Understanding the Basics of Corporate Finance

Almost every decision in the corporate world is financial in nature. There are numerous financial implications when purchasing another firm (e.g., a competitor or supplier), launching an expensive advertising campaign, deciding to purchase, rent or buy a new production facility—the list goes on.

This course will cover the basics of discounted cash flow analysis and rigorous cash flow forecasts derived from P&L projections. Participants will understand rules for making investment decisions, including the net present value (NPV) rule and internal rate of return (IRR) rule, as well as the treatment of real options. Participants will also learn how to compute the right discount rate, or cost of capital, to account for the time value of money as well as risk. This course will utilize numerical examples to give participants hands-on practice with each of the methods taught.

Program Takeaways

• Value – Learn how to make value-maximizing investment decisions
• Rules – Appreciate the uses and misuses of popular decision rules (NPV, IRR)
• Forecasting – Analyze and make cash flow forecasts from projected income statements

Agenda

Day 1

Session 1: Discounted Cash-Flow Analysis and Rules to Make Investment Decisions

• Present Values, Perpetuities, Annuities
• Net Present Value Rule, Internal Rate of Return (IRR) Rule
• Shortcomings of the IRR Rule
• Payback Rule
• Capital Budgeting

Session 2: Real Options

• Option to Wait and the Value of New Information
• Option to Expand
• Option to Scale Investments Up or Down

Day 2

Session 3: Cash Flows

• Five Steps of Project Valuation
• What are Cash Flows?
• Making Cash-Flow Forecasts: Investments, Recoveries, Depreciation, Sunk Costs, Opportunity Costs, Operating Cash Flows, Capital Gains and Losses, Working Capital

Day 3

Session 4: Cost of Capital

• Capital Asset Pricing Model
• “Pure Play Approach” to Assess Project Risk
• Market Price of Risk
• Weighted Average Cost of Capital