COURSE 1: Financial Environment

Excluding the very small (individual) companies,

generally financed by the owner (with or without a legal
structure), companies mostly finance themselves
§ In direct – on the financial markets or from private or
public investors
§ Indirectly – raising money from intermediates who
collect it from their clients
or investors.

Finance corporate theory = Higher risk equals to higher return (THREE FACTORS MODELS).
Equity: all the capital invests by the owner. Bond are less risky than equity. Equity holders are taking
more risk.
CFO are doing credit management, credit contract clauses, banks conditions and proposals.
Equity holder can be anyone

Key players:

Banks: Local or International, Private, public, or mutual, global, or focused on sectors, retail, global
or Investment. Business model: based on 2 basic principles: fractional reserves and conversion. With
a strong constraint: a highly regulated business. Leading to 2 categories of revenue
Interest based – the bank grants a credit and charge interests.
Commission based – the bank delivers a service and is paid through a commission.

Investment funds: local or Int, Generalist or focused on some specific sectors: Food, Biotech,
Merieux Equity Partners: Health & Food, Unigrains (Food) Investment stage: Seed, growth, Buy-outs,
turnaround. Business model (simplified): Raise and invest funds but also divest regularly ->
Management fees perceived on invested assets, Capital gains shared between managers and
investors (carried interest)

Financial markets: Local or international (according to listed companies or investors):

Shanghai Stock Exchange or New York Stock Exchange, Equity, debt but also a lot of other asset
classes: Derivatives, Futures and Options, focused on listing or diversified as Euronext vs LSE
Business model: Listing fees from companies, Market access fees from Members, Commission on
trades, other revenue.

The companies themselves: The lion’s share of the financing resources, Older than the banks
themselves. As long as it’s between two non-parent companies, this way of financing is closely linked
to the business relations. Used to finance working capital and considered as management criteria in
some industries or context. Vary accordingly with the local regulation (if it exists) and practices. No
specific “business model” as it is generally not rewarded but a soft signal for a:
- weak or non-efficient financing system, an imbalanced relation between two companies or two
stages in a sector value-chain or a deterioration of the financial situation of the client’s side

A global view of the financial ecosystem:

COURSE 2 : A private company, from the financial angle

Corporate finance is always in percentage and not numbers.

50% of debts for a loan is too much.
The risk is not the same:
Public company is less risky because public company are really liquid, and you can sell more faster
with public. There is not second seller for private company if you want to sell your products non
sold. Benefits: fewer demanding accountings standards (for loan and bonds), he will require different
levels of returns.

The financial structure: balance sheet

-> Assets and liabilities
-> Financially useful resources
Noncurrent less 12 months
Current beyond 12 months

FA and Shareholders equity, long term is non-liquid (more than 12 months)

Trade payable, trade receivable, cash are liquid (less than 12 month)

If WC is negative, you are in a big problem, you can’t live for a company without

The accounting balance sheet is built in following terms: Liabilities term and Asset lifetime
So, the equity is liabilities but to the shareholders.
The financial balance sheet focuses on the breakdown between : Categories of usage, Financial
resources categorized according to their origin.
Both readings are valuable but complementary

Main mechanism: Cash is the first source of capital

Cash Flow (CF) = Liquid Capital = What a firm can spend
CF makes the bridge between the profits and the change in the balance sheet over 2 financial year
(FY) Bridges the gap between a firm’s financial needs and available resources
The main document to analyze: Cash Flow Statement`

Make the difference between profits and cash, and put a focus on the later because
Depreciation is a non-cash expense because you’re just distributing the cash

Cash flow cycle:

FCF: Operating CF – Investing CF

- Operating CF: NOPAT + depreciation – less the change in WC
 - Investing CF: capital expeditors- divestment
FCF: Nopat + dep – change in WC – capital expitors (cash used) – divestment (pas toujours)

Ebit = sales – expenses expenses. : purchases, external charges, wages, deprec

Income tax rate: this gives
WC = Current assets – current liabilities

All in, the level of resources injected in a business depends on the capital intensity (IC/sales),
assuming that generally it goes along with the lifetime of the assets.
IC = Capital Employed = Equity + Net Financial Debt = Net Fixed Assets + WCR

Capital intensive businesses will require long term resources (equity and LT debt including bonds)
whereas low cap intensive businesses will require less equity and more short-term financing
Capital emplyed : WC

The private company use their own cash to finance their own project
and whereas large raise money from outside easier to lend.
In the bear phase: lack of liquidity = recession.
the debt holder is always taking less risk bc he can take the assets

COURSE 3: Analysis and decision making

Most of the stakeholders provide resources to finance the company.

Stakeholders: shareholders, bankers, debt holders, suppliers and clients, employees, and states.
long term: banks debt holders: short term (working capital = liquidity) (12 months).
Soft loan is part of WC. Employees have short term liquidity.

What’s the best resources mix? What should drive this kind of decision?

They don’t share the same interests and the same goals about the company:
Management as CEO wants bargaining power: self-preservation. Lower the cost of the resources
Protect its bargaining powe, Preserve the liquidity “safety margin”, Manage debt maturity and
other covenantsBest compensation and long tenor. Strategy of high risk because they are not taking
the risk but earn and have advantages.
As the CFO of a midsize company, what are you main missions regarding the
financing of your company?
CFO jobs: banks conditions, credit contract clauses, debt maturity and redemption schedule.
The CFO of a company is not decision taking but about the strategic goals as business estimates the
control of key financial ratios and anticipate the problems and keep a high level of confidence.

You are the shareholder of a midsize company: which parameters are driving
your decisions?
Shareholders wants maximization of value (growth and returns): compensation
thanks to market share, profits and also invested capital

Investors (in debt or equity) are expecting a reward for the risk they take when they put money in a
company. This rate equates to the minimum level of return they can expect for this type of
investment.

You are the leading bank of a midsize company: what is on your dashboard and
what are you considering increasing your lines?
Lenders cares about loss aversion (keep paying the interest) linked to Moody’s grade (investment
grade AAA better to D worst, try to do shorter term for the loan to ensure security and repayment

-Quantitative: Last 3 years financial statements, the sector environment, the current amount of
financing, the company payments track record
-qualitative: The kind of relation and the background
- The position targeted by the bank
- Security: assets used, receivables, fixed assets, cash, guaranties given by shareholders, what they
can’t do, bankruptcy.

Does a company need to diversify its financial resources – why?

Diversification reduces risk by investing in vehicles that span different financial
instruments, industries, and other categories. Unsystematic risk can be mitigated
through diversification while systematic or market risk is generally unavoidable.
Generally, larger firms have larger financial reserves and can withstand larger macro risks. They are
more established and have greater access to funding. They also enjoy more repeat business, which
generates higher sales and larger profits than smaller scale companies. AS Invest in foreign markets.
This means that they can establish subsidiaries overseas or Physical resources : physical assets such
as manufacturing facilities, buildings, vehicles, machines, systems

Bullet loan :
For a lender, the ratios for analyzing a firm’s repayment capacity include : NOPAT, ST debt
The main methods of fund raising are : debt, equity and grants
3 main financial statement are : BS, IS, CF
Price earnings ratio is higher if : Earning growth are higher
More sense to compare share price to : Net income
Is a debt a good way for financing activities for SH perspective : Yes
The equity cost capital is measure of : rate of return required by lenders
Bullet loan: redeemed at maturity date in one payment (loan + interest)