Corporate Finance Fundamentals: Learn Business Finance with CFI Part 1 | CFI Course

So welcome to this course, Corporate Finance Fundamentals. We are so excited to share this course material with you. So in this course, we will cover all the foundational aspects of corporate finance. We're going to break the course into three logical sections. The first section, we're going to cover capital investment. Section two, we're going to look at capital financing. And finally for section three, we'll look at capital return. By going through these three sections of the course, we'll understand exactly how corporations think about all aspects of capital allocation. When we look at capital investment, we'll understand exactly how corporations select the best projects to invest in, to make sure that they're creating value for the shareholders. For capital financing, we'll look exactly at how the corporation selects the appropriate mix of debt and equity to finance any investments, resulting in an optimal capital structure. And finally, for capital return, we'll look at the different ways that corporations can return capital to shareholders if they don't have appropriate projects to invest in. So we'll definitely cover the theories and concepts, but more importantly, we're going to apply all of those theories to practical situations. We have plenty of Excel examples lined up for you to complete, to make sure that you know exactly how to apply all of the academic concepts that we're going to touch on. So we can't wait to share this material with you. Let's jump in and get started right away. So let's quickly discuss the learning objectives for this course. First of all, we want to make sure that we understand exactly what capital investment is, and why it increases a company's assets. Secondly, we want to learn the common metrics that companies use in order to evaluate various investments. We also need to understand the business life cycle, and how that lines up and impacts the funding life cycle of an organization. When we talk about capital financing, we need to understand the different types and sources of equity and debt that are available to companies. Then what we're going to do is we're going to utilize the right mix of debt and equity in order to minimize the company's weighted average cost of capital, or WACC. And finally, for situations where the company cannot find adequate investments, or has excess capital available, we're going to look at the advantages and disadvantages of the various ways that a company can return capital to shareholders. Now the ultimate goal of corporate finance, or its purpose, is always to maximize the value of a business. And this is done through planning and implementing management resources, and always balancing risk and profitability. Now we mentioned that this course would be divided into three sections. For the first section, when we talk about capital investment, we will look at deciding what projects or businesses to invest in. We're always looking to earn the highest possible risk-adjusted return. In the second section of the course, we'll look at capital financing, and this is where we'll determine exactly how to fund the capital investments that we've selected. We're always looking to optimize the firm's capital structure, and this is done by minimizing the weighted average cost of capital, or WACC. And finally, in the third section of the course, we'll look at capital return. And capital return is what a company would do when there are no adequate businesses or projects to invest in. We'll decide how and when we want to return capital to investors. One of the things to keep in mind is that there are six basic types of transactions that a company can engage in. The first type would be an initial public offering, or an IPO. This is when the company issues equity in the form of shares to the public for the first time. After an IPO, or initial public offering, the company could do a follow-on offering. This would be when the company wants to issue more equity to public shareholders. Now, while a follow-on offering would be open and available to any public shareholders, the company may choose to do a private placement, where it would be issuing shares only to a select group of shareholders. Now, the first three types of transactions involve the company seeking forms of financing. But we can also look at mergers and acquisitions, or M&A. And this is where the company would look for other companies to possibly invest in. Another form of financing which could be available to the company is a leveraged buyout. And this is where a private equity firm may be interested in taking a position or completely acquiring the company. And finally, the company may look at divestiture. So the company may put itself up for sale and look for possible companies which would be interested in purchasing it. So we already discussed that the main purpose of corporate finance is to maximize the value of a business through proper planning and implementation. And we've also discussed the three main sections for this course. For now, we're going to start with capital investment on the left. So we're going to be deciding, or looking at, how companies decide exactly what projects or businesses to invest in, keeping in mind that they're always trying to earn the highest possible risk-adjusted return. Let's jump into it. Now, this course is not really going to focus on mergers and acquisitions, or M&A, but it's important for us to have a basic understanding of what it is. Essentially, M&A is the process of companies either buying, selling, or combining businesses. One useful thing to remember is that companies often make a decision about whether or not they want to buy it or build it. They could build their own expansion capacity, or they can go and buy it from another company who's already built it, which would be M&A. So let's now look at some benefits and some potential drawbacks of buying it, or doing mergers and acquisitions. First of all, there can be cost savings. If we're able to find a company that's up for sale at a reasonable price. Another potential benefit of M&A could be revenue enhancements, or revenue synergies, as they're often called. We could also quickly increase our market share by acquiring another company. And finally, another benefit of M&A could be that it could enhance financial resources, partly because we may be able to find a company at a decent price, or because it can be very quick and efficient to buy another company. Now if we look at the potential drawbacks of M&A, there could be a drawback if we overpay for an acquisition, or the large expenses associated with the investment. And finally, another potential drawback is there could be a negative reaction to the merger or acquisition, resulting in a depressed share price. So before we close off this discussion on mergers and acquisitions, let's discuss strategic versus financial buyers. So let's suppose we were working for a company, and the company wanted to put itself up for sale. It could look either for a strategic buyer or a financial buyer. A strategic buyer would be another operating business, for example. If there was another operating business that wanted to acquire us, and that business was similar to our business, that would be a horizontal expansion. Or if that strategic buyer wanted to expand vertically, either upstream or downstream, that would be an example of a vertical expansion. Since strategic buyers have businesses which would be similar to ours, they often are able to capture synergies, so they need to identify and deliver on operating synergies. Financial buyers, on the other hand, are simply financial entities, and they are not operators of businesses, usually. They could be private equity firms, which would be a financial sponsor, or it could be a professional investor or a non-operator. One of the things that's interesting about financial buyers is that they often use a lot of leverage in order to maximize equity returns. So let's make sure that we understand what a capital investment is. Essentially, it's any investment for which the economic benefit is greater than one year. So there are lots of examples of capital investments. For one, we could decide to open up a new factory, for example. We could also enter into a brand new market, or we could go and acquire another business. Finally, we might look at R&D, or research and development, of new products. Now, while this is not an exhaustive list, it gives you an idea of some investments which would have an economic benefit greater than one year. Now, capital investment. One thing to keep in mind is that capital investment will increase the assets of a company. And how would the company fund this investment exactly? Well, it would do that through a mix of debt and equity. Either both the debt and the equity would increase, or one of them would increase. So later in the course, we'll talk about how companies decide between the mix of debt and equity. But for now, what we want to understand is simply that capital investments will always increase the assets for a corporation. So in this section of the course, we're going to look at some common metrics that get used to evaluate capital investment, starting with present value. So in this particular example, we have a potential investment which could yield us $100 each year for the next five years. What we need to do is calculate the present value of these future values. So we can calculate the present value by taking the future value and dividing it by 1 plus i to the power n, where i is the discount rate or the cost of capital. And for this example, we're going to use a discount rate of 10%. So also in that equation, n represents the number of periods. Let's look at an example here. We can calculate the present value of the first $100 by dividing it by 1.10 to the power of 1. So that's 1 plus the discount rate of 10% to the power of 1, since it's the first period. And we get a present value of $91. To get the present value of the next $100, we're going to divide it by 1.10 to the power of 2, since it's the second period. And that will get us a present value of $83. If we continue this process for year 3, we get $75 for the present value. Year 4, $68. And for year 5, we get a present value of $62. Now what we do for a final step is we simply add up all of these present values. And we get to a net present value of $379. So what we can say is, if we were going to receive $100 for the next five years, today that would be worth $379. Or it would be the equivalent to receiving $379 today. So it's great to understand this theory, but now let's look exactly at how this is done in Microsoft Excel. Now as you can see, we have the Excel template here open that we've provided. If you didn't get a chance to download it, definitely hop back to the last lesson and make sure that you have it downloaded. Open it up. So what we're wanting you to do here is have a go at filling in these cells which are shaded in grey. So all of these cells across here, and then these cell down in here. So let's take a look at these two footnotes here. They come up over on this side. So first of all, we don't want you to use either the MPV or XMPV functions. And also, we want to assume year zero is the current date for the MPV calculation. So what we basically want you to do is manually discount the cash flows. So this cash flow here, since it's in year zero, should not be discounted at all. This one is going to be discounted by one year, two years, etc. All the way along. Then what we do, obviously over here, we want you to add them up to get the net present value. So what you can watch for, which might be fun as well, is over here there's a little checkbox which will appear if you get that line correct and another checkbox down here. Up here, you'll see 100% as soon as you're done this whole schedule. So good luck with it and have fun. We'll see you soon. All right, so let's take a quick look at this PV tab here. The first thing that we want to highlight is if we look in this cell that says year zero and we hit F2, you can see that there's just a zero in that cell that's been formatted to show up as year zero. If we look in the next cell, we're just adding one to it. So these are really numbers all the way across here that we're going to be able to use actually in our formula down here. So for the formula here, let's type in equal sign and we're going to take the undiscounted cash flow here and we're going to divide it by and then open the bracket one plus the discount rate. So let's go down here, select that cell. We're going to tap F4 just to lock that one in place and we're going to close the bracket and put it now to the power of the zero, which is right up there and we can hit enter. So this has come out actually as expected because we can see here, assume year zero is the current date for the net present value calculation. So the minus $200 million here has not been discounted, which is what we would expect. All we need to do now is from this cell, we're going to hold down the shift key and highlight across and now hit control R, which is a fill right to copy this formula all the way across. And we've got a check box here showing that that is correct for that line. Now let's take a peek in this cell right here, tap F2 and we can see that what we're doing is we're taking that $50 million cash flow and we're dividing it by one plus 15% to the power of 10. We're getting the 10 from up here. So it's discounting it back 10 years. All we need to do down here now in order to get the NPV is put in a sum function and we're simply going to sum up all of these discounted cash flows like this, and we should get this figure. And in fact, we have a check box here and a hundred percent here showing that we're all complete. Great work.