Finance

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📘 1. Corporate Finance

a. Capital Structure

• The mix of debt and equity that a company uses to finance operations.

• Goal: Minimise the cost of capital and maximise value.

Example:

• Company A has:

  • $2M in equity

  • $1M in debt

  • Capital Structure: 67% equity, 33% debt

b. Capital Budgeting

• Process of evaluating investment projects (e.g., buying machinery, launching a product).

• Tools: NPV, IRR, Payback Period

Example:

• The project requires $50,000

• Expected cash flows = $15,000 annually for 5 years

• Discount rate = 10%

• Calculate NPV to decide whether to invest.

c. Dividend Policy

• Decisions about whether to pay dividends or reinvest profits.

• Types:

  • Cash dividends

  • Stock dividends

  • Share buybacks

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📗 2. Investment Banking

a. Role of Investment Banks

• Assist companies in:

  • Raising capital (IPOs, bond issuance)

  • Mergers & Acquisitions (M&A)

  • Underwriting and advisory services

Example:

• JPMorgan Chase helps a tech firm go public by underwriting a $500M IPO.

b. Initial Public Offering (IPO)

• A company sells shares to the public for the first time.

• Investment bank helps:

  • Valuation

  • SEC filings

  • Marketing to investors (roadshows)

c. Mergers and Acquisitions

• Mergers: Two companies combine

• Acquisitions: One company buys another

• IBanks assist in:

  • Valuation

  • Negotiation

  • Due diligence

Example:

• Facebook acquires Instagram for $1B, with advice from investment bankers.

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📙 3. Risk Management

a. Types of Financial Risks

• Market Risk: Price changes in stocks, interest rates, etc.

• Credit Risk: Borrowers defaulting

• Liquidity Risk: Inability to convert assets to cash

• Operational Risk: Failures in internal processes

b. Risk Mitigation Tools

• Hedging: Using derivatives (options, futures, swaps)

• Insurance: Against specific financial losses

• Diversification: Spread investments to reduce exposure

Example:

• A company expecting to import goods in euros hedges currency risk using a forward contract to lock in exchange rates.

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📒 4. Financial Analysis

a. Horizontal and Vertical Analysis

• Horizontal: Compare financial results across time.

• Vertical: Compare line items as % of a base item (e.g., sales)

Example:

• Cost of Goods Sold (COGS) is 60% of revenue in 2023 vs. 65% in 2022 → Indicates cost improvement.

b. Financial Ratios

Category	Ratio	Formula	Use
Profitability	ROE	Net Income / Equity	Measures return to shareholders
Liquidity	Current Ratio	Current Assets / Current Liabilities	Short-term financial health
Leverage	Debt-to-Equity	Total Debt / Equity	Financial risk
Efficiency	Asset Turnover	Revenue / Assets	Asset utilization

Example:

• ROE = $50,000 / $200,000 = 25% → Strong return on equity

c. Trend Analysis

• Identifies patterns in financial data over multiple periods.

• Helps forecast future performance.

Example:

• A firm’s revenue grows by 10% every year for 3 years → Positive growth trend.

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🧠 Summary Table

Topic	Key Focus	Example
Corporate Finance	Capital structure, investments, dividends	Using NPV to evaluate a new project
Investment Banking	IPOs, M&A, capital raising	Advising a company on a $500M IPO
Risk Management	Identifying and hedging risks	Using futures to lock fuel prices
Financial Analysis	Ratio analysis, trends, forecasts	Calculating ROE or debt-equity ratio

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