A complete summary including steps, examples and notes to pass your finance exam!
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Course
Finance
Institution
Vrije Universiteit Amsterdam (VU)
This summary includes all the key information of the lecture slides of the finance course. In addition it includes steps and guides that you need for your calculations. Moreover the summary includes examples that support your understanding. Every important detail is included.
Aim: Determine value of project and compare it to price of the project. It is about
the future.
Collaborates with:
• Marketing manager
• Balance sheet/ income statement/ cash ow statement
Lend or not to lend money to a rm
• By means of: Analysing cash ow and nancial statements
Three main issues in nance:
. Capital budgeting: what project to invest money in
. Asset pricing: determine fair value
. Financial investments: what do you do with additional money? - invest in
something or not to invest
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, Financial management
Financial manager is connection between nancial market and real market
• Financial markets ➡ nancial market = capital budgeting decision
• What to do with money that comes in? Financial manager decides what to do
with cash in ow
• E.g., invest in development, pay dividends/ buy stocks (give cash to
shareholder)
• Driver of decision we make: wealth creation
How to create value
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, Step : You invest your cash in the machine, so cash diminishes and machine is
added to the debit side. (Balance sheet of Book Value)
Step : BUT the machine is a promising project and therefore it has a higher value
than the actual price of the machine. So you have to determine the value of the
project. (Balance sheet based on Market Values) Selling the machine for a higher
price than price of machine allows investment in new machines, expansion, etc.
Step : The value of the project also determines equity
Step : Due to the change in equity, there is also a change in the price per share (P)
Step : The wealth creation is equal to - = and the wealth creation
per share is / = , . So P increases with %, investors look for ratio.
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5 875 350 2 50 4375 3500
25 875
, Thus, we create value if we invest in projects that are worth more than they cost. If
price goes up, market thinks that value is higher than cost of project (positive).
But, we destroy value if we invest in projects that are worth less than they cost. If
the projects value is , the wealth creation is equal to - =- and
the wealth creation per share is - / = - . So P decreases with %.
Fundamental topics in nance (in this course)
. The capital budgeting decision (het investeringsvraagstuk)
• Price per share / earnings per share (based on average of year earning)
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fi 2800
fi fi 700 350 2 2800
10 3500 20 700
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