International Corporate Finance (ICF)
-
Upload
cooper-kirk -
Category
Documents
-
view
21 -
download
0
description
Transcript of International Corporate Finance (ICF)
InternationalInternationalCorporate Finance (ICF)Corporate Finance (ICF)
Jim Cook
Cook-Hauptman Associates, Inc. (USA)
Day 2 in the pm # 2 / 34International Corporate Finance
AgendaAgenda Thursday – (Sessions am: 8:30-12:00, pm: 1:30-5:00)
am: Structures, Statements, Value, Analysis, Currency pm: Time & Currency Discounting/Trading of Money
Friday – (Sessions am: 8:30-12:00, pm: 1:30-5:00) am: Workshop on Evaluating Financials. Discussion of the RMB pm: Internal Operations: Cash Management & Project Evaluation
Saturday – (Sessions am: 8:30-12:00, pm: 1:30-5:00) am: Workshop on Financial Projections and Raising Capital pm: External Operations: Markets’ instruments and practices
Sunday – (Sessions am: 8:30-12:00, pm: 1:30-5:00) am: Workshop on Mini-Cases: Process, Discrete, Software, eBay pm: Reviewing important points. Final Exam.
On the Internet at: http://cha4mot.com/ICF0411
Day 2 in the pm # 3 / 34International Corporate Finance
The Operating CycleThe Operating Cycle Operating cycle – time between purchasing the
inventory and collecting the cash
Inventory period – time required to purchase and sell the inventory
Accounts receivable period – time to collect on credit sales
Operating cycle = inventory period + accounts receivable period
Day 2 in the pm # 4 / 34International Corporate Finance
Cash CycleCash Cycle
Cash cycle time period for which we need to finance our inventory Difference between when we receive cash from the sale and
when we have to pay for the inventory
Accounts payable period – time between purchase of inventory and payment for the inventory
Cash cycle = Operating cycle – accounts payable period
Day 2 in the pm # 5 / 34International Corporate Finance
Operating Cycle ChartOperating Cycle Chart
Inventorypurchased
Inventorysold
Time
Cash paidfor Inventory
Cashreceived
Operating Cycle
The operating cycle is the time period from inventory purchase until the receipt of cash. (TheOperating cycle may not include the time from placement of the order until arrival of the stock.The cash cycle is the time period from when cash is paid out to when cash is received.
Day 2 in the pm # 6 / 34International Corporate Finance
Example InformationExample Information Inventory:
Beginning = 5000 Ending = 6000
Accounts Receivable: Beginning = 4000 Ending = 5000
Accounts Payable: Beginning = 2200 Ending = 3500
Net sales = 30,000 Cost of Goods sold = 12,000
Day 2 in the pm # 7 / 34International Corporate Finance
Example – Operating CycleExample – Operating Cycle
Inventory period Average inventory = (5000 + 6000)/2 = 5500 Inventory turnover = 12,000 / 5500 = 2.18 times Inventory period = 365 / 2.18 = 167 days\
Receivables period Average receivables = (4000 + 5000)/2 = 4500 Receivables turnover = 30,000/4500 = 6.67 times Receivables period = 365 / 6.67 = 55 day
Operating cycle = 167 + 55 = 222 days
Day 2 in the pm # 8 / 34International Corporate Finance
Example – Cash CycleExample – Cash Cycle
Payables Period Average payables = (2200 + 3500)/2 = 2850 Payables turnover = 12,000/2850 = 4.21 Payables period = 365 / 4.21 = 87 days
Cash Cycle = 222 – 87 = 135 days
We have to finance our inventory for 135 days
We need to be looking more carefully at our receivables and our payables periods – they both seem extensive
Day 2 in the pm # 9 / 34International Corporate Finance
Credit Management: Key IssuesCredit Management: Key Issues
Granting credit increases sales
Costs of granting credit Chance that customers won’t pay Financing receivables
Credit management examines the trade-off between increased sales and the costs of granting credit
Day 2 in the pm # 10 / 34International Corporate Finance
Components of Credit PolicyComponents of Credit Policy
Terms of sale Credit period Cash discount and discount period Type of credit instrument
Credit analysis – distinguishing between “good” customers that will pay and “bad” customers that will default
Collection policy – effort expended on collecting on receivables
Day 2 in the pm # 11 / 34International Corporate Finance
Cash Flows from Granting CreditCash Flows from Granting Credit
Credit Sale Check Mailed Check Deposited Cash Available
Cash Collection
Accounts Receivable
Day 2 in the pm # 12 / 34International Corporate Finance
Terms of SaleTerms of Sale
Basic Form: 2/10 net 45 2% discount if paid in 10 days Total amount due in 45 days if discount not taken
Buy $500 worth of merchandise with the credit terms given above Pay $500(1 - .02) = $490 if you pay in 10 days Pay $500 if you pay in 45 days
Day 2 in the pm # 13 / 34International Corporate Finance
Example: Cash DiscountsExample: Cash Discounts
Finding the implied interest rate when customers do not take the discount
Credit terms of 2/10 net 45 and $500 loan $10 interest (.02*500) Period rate = 10 / 490 = 2.0408% Period = (45 – 10) = 35 days 365 / 35 = 10.4286 periods per year
EAR = (1.020408)10.4286 – 1 = 23.45%
The company benefits when customers choose to forego discounts
