Practical finance

Aims of the course

This course aims to:

1. Raise your awareness, confidence and skills in corporate valuation; 
2. Empower you to engage more successfully in financial negotiations and financial value management; 
3. Support you if you are considering, or already engaged in, advanced studies in finance or its applications.

Content

Practical finance explains how companies are valued, and how business investors and lenders view their investments. It is especially useful if you are studying finance or accounting, and interested in valuation or capital raising. It will also benefit you if you are a business owner, manager, investor or consultant - or aspire to any of these positions in the future - and also if you are considering working in, or with, finance.

Practical finance will cover: valuing businesses and valuation multiples; valuation and discounted cash flow; market and book values; debt capital markets and loan markets; equity capital markets and private equity. No prior knowledge is needed. However, you may wish to consider taking Foundations of finance together with this course, to ground your studies - and their practical application - in their broader accounting and economic context. 

Business valuation is very important, but difficult to nail down with precision. Indeed the largest component of many valuations is often the most challenging to quantify. We will explore together and apply a number of well established valuation techniques, noticing that they will often produce a range of potential valuations, rather than a single consistent figure. 

We will also identify the different perspectives and interests of lenders, borrowers, share investors and operational managers, and how to improve harmony and effective collaboration between them. By the end of the course, you will be empowered to be a more valued participant or partner in any of these important current or future roles.

Presentation of the course

Each session will include an introductory lecture, your questions, discussion and examples incorporating financial numbers. Please bring something to write with and on, and a calculator.

Class sessions

1. Valuing businesses and valuation multiples Values and valuations are fundamentally important, but not always straightforward to quantify. Appropriate valuation techniques, and the values themselves, can depend on the circumstances, as well as the nature of the asset. When a company’s shares are listed on an exchange, the latest traded price per share is quoted continuously during trading hours. The total current market price of all the shares is simply the price per share multiplied by the number of shares. This total figure is sometimes known as the market capitalisation, to emphasise the perspective that the prevailing market price of the shares might represent an overvaluation – or an undervaluation – by the market. Multiples valuation means comparing values, or estimating values, based on a multiple of a relevant financial measure. Examples include price to earnings ratios for a company’s equity, and EBITDA (earnings before interest, tax, depreciation and amortisation) multiples for the whole enterprise, the total of the company’s share value and its debt.

2. Valuation and discounted cash flow Cash flow is an enormously important measure for most organisations and individuals, most of the time. But so is the timing of our cash flows. $1m receivable tomorrow is better than $1m receivable in 10 years’ time. If we get $1m tomorrow, we might be able to use it a number of different useful ways. For example, we might be able to repay some borrowings earlier, and save interest expense. Or we might be able to deploy the $1m into another attractive investment opportunity. On the other hand, if we have to wait another 10 years to get our $1m, we won’t have any of those attractive options open to us. So we’d clearly prefer to collect our money earlier, assuming no difference in the amounts. This preference reflects the time value of money. But what if we had to choose between getting a smaller amount of $0.8m tomorrow, or the full $1m in 10 years’ time? Tools for making this evaluation include Future value, Present value, and Net present value. These project evaluation tools are all Discounted Cash Flow (DCF) techniques, giving results in today’s money terms. They factor in the timing and risk of forecast cash flows, as well as their amounts. One valuation method for a business or company is a DCF analysis of the entire enterprise.

3. Market and book values Market values imply a sale and purchase transaction, or a potential sale and purchase transaction, in the market. Book values, in this context, mean amounts reported in a company’s financial statements. Book values and market values can differ substantially, with market values of successful companies often greatly exceeding their book values. Reasons for the differences include valuable intangible corporate assets, that are not recorded in traditional financial statements. Book values for large organisations are audited, adding to the credibility of the reported book values.

4. Debt capital markets and loan markets Borrowings and loans are liabilities for the borrower, and investment assets for the lender-investor. Creditworthy organisations can borrow money by issuing bonds. The bond is a promise by the issuer to repay the amount borrowed, plus interest, over a designated period of time. Issuers of bonds include a wide range of corporate and public sector entities, including central governments. Debt capital markets are the markets where bonds are traded. The prices of bonds are inversely related to their current market yields. The yield is driven, in turn, by a number of factors including general market interest rates, and perceptions of the credit risk of the issuer. Credit rating agencies issue opinions on the credit risk of particular issues of bonds, as well as the general credit strength of certain issuers. Loan markets relate to lending and borrowing documented in a loan agreement between a borrower and a lender, or a syndicate of lenders. Lenders include banks and other financial services organisations. Interest and capital repayments of loans and bonds are a legal contractual commitment of the borrower. Failure by the borrower to meet its obligations will generally be an event of default, giving additional enforcement rights to the lender. These lenders’ rights are a source of risk for borrowers, and a reason why adding debt to a financing structure increases risk for the borrower, at worst potentially leading to corporate failure for the over-borrowed company.

5. Equity capital markets and private equity The simplest, and most common, form of equity is ordinary shares, also known as common stock. Ordinary shares are a proportionate ownership interest in a company. Dividends on ordinary shares are a discretionary payment by the company, out of its profits (if any). This is key difference between equity capital and debt capital, debt servicing payments being contractual obligations. Shares and bonds are known collectively as securities. Other forms of security include intermediate ‘hybrid’ securities, which have some features of equity, and some features of debt instruments. Equity is generally safer for the issuer compared with debt, but more expensive. Part of the cost of equity capital is the expectation, or requirement, of the equity investors for the company to grow its capital value. Equity capital markets are the markets where equity is issued and traded. Public companies, also known as listed companies, are those whose shares are quoted on a stock exchange, and which members of the public can invest in, generally through a broker. Private equity deals with companies whose shares are not listed on exchange. Flotation, or an initial public offering, results in shares becoming listed on an exchange. Privatisation, or taking private, is the opposite process. Private companies have relatively fewer reporting obligations, but more limited access to new capital. Here as elsewhere, there is a trade off – and a strategic decision to make – to balance flexibility and cost. The balance point is likely to change over the life cycle of the business.

Learning outcomes

The learning outcomes for this course are to enable you to: 

1. Understand corporate valuation and how sale and purchase prices are negotiated;
2. Participate effectively in related professional work, internally or as an advisor;
3. Support you in progressing or applying for advanced studies in finance or entrepreneurship.

Required reading

There are no required readings for this course.

Typical week: Monday to Friday

Courses run from Monday to Friday. For each week of study, you select a morning (Am) course and an afternoon (Pm) course. The maximum class size is 25 students. 

Courses are complemented by a series of daily plenary lectures, exploring new ideas in a wide range of disciplines. To add to the learning experience, we are also planning additional evening talks and events.

Evaluation and Academic Credit 

If you are seeking to enhance your own study experience, or earn academic credit from your Cambridge Summer Programme studies at your home institution, you can submit written work for assessment for one or more of your courses. 

Essay questions are set and assessed against the University of Cambridge standard by your Course Director, a list of essay questions can be found in the Course Materials. Essays are submitted two weeks after the end of each course, so those studying for multiple weeks need to plan their time accordingly. There is an evaluation fee of £75 per essay.

For more information about writing essays see Evaluation and Academic Credit.

Certificate of attendance

A certificate of attendance will be sent to you electronically after the programme.