Citibank: basic of corporate finance
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Unit 3: Time Value of Money (Continued)
Discrete Discounting...............................................................3-22
Continuous Discounting ..........................................................3-24
Practice Exercise 3.3..........................................................................3-27
Annuities...............................................................................................3-31
Future Value of an Annuity......................................................3-31
Present Value of an Annuity....................................................3-32
Perpetuities..............................................................................3-33
Uneven Payment Streams...................................................................3-34
Practice Exercise 3.4...........................................................................3-37
Unit Summary........................................................................................3-41
Progress Check 3.................................................................................3-43
Unit 4: Valuing Financial Assets
Introduction...............................................................................................4-1
Unit Objectives........................................................................................4-1
Bonds.......................................................................................................4-1
Bond Terminology.......................................................................4-2
Process for Issuing Bonds.........................................................4-3
Pricing Bonds..............................................................................4-4
Common Stock.......................................................................................4-7
Valuing Common Stock.............................................................4-7
Preferred Stock.....................................................................................4-11
Pricing Preferred Stock............................................................4-11
Unit Summary........................................................................................4-12
Progress Check 4.................................................................................4-15
Unit 5: Introduction to Capital Budgeting
Introduction...............................................................................................5-1
Unit Objectives........................................................................................5-1
Nominal and Effective Rates.................................................................5-2
Calculating Effective Interest Rates..........................................5-2
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Unit 5: Introduction to Capital Budgeting (Continued)
Adjusting for Inflation...................................................................5-4
Practice Exercise 5.1.............................................................................5-7
Net Present Value...................................................................................5-9
Present Value of Cash Flows....................................................5-9
Net Present Value of Cash Flows...........................................5-10
Practice Exercise 5.2...........................................................................5-13
Internal Rate of Return..........................................................................5-15
Adjusting NPV and IRR for Inflation.....................................................5-17
Other Methods for Making Investment Decisions..............................5-18
Payback Period........................................................................5-18
Profitability Index (PI)................................................................5-20
Practice Exercise 5.3...........................................................................5-23
Unit Summary........................................................................................5-27
Progress Check 5.................................................................................5-29
Unit 6: Corporate Valuation Risk
Introduction to Units 6, 7, and 8 – Corporate Valuation......................6-1
Introduction...............................................................................................6-3
Unit Objectives........................................................................................6-3
Calculating Expected Cash Flows........................................................6-4
Expected Return..........................................................................6-4
Expected Cash Flows ................................................................6-7
Practice Exercise 6.1.............................................................................6-9
Measuring Risk.....................................................................................6-11
Variance.....................................................................................6-13
Standard Deviation...................................................................6-16
Summary....................................................................................6-18
Practice Exercise 6.2...........................................................................6-19
Portfolio Risk.........................................................................................6-21
Portfolio Diversification............................................................6-21
Systematic and Unsystematic Risk.........................................6-27
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Unit 6: Corporate Valuation – Risk (Continued)
Summary...................................................................................6-30
Practice Exercise 6.3..........................................................................6-31
Beta...........................................................................................6-33
Summary...................................................................................6-37
Practice Exercise 6.4..........................................................................6-39
Symbols and Definitions .....................................................................6-41
Risk vs. Return......................................................................................6-42
Required Rate of Return..........................................................6-42
Capital Asset Pricing Model (CAPM)....................................6-45
Practice Exercise 6.5..........................................................................6-49
Unit Summary.......................................................................................6-53
Unit 7: Corporate Valuation – Cost of Capital
Introduction...............................................................................................7-1
Unit Objectives........................................................................................7-1
Sources of Capital and Their Costs......................................................7-1
Cost of Debt................................................................................7-2
Cost of Preferred Stock.............................................................7-3
Cost of Common Stock (Equity)................................................7-4
Dividend Valuation Model..............................................7-5
Capital Asset Pricing Model (CAPM)...........................7-6
Summary......................................................................................7-8
Practice Exercise 7.1.............................................................................7-9
Weighted Average Cost of Capital.........................................7-15
Capital Structure...........................................................7-17
Flotation Costs..............................................................7-18
Summary....................................................................................7-19
Practice Exercise 7.2...........................................................................7-21
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Unit 8: Corporate Valuation – Estimating Corporate Value
Introduction...............................................................................................8-1
Unit Objectives........................................................................................8-1
Forecasting Cash Flows........................................................................8-1
Free Cash Flow Calculation..........................................8-2
Assumption-based Cash Flow Forecasting ................8-4
Residual Value........................................................................................8-7
Perpetuity Method.......................................................................8-8
Growing Perpetuity Method.......................................................8-9
Other Methods...........................................................................8-10
Summary....................................................................................8-10
Practice Exercise 8.1...........................................................................8-11
Discounted Cash Flow Method...........................................................8-13
Placing Value on a Company..................................................8-13
Summary....................................................................................8-18
Practice Exercise 8.2...........................................................................8-19
Other Valuation Methodologies...........................................................8-21
Price / Earnings Ratio..............................................................8-21
Market / Book Ratio..................................................................8-23
Liquidation Value......................................................................8-24
Dividend Value..........................................................................8-24
Other Ratios...............................................................................8-25
Factors Affecting Value........................................................................8-26
Market Liquidity.........................................................................8-26
Country Conditions ...................................................................8-27
Industry Conditions....................................................................8-28
Synergies...................................................................................8-28
Unit Summary........................................................................................8-29
Progress Check 8.................................................................................8-31
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Unit 9: Fixed Income Securities
Introduction...............................................................................................9-1
Unit Objectives........................................................................................9-1
Introduction to Bond Pricing and Yield Mathematics...........................9-2
U.S. Treasury Bills.......................................................................9-2
Pricing U.S. Treasury Bills .............................................9-3
Calculating the Discount Rate .......................................9-4
Rate of Return..................................................................9-4
Summary..........................................................................9-6
Practice Exercise 9.1.............................................................................9-9
U.S. Treasury Notes.................................................................9-11
Pricing U.S. Treasury Notes.......................................9-11
Calculating Yield to Maturity........................................9-13
U.S. Treasury Bonds................................................................9-14
Call Provision...............................................................9-14
Summary...................................................................................9-15
Practice Exercise 9.2..........................................................................9-17
Eurobonds................................................................................9-19
Other Bonds..............................................................................9-21
Accrued Interest.......................................................................9-21
Bond Price Quotes..............................................................................9-23
Treasury Bill Quotes.................................................................9-23
Treasury Note and Bond Quotes............................................9-25
Summary...................................................................................9-27
Practice Exercise 9.3..........................................................................9-29
Duration.................................................................................................9-33
Factors That Affect Bond Prices............................................9-33
Duration of a Bond...................................................................9-34
Duration of a Portfolio..............................................................9-37
Duration Relationships............................................................9-38
Summary...................................................................................9-39
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Unit 9: Fixed Income Securities (Continued)
Practice Exercise 9.4..........................................................................9-41
Unit Summary.......................................................................................9-43
Unit 10: Derivative Securities
Introduction............................................................................................10-1
Unit Objectives.....................................................................................10-1
Options..................................................................................................10-1
Background and Markets........................................................10-3
Payoff Profile for Calls and Puts.............................................10-4
Call Options..................................................................10-4
Put Options...................................................................10-6
Summary...................................................................................10-9
Swaps...................................................................................................10-9
Interest Rate Swaps.................................................................10-9
Currency Swaps......................................................................10-14
Unit Summary......................................................................................10-15
Progress Check 10.............................................................................10-17
Appendix
Glossary...................................................................................................G-1
Index
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Introduction
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INTRODUCTION: BASICS OF CORPORATE FINANCE
COURSE OVERVIEW
Basics of Corporate Finance serves as an introductory course for students beginning
their study of finance and financial markets. The ideas and calculations presented in
this workbook serve as the foundation for continued study in the areas related to
corporate finance and the capital and derivative markets. The purpose of this course
is to help the student build a working vocabulary of the financial world and to
understand the basic computations used by analysts working in the corporate finance
field. The terms and ideas covered in this course will provide the background
necessary for the student to understand concepts presented in future courses.
This workbook serves as a foundation for other courses in the series. It is comprised
of ten units.
UNIT 1: Financial Statement Analysis
The first unit in the workbook is an introduction to the financial statements of a
company. This unit briefly explains the purpose of each financial statement and
provides definitions for the common items found in each of the statements. The
unit also introduces ratio analysis and its use in the analysis of the finances and
operations of a firm. The unit focuses on definitions of key terms, although some
simple mathematical calculations and relationships are introduced and explained.
UNIT 2: Financial Markets and Interest Rates
The next unit is a brief overview of the financial markets and the components of
interest rates. This unit will help you understand how financial markets operate and
to identify the participants in the markets. A brief discussion of interest rates and
the role they play in the financial markets is also included. The unit's focus is
mainly to identify and define key terms; it does not require any mathematical
calculations.
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