FINANCE 1. Introduction Solvay Business School Université Libre de Bruxelles

June 16, 2015 DESG |2 Qui suis-je? André Farber Professeur de finance à la Solvay Business School depuis…. Actuellement –Vice Recteur à la Stratégie et au Développement Institutionnel –Administrateur de CPH Banque & Fluxys

June 16, 2015 DESG |3 Organisation du cours Référence: FLOP Farber, A., Laurent, M-P., Oosterlinck, K ; Pirotte, H. Finance Pearson Education, 2004 Site web: Slides Fichiers Excel Anciens examens Cotation: Examen à livre fermé

June 16, 2015 DESG |4 Qu’est-ce que la finance? Trois grandes types de décisions: INVESTISSEMENT FINANCEMENT DIVIDENDES

June 16, 2015 DESG |5 Vision comptable BilanCompte de résultats Chiffres d’affaires –Charges d’exploitation = Résultat avant charges financières et impôts (EBIT) –Intérêts –Impôts = Bénéfice net Bénéfice mis en réserve Dividende Actifs circulant Immobilisés Dettes à court terme Dettes à moyen et long terme Fonds propres Fonds de roulement net

June 16, 2015 DESG |6 Flux financiers (Cash Flows) EntrepriseMarchés financiers Emission de titres Investissement Cash flow opérationnel Dividendes, intérêts TEMPS et INCERTITUDE Investisseurs

June 16, 2015 DESG |7 Vision financière Actif total Immobilisés + Fonds de roulement net Fonds propres Dettes Valeurs comptable Valeurs de marché Capitalisation boursière Valeur de la dette Market capitalization Création de valeur

June 16, 2015 DESG |8 How to measure value creation ? 1. Compare market value of equity to book value Value creation if M/B > 1 2. Compare return on equity to the opportunity cost of equity Value creation if ROE > Opportunity Cost of Equity

June 16, 2015 DESG |9 Google Inc. (GOOG)(24/01/08) Stock price:$574.49

June 16, 2015 DESG |10 Google (suite)

June 16, 2015 DESG |11 Création de valeur L’objectif de ce cours est d’introduire les principales méthodes d’évaluation qui permettent d’identifier les décisions créatrices de valeurs. Il repose sur quelques principes fondamentaux: –TIM: Time is money, le temps est de l’argent –NFL: No free lunch, pas de repas gratuit (≠National Football League) –RIRE: Risk – Return (pas drôle) –NABO: No arbitrage opportunity, pas d’arbitrage possible (géant..)

June 16, 2015 DESG |12 Plan du cours 1. Introduction – Fondements (certitude) 2. Fondements (incertitude) 3. Relation risque – rentabilité attendue 4. Evaluation d’options 5. Evaluation d’actions et d’entreprises 6. Choix d’investissement 7. Structure financière et coût du capital 8. Synthèse

June 16, 2015 DESG |13 Drivers of ROE PROFITABILITY (du Pont system) Three determinants : Financial Leverage Asset Turnover Profit Margin Microsoft US$ bil. Net Income10 Sales32 Assets61 Book equity % 31.0%

June 16, 2015 DESG |14 Examples Source: Business Week July 26, 2004

June 16, 2015 DESG |15 Levers of Performance Return on Equity Return on Invested Capital Profit MarginAsset Turnover Leverage

June 16, 2015 DESG |16 Summarized (managerial) balance sheet Assets Fixed assets (FA) Working capital requirement (WCR) Cash (Cash) Liabilities Stockholders' equity (SE) Interest-bearing debt (D) FA + WCR + Cash = SE + D Working capital requirement : definition + Accounts receivable + Inventories + Prepaid expenses - Account payable - Accrued payroll and other expenses Interest-bearing debt: definition + Long-term debt + Current maturities of long term debt + Notes payable to banks

June 16, 2015 DESG |17 Net Working Capital Net working capital can be understood in two ways: as an investment to be funded: Current Assets - Current Liabilities as a source of financing=Stockholders' equity + LT debt - Fixed Assets Fixed Assets Current Assets Stockholder’s equity Long term debt Current liabilities Net Working Capital Current ratio: a measure of NWC Current ratio = Current assets / Current liabilites Net working capital = Current assets - Current liabilites Current ratio > 1  NWC > 0

June 16, 2015 DESG |18 Net Working Capital vs Working Capital Requirement Summarized balance sheet identity: FA + WCR + CASH = SE + LTD + STD can be written as: WCR + (CASH - STD) = (SE + LTD - FA) WCR + NLB = NWC Working Capital Requirement Net Liquid Balance Net Working Capital

June 16, 2015 DESG |19 Return on invested capital Return on assets (net)= Net income / Total assets Advantage: fits with DuPont system ROE = ROA x Equity multiplier Limitation: Net income = EBIT - Interest expense - Taxes –Depends on capital structure: 1. Interest expense: function of interest-bearing debt 2. Interest expense : tax deductible Preferred measure: Return on Invested Capital (ROIC) NB: ROIC = ROA (gross) (1 - Tax rate) = ROE of a all equity financed firm

June 16, 2015 DESG |20 Financial leverage Financial leverage magnifies ROE only when ROA (gross) is greater than the interest rate on debt. Balance sheet: TA = SE + D Income statement: NI = EBIT - INT- TAX Interest expense INT = r D (Interest expense = Interest rate x Interest-bearing debt) TaxesTAX = (EBIT - r D) T c ( Taxes = Taxable income x Tax rate) Remember : ROIC = ROAgross (1 - Tc) ROE = ROIC + (ROAgross - r) (1-Tc) (D/SE)

June 16, 2015 DESG |21 Financial Leverage: example