determining the interest rate ................. 347
6.4 The primary market .................................... 352
6.4.1 Fixing the issue price of a security ........... 358
6.4.2 Placement of an issue in a public offer ........ 362
6.5 The secondary market .................................. 366
6.6 Shares ................................................ 371
6.6.1 Definition of a share .......................... 371
6.6.2 Types of shares and rights resulting from
them ........................................... 374
6.6.3 Valuation of the price of shares ............... 378
6.7 Bonds ................................................. 385
6.7.1 Main characteristics of bonds .................. 385
6.7.2 Main principles governing the issue of bonds
in Poland ...................................... 391
6.7.3 Possibilities of valuation of bonds ............ 397
6.8 Management of a capital investment portfolio .......... 401
6.8.1 The expected rate of return and the risk
of securities .................................. 402
6.8.2 Formation of a portfolio of capital
investments .................................... 410
6.8.2.1 Two-element portfolio ................. 410
6.8.2.2 Multiple-element portfolio ............ 417
6.8.2.3 Propensity to risk .................... 420
6.8.2.4 Construction of a portfolio with
risk-free securities .................. 424
6.2.8.1 Other methods of construction
a portfolio ........................... 426
6.8.3 Equilibrium model of the capital market CAPM ... 433
Control questions ......................................... 440
Bibliography ............................................... 440
7 Cost of the company's capital .............................. 441
7.1 Sources of financing ................................. 441
7.1.1 External sources of financing ................ 445
7.1.2 Internal sources of financing .................. 449
7.2 Structure of capital .................................. 451
7.3 Cost of capital ...................................... 455
7.3.1. Measurement of the cost of capital items ....... 457
7.3.1.1 Cost of ordinary capital .............. 458
7.3.1.2 Cost of preference capital ............ 462
7.3.1.3 Cost of retained profit ............... 463
7.3.1.4 Cost of external capital .............. 464
7.3.2. Estimation of total cost of capital ............ 467
7.4 Modigliani-Miller Theory (MM Model) ................... 474
7.4.1 Modigliani's and Miller's statements in
a tax-free economy ............................. 475
7.4.2 Modigliani's and Miller's statements with
allowances made for taxation of company's
profit ......................................... 479
7.5 Costs of bankruptcy ................................... 484
7.6 Optimal structure of capital .......................... 488
Control questions ............................................ 493
Bibliography .................................................. 493
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