01 Corporate Structures and Ownership
Classification ofbusiness structures
Types
compare
difference
non-profit
profiit must be reinvested
Public and Private Corporations
Differences
Exchange listing and share ownership transfer
Registration and disclosure requirements
Private to public
Initial public offering (IPO)
Trends in public and private companies
emerging economies: public is rising
developed market: public is declining
02 Corporate Governance and ESG
Corporate Governance
Interest Conflicts
Principal-agent
Shareholder vs. Management/Board
Controlling shareholder vs. Minority shareholder
Stakeholder Management
Shareholder mechanisms
Reporting and transparency
Shareholder derivative lawsuits
Board of director and management mechanisms
governance committee
director excluded from voting on relate-party transaction
Government mechanisms
common law better than civil law
Impact to corporate
Poor corporate governance
Effective corporate governance
ESG
Concepts
Environmental
stranded assets, toxic emissions & waste
Approach
values-based
moral or faith-based belief
Investing
socially responsible investing (SRI)
Methodology
Engagement/active ownership
03 Business Models & Risks
Business model
Features
Value chain
supply chain
both within and external a firm
Profitability and unit economics
operating margin
operating income / revenue
unit cost
(total fixed costs + total variable costs) / produced units
contribution margin
selling price per unit - variable cost per unit
break-even point
fixed cost / contribution margin
Types
Business model variations
E-Commerce business models
Network Effects and Platform business models
increase in value, more users join
Crowd sourcing business models
Financial implication
External factors
marcoeconomic variables, i.e. GDP growth
Firm-specific factors
wide moat: strong barriers to competition, low business & financial risk
Risks
Marco risk
political, economic, legal
Business risk
operating result different from expectation
04 Capital Investments
Concept
Definition & Steps
Capital allocation process
to make capital investment decisions
4 steps
Step 2: Investment analysis
Step 3: Capital allocation planning
Step 4: Monitoring and post-audit
Basic Principles
After tax incremental cash flows
3 includes
Externalities
Synergy (positive effect)
Cannibalization (negative effect)
Investment Decision Criteria
Single project estimation
Mutually Exclusive Investment Decision
Capital allocation methods
Common capital allocation pitfalls
05 Working Capital & Liquidity
Financing options
Internal
Operating cash flow
usable captial
= after-tax operating cash flows - interest - dividend
= net income + depreciation - dividend
working capital
accounts payable
1/10, net 40: 1% discount if paid within 10 days; or full amount by 40 days
Working capital management
Liquidity & short-term funding
Measurement
Liquidity Ratio
Current ratio
current assets / current liabilities
Quick ration
(cash + short-term marketable securities + receivables ) / current liabilities
Cash ratio
(cash + short-term marketable securities ) / current liabilities
activity ratios
receivable turnover
credit sales / average receivables
No, of days receivable
365 / receivable turnover
inventory turnover
cost of goods sold / average inventory
Payables turnover
purchase / average trrade payable
purchase = inventory1 - inventory0 + COGS
No, of days payable
365 / payables turnover ratio
cash conversion cycle
days of inventory + days of receivable - days of payable
Turnover/Turnover Days
Receivables/lnventory/Payables
Cycle
Operating cycle = Inventory Turnover Days + Accounts Receivable Turnover Days
Cash conversion cvcle = Operating cycle - Accounts Payable Turnover Days
Evaluating short-term financing choices
06 Cost of Capital-Foundational Topics
WACC
Cost of the various sources of capital
Cost of debt
Debt-rating approach
comparably rated of similar maturities
Cost of equity
Bond yield plus risk premium
lssues in cost of capital
Public company beta
Adjusted beta = 2/3 (unadjusted beta) + 1/3
Nonpublic company beta
step 1: deleverage, asset beta
step 2: leverage, equity beta
07 Capital Structure
Modigliani-Miller propositions
Modigliani and Miller theory
Without tax
MM I
capital structure not affect MV
investment and capital structure decisions are independent
WACC not affected by capital structure
MM II
Higher financial leverage raise cost of equity
With tax
MM II
As debt increase, WACC decreasees and CV increases
static trade-off theory
Optimal capital structure
CV is maximized, WACC is minimized
value-enhancing effects from tax deductibility of interest
value-reducing impact of costs of financial distress
Factors affecting capitalstructure decision
Internal factors
Business model characteristics
capital structure policies / guidelines
External factors
market conditions / business cycle
industry /peer firm leverage
Costs of financial distress
Information asymmetry
Pecking order theory
internal funds -> debt -> public equity offerings
Agency costs
MJ's free cash flow hypothesis
determine weights in WACC
target capital structure, or raise capital with this target, use this target
if target not known
averages of comparable companies' capital structures
08 Measures of Leverage
Leverage
Degree of financial leverage
Degree of operating leverage
Breakeven point
Operating breakeven point
