Introduction to Corporate Finance course

The first course in Corporate Finance starts with a basic introduction of notation and terminology. It is meant as both a refresher as well as an introductory course.  If you are new to the subject but are comfortable with basic accounting and financial statement concepts, skip directly to Risk & Return or to Beta, Calculating WACC or Weighted Average Cost of Capital. If this is still basic stuff and you need some more material to chew on, take a look at the Beta and WACC Calculation Example from the AMD Corporate Finance Case Study.  Alternatively for a complete look at the Corporate Finance Training Courses available, please see the Corporate Finance Training Roadmap.

We start off with Financial Statements,  Time Value of  Money, Risk and Return, Opportunity Cost, Cost of Capital, Weighted Average Cost of Capital and Return measures. We close with a 38 page detailed case study on Electronic Arts that reviews the Electronic Arts (EA) balance sheet, profit and loss statements, shows how to project the EA statements in the future and arrive at a valuation of EA at that point in time. The primary question we try and answer in this course is the valuation question: How do we derive a value for EA and how do we determine if it represents fair value for that share?

The Introduction to Corporate Finance course assumes no prior knowledge of the subject but requires familiarity with basic mathematics. To help you assess your understanding of the concepts the posts also include test questions.

1. Corporate Finance Overview:

• An index of the sessions in this introductory course

2. Financial Statements – Balance Sheet, Profit & Loss and Cash flows

Financial statements are useful tools for analyzing and understanding the health of a business. In this post we briefly explain the balance sheet, income statement and statement of cash flows.

3. Balance Sheet: Assets, Depreciation

The balance sheet includes current and long term assets. In this post we define and explain the different types of assets

• Cash and cash equivalents
• Accounts receivable and inventory
• Property, plant and equipment

and differentiate between when the cost of an asset is expense of capitalized.

We also discuss depreciation and how the different approaches used impacts the balance sheet.

4. Balance Sheet: Liabilities & Working Capital

Just as was the case with assets liabilities are also classified as current or long term depending on the duration we hold them. In this post we define and explain the different types of liabilities

• Lines of credit / overdraft facilities at banks
• Short term loans and debt
• Accounts payable
• Accrued benefits & obligations
• Current portion of long-term debt
• Long-term liabilities

The post explains net working capital and how to calculate it.

5. Equity and the Income Statement

In this post we look at what equity is and its various types such as shares, authorized shares, issued shares, treasury shares, preferred shares, common stock, retained earnings. We also explain bankruptcy.

We then move on to the next statement, the income statement. An example explains the various titles of account.

6. Risk & Return

For every risk we take on, there is a promise of commensurate return. Whether we realize the return or not is another story. In this post we discuss the relationship between risk and reward.

7. The many faces of Return: ROE, ROIC and Payback

Fixed costs and uncertainty in outcomes drive risk. The balance these two components determines what the appropriate return should be. What you get on average is the expected return. In this post we look at different approaches to measuring return.

8. Discount rate and time value of money

What do we have to invest today to get US$ 100,000 two years from now? Discounting adjusts the future value to its present value using a discount rate to account for the time value of money. In this post we illustrate the concepts of compounding, time value of money and present value of cash flows with examples.

9. Present Value in Action

This post walks through examples of calculating net present value.

10. Calculating Internal Rate of Return or IRR

What is the rate that we can earn on our investment. In this post we teach you how to calculate the internal rate of return or IRR.

11. Opportunity Cost and Cost of Capital

What is the cost of choosing one alternative investment over another? What does it cost to put your money to work? In this post we explain the concepts of opportunity cost and cost of capital.

12. Beta, Calculating WACC or Weighted Average Cost of Capital

Equity and debt are two ways to raise capital. If a company raises capital using both equal and debt, the average required return is called the weighted average cost of capital or WACC. This post explains the related terminology and how to calculate WACC.

13. Case Study: Electronic Arts (EA)

A valuation case study. While dated, the case gives insights into how to:

1. Calculate the right price  for Electronic Arts’ shares
2. Make an investment decision – should we invest in this firm or not?
3. Determine if the company is overpriced or under priced
4. Identify the assumptions being to justify Electronic Arts’ then current stock price

This “Introduction to Corporate Finance” course supplements material covered in the small business basic accounting course available separately at Basic Accounting Short Course for small business – Course Guide.