1. Basics of financial management
Week 2

2. Programme Programme across the several weeks: Class 1: ch1, 2, 3, 4
Class 2: ch5, 9, exercises class 1
Class 3: ch11, 12, 14, exercises class 2
Class 4: ch15, 16, 17, exercises class 3
Class 5: exercises class 4, Short recap
Class 6: mock examination
Examination

3. Today Goals for today Recap and exercises of class 1
Assessment of capital budgeting projects
Ratios, ratios, ratios
Exercises to prepare for next class

4. Recap: Aspects of the choice of a legal form
Management and ownership
Financing possibilities
Continuity
Liability
Tax consequences
Disclosure of financial information

5. Recap: Financial Management disciplines
Corporate Finance
Management accounting
Financial accounting

6. Recap: The balance sheet
Serve the business for more than one year
Fixed assets
Equity
* Owners
* Unlimited period
* Reward depends on
profit
* Risk-bearing
Time between purchase and use is shorter than one year
Current assets
Liabilities
* Creditors
* Temporary
* Fixed reward
* Risk-avoiding

7. Recap: Profit determination
Balance sheet at start of period
Increase of Equity = Profit
(Except for private contributions and private drawings)
Balance sheet at end of period
Profit and loss account specifies the composition of profit

8. Recap: Receipts/expenditure vs. Revenue/costs
Difference on balance sheet
Sales
Receipt
Payment by cystomer
Revenue
Activities for customer
Receivables
Fixed assets
Expenditure
Purchase
Depreciation
Book value
Loans/Credit
Amount
Repayment
Interest
Liabilities
---
Provisions
Increase provision

9. Recap: Depreciation

10. Exercises of previous class
Warm-up questions
2.2
3.4

11. Assessment of capital budgeting projects
Average book rate of return
On the basis of profitability
Pay back period
On the basis of cash flow
Net present value
Internal rate of return
Taking into account the time value of money

12. Average book rate of return
Average annual profit
ABR =
Average invested capital
Ignores time value of money
Disadvantage

13. Pay back period
Time it takes a project to recover its initial investment from the cumulative cash flow
Only partly takes into account the time value of money
Does not calculate profitability
Disadvantages

14. Criteria that take into account the time value of money
Discount rate whereby the present value of the expected cash flows equals the initial investment
Internal rate of return > weighted average cost of capital  project acceptable
Internal rate of return
Present value of the expected cash flows
NPV > 0  project acceptable
Net present value

15. Interest calculation methods
Interest calculated on the initial amount only
Simple interest
Interest calculated on the total initial amount and on the accumulated past interest
Compound interest

16. Financial statement analysis
• Profitability ratios
• Solvency ratios
• Liquidity ratios

17. Earnings before interest and taxes
Profitability
Relationship between profit and capital
Return on assets
On business level
Return on equity
Equity providers
Earnings before interest and taxes
Average total assets
Profit after tax
Average equity

18. Earnings before interest and taxes
Solvency
A company’s ability to meet its financial obligations in the event of liquidation D TA
E D
TA E
Ratios
Debt ratio of
Other financial leverage ratios
Indicator
Earnings before interest and taxes
Interest
Interest coverage ratio
Financial resilience

19. Liquidity Dynamic Period Cash flow forecast Static Moment
A company’s ability to meet its short-term financial obligations
Dynamic
Period
Cash flow forecast
Static
Moment
Balance sheet

20. For next class
Exercises
E5.3
E9.6