Day 2 in the pm # 14 / 34International Corporate Finance
Credit Policy EffectsCredit Policy Effects
Revenue Effects Delay in receiving cash from sale May be able to increase price May increase total sales
Cost Effects Cost of sale is still incurred even though the cash from the sale
has not been received Cost of debt – must finance receivables Probability of nonpayment – some percentage customers will
not pay for products purchased Cash discount – some customers will pay early and pay less
than the full sales price
Day 2 in the pm # 15 / 34International Corporate Finance
Short-Term Financial PolicyShort-Term Financial Policy
Size of investments in current assets Flexible policy – maintain a high ratio of current
assets to sales Restrictive policy – maintain a low ratio of current
assets to sales
Financing of current assets Flexible policy – less short-term debt and more
long-term debt Restrictive policy – more short-term debt and less
long-term debt
Day 2 in the pm # 16 / 34International Corporate Finance
Carrying vs. Shortage CostsCarrying vs. Shortage Costs
Managing short-term assets involves a trade-off between carrying costs and shortage costs
Carrying costs – increase with increased levels of current assets, the costs to store and finance the assets
Shortage costs – decrease with increased levels of current assets, the costs to replenish assets Trading or order costs Costs related to safety reserves, i.e., lost sales and
customers and production stoppages
Day 2 in the pm # 17 / 34International Corporate Finance
Understanding FloatUnderstanding Float
Float – difference between cash balance recorded in cash account and cash balance recorded at the bank
Disbursement float Generated when a firm writes checks Available balance at bank – book balance > 0
Collection float Checks received increase book balance before the bank
credits the account Available balance at bank – book balance < 0
Net float = disbursement float + collection float
Day 2 in the pm # 18 / 34International Corporate Finance
Example: Types of FloatExample: Types of Float
You have $3000 in your checking account. You just deposited $2000 and wrote a check for $2500. What is the disbursement float? What is the collection float? What is the net float? What is your book balance? What is your available balance?
Day 2 in the pm # 19 / 34International Corporate Finance
Example: Measuring FloatExample: Measuring Float
Size of float depends on the dollar amount and the time delay
Delay = mailing time + processing delay + availability delay
Suppose you mail a check for $1000 and it takes 3 days to reach its destination, 1 day to process and 1 day before the bank will make the cash available
What is the average daily float (assuming 30 day months)?
Method 1: (3+1+1)(1000)/30 = 166.67 Method 2: (5/30)(1000) + (25/30)(0) = 166.67
Day 2 in the pm # 20 / 34International Corporate Finance
Example: Cost of FloatExample: Cost of Float
Cost of float – opportunity cost of not being able to use the money
Suppose the average daily float is $3 million with a weighted average delay of 5 days. What is the total amount unavailable to earn
interest? 5*3 million = 15 million
What is the NPV of a project that could reduce the delay by 3 days if the cost is $8 million? Immediate cash inflow = 3*3 million = 9 million NPV = 9 – 8 = $1 million
Day 2 in the pm # 21 / 34International Corporate Finance
Choosing the Best PolicyChoosing the Best Policy Cash reserves
Pros – firms will be less likely to experience financial distress and are better able to handle emergencies or take advantage of unexpected opportunities
Cons – cash and marketable securities earn a lower return and are zero NPV investments Maturity hedging
Try to match financing maturities with asset maturities Finance temporary current assets with short-term debt Finance permanent current assets and fixed assets with long-term debt and equity
Interest Rates Short-term rates are normally lower than long-term rates, so it may be cheaper to finance with
short-term debt Firms can get into trouble if rates increase quickly or if it begins to have difficulty making
payments – may not be able to refinance the short-term loans Have to consider all these factors and determine a compromise policy that fits the needs of your firm
Day 2 in the pm # 22 / 34International Corporate Finance
Capital Budgeting FoundationsCapital Budgeting Foundations
For good selections, there must be good possibilities Have clear long term goals and specific direction Engage everyone to contribute ideas and improvements Research the emerging markets, competition, and technologies
For good outcomes, there must be clear structures Divide Capital Budgeting into Acquisitions and Projects Be sure that Buy versus Make is always considered Appoint a Process Master for Acquisitions and one for Projects Acquisitions may be centered in Purchasing or Finance, whereas Projects may be centered in Engineering or Manufacturing. Have an Investment Decision Council for integrating approvals
For Project Priortization, consider the Gartner Program (which follows immediately) as a starting reference
Day 2 in the pm # 23 / 34International Corporate Finance
Classification of ProjectsClassification of Projects
1. New products or expansion of existing products
2. Purchase or Renovation of equipment or buildings
3. Research and Development
4. Exploration
5. Other
6. Mandated key requirement: greater than one year!
Day 2 in the pm # 24 / 34International Corporate Finance
Prioritization Success FactorsPrioritization Success Factors
1. Establish governance and clear accountabilities
2. Allocate sufficient resources to support the process
3. Ensure the process is disciplined and sustained
4. Develop an objective prioritization framework
5. Support decision-making with tools
6. Maintain communication and education programs
Source: Getting Priorities Straight, Gartner Group, 2002.10
Day 2 in the pm # 25 / 34International Corporate Finance
Organizing the PrioritizationOrganizing the Prioritization Assign a process owner to oversee the process
implementation and execution
Create a qualified support team
Review investments on an ongoing basis Disciplined process ensures all project proposals go
though the same screening End-to-end process manages portfolio proactively
through entire project life cycle Review the portfolio periodically to adjust both the
process and the portfolio to changing conditions Integrate with the project management process to
track project status at major decision points
Day 2 in the pm # 26 / 34International Corporate Finance
Project Portfolio ManagementProject Portfolio Management
Leading enterprises are adopting portfolio management techniques to gain benefits
Project portfolio management (PPM) is a 5-step process for prioritizing and managing initiatives
Process is not sequential, but has feedback loops
Manage portfolio
Match resources
Evaluate initiatives
Define initiatives
Prioritize &
balance
Day 2 in the pm # 27 / 34International Corporate Finance
Prioritization FrameworkPrioritization Framework
Day 2 in the pm # 28 / 34International Corporate Finance
Prioritize the InitiativesPrioritize the Initiatives Investment categories can be used to group initiatives
with similar characteristics
Scoring model should reflect management objectives Weightings define the relative importance of each criterion Combine financial/non-financial measures into single score Force rank initiatives based on overall weighted scores
Probability of success
Return on investment 8 50 40
Strategic fit 7 30 21
5 20 10
Project Score 71
Evaluation criterion ScoreWeighted
scoreWeight
%
Day 2 in the pm # 29 / 34International Corporate Finance
Notes on the Scoring ModelNotes on the Scoring Model
1) Should closely match the Prioritization Framework2) No need for weightings to sum to 100, for example, a fantastic
flexibility capability should not lose out, nor should something of significant possibilities
3) Fatal items should be multiplied, not summed, for example, confidence (if near zero, don’t do it!)
4) Some visibility should be given to buy versus make5) ALL, projects are interdependent; they constitute the company!6) Maps can be a great help to justifying the right projects; maps of
technology, of capability, and of opportunity – often, in the real world, you must do three (or so) suboptimal projects to have a platform of substantial consequence.
7) Some provision should be made for learning from and improving the management processes
8) Ask often, what do I wish we had funded and why didn’t we?
Day 2 in the pm # 30 / 34International Corporate Finance
Financial AnalysisFinancial Analysis
But, how to do the Financial Analysis? Every Capital Budget Request must have a projected Cash
Flow of revenue recognition and direct costs (Finance can put in the overhead, taxes, but not interest or depreciation!)
The revenue recognition should be “signed off” by someone responsible for getting those revenues (or savings)
The resolution should be by month and should be CASH, not bookings, or even sales.
Key events and key contingencies should be highlighted
There must be a “champion” who will go as the project goes
Day 2 in the pm # 31 / 34International Corporate Finance
Incremental Cash FlowsIncremental Cash Flows
Initial cash outflow Initial cash outflow -- the initial net cash investment.
Interim incremental net cash flows Interim incremental net cash flows -- those net cash flows occurring after the initial cash investment but not including the final period’s cash flow.
Terminal-year incremental net cash flows Terminal-year incremental net cash flows -- the final period’s net cash flow.
Day 2 in the pm # 32 / 34International Corporate Finance
Cash Flow RulesCash Flow Rules
1) Include Cash, but not accounting income (don’t include depreciation, for example)
2) Operating flows, but not financing flows (no interest charges)
3) Include all other cash flows (that includes tax effects)
4) Just the incremental flows (attributable to project)
5) Include opportunity costs & side effects
6) Ignore sunk costs and allocated overhead costs (neither are incremental)
7) Include project-driven changes in working capital net of spontaneous changes in current liabilities
8) Include effects of inflation/deflation as can best be determined
Day 2 in the pm # 33 / 34International Corporate Finance
Analytical IssuesAnalytical Issues
What Technique and Metrics should be used?
Net Present Value
Internal Rate Return (hurdle rate)
Average Accounting Return
Payback Period
ROA, RONA, ROE (The Dupont Method